Deoffshorisation in Russia
11-12 June 2015
Alexei Ryabov
Tax Partner
Page 2
Contents
5
2
3
1 Deoffshorisation campaign
CFC rules
Tax residency
Tax amnesty
6 Questions and answers
4 Beneficial ownership
DEOFFSHORISATION CAMPAIGN
1
Page 4
12 December 2013
27 May, 26 August,
22 October 2014
18 March 2014
24 November 2014
1 January 2015
President message to the Federation Council on
“Deoffshorisation” of Russian economy
The first draft of the “Deoffshorisation” legislation
Revised versions of the Draft Law, the Draft Law
was submitted to the State Duma
The Law 376-FZ was enacted
The Law 376-FZ came into force
The Draft Law on Capital Amnesty was adopted by
the Federation Council 3 June 2015
3 June 2015
The amendments to the 376-FZ were adopted by
the Federation Council
Deoffshorisation campaign: background
Page 5
Deoffshorisation Campaign Tax vs non-tax measures
TAX MEASURES NON-TAX MEASURES
Controlled Foreign
Company
Tax Residency
Beneficial Ownership
Introduction of local codified GAAR (planned)
Amnesty of Capital
Extension of criminal liability
THE CONTROLLED FOREIGN COMPANY (“CFC”) RULES
2
Page 7
CFC rules Controlling person
► Individuals – Russian tax
residents (more than 183 days
in Russia) - taken together with
spouses and infants
► Legal entities – Russian tax
residents (established or
managed and controlled in
Russia)
PHC
(BVI)
SubHoldCo
(Cyprus)
HoldCo
(Russia)
DutchCo CyprusCo
BVICo
Russian tax residents – Controlling Persons
100% 40% 45% 15%
PHC
(BVI)
CFC
CFC
Page 8
CFC rules CFC – foreign legal entity
More than 50%
Participating interest* in 2015
1
Controlling Persons
More than 25%, or
More than 10%, if participation of
all Russian tax residents (even unrelated)
exceeds 50%
1
2
Participating interest* starting from
1.01.2016
Control : • decisive influence on decisions affecting a controlled company’s
distribution of profit; and (or)
• ability to influence the entity that manages such structure’s assets as regards decisions on profit distribution
Leg
al
part
icip
ati
on
C
on
tro
l
OR
*Participating interest - direct (indirect) participation, including participation
through structures (i.e., trusts, funds, foundations etc.)
Page 9
CFC rules CFC – foreign structure: significant amendments
Trust /
Foundation
Settlor is a
controlling person
Has the right with respect
to:
- Income OR
- Management of the
income or
- Property (revocable trust)
OR
Carries out control
Beneficiary is a controlling
person
Has the right with respect to:
- Income
- Management of the property
- Property upon liquidation and
- Carries out control
Settlor is not a controlling
person
Does not have right with respect
to:
- Income
- Management of the income
- property
- Property upon liquidation
Does not carry out control
Beneficiary is
not a
controlling
person
- Does not carry
out control
Companies
Page 10
CFC Profits
Local audited FS
►Treaty country
AND
►Company subject
to mandatory audit
subject to “lex
personalis”
Russian Tax Rules
Any other
cases
Recommendation:
► Unless the Law is amended, seek legal advice on mandatory audit
for all CFCs. In addition, seek clarifications from the Russian
Ministry of Finance
CFC rules Calculation of CFC profits (1 of 2)
Page 11
Profits
Dividends
13%
20%
Russian tax
Tax paid by CFC
Distributed in the current and next year
In Russia or abroad
CFC Income deemed received by the controlling person as of
31 December of the year following the CFC financial year
CFC rules Calculation of CFC profits (2 of 2)
Excluded income:
• FOREX differences
• Income on reassessment
Page 12
CFC rules Issues to consider for Cyprus
“Grey” areas in definition of control and determination of participating interest (e.g., voting vs. non-voting shares)
No practice of exempt structure – matter of judgment
Main exemptions of CFC profits (e.g. ETR test) may not be applicable to typical Cypriot companies (e.g. holding, financing)
Carefully consider simplification of structures/ restructuring and related accounting treatment to avoid CFC leakages
Prospects of using audited financial accounts as CFC profits basis still unclear!
* ETR - effective tax rate
TAX RESIDENCY OF FOREIGN COMPANIES BY PLACE OF EFFECTIVE MANAGEMENT
2
Page 14
Tax residency General provisions
Definition
► A foreign company can be treated as
Russian tax resident if:
the place of management of the foreign
company is in Russia; OR
it is tax resident in Russia under an
applicable double tax treaty (tie breaker
procedures)
The introduction of the “place of
management” principle enables Russian
taxes to be levied on worldwide income of
foreign companies, if they are effectively
managed from Russia
This creates an exposure for Cypriot
companies instructed from Russia
HoldCo
(Russia)
Dutch Co Cypriot Co
BVI Co
100%
Management
Page 15
Tax residency Determination of place of management
KEY CRITERIA:
Executive management is
exercised from Russia
The company’s chief (executive)
officers perform their duties
mainly in Russia
SUPPLEMENTARY CRITERIA:
Accounting records or management
accounts are maintained in Russia
The company’s corporate records
are maintained in Russia
Day-to-day management of
personnel takes place in Russia
Chief officers are persons
who oversight an enterprise’s
activities and responsible for
planning, management and
If the key criteria are met both in Russian and in other foreign state, the supplementary criteria should be considered (at least one of them is a sufficient trigger)
Page 16
Tax residency Exemptions
Operating companies
• Own qualified personnel and assets in DTT countries only
Shareholder control
• General shareholder’s meeting
• Standards, methodologies and/or policies that apply to the group or are strategically important for shareholders
Issuers of “qualifying”
bonds
• Foreign issuers of traded bonds (special conditions should be met)
1
2
3
Active holding
companies • Active holding and subholding foreign companies
O&G projects
participants
• Foreign companies with main activities under PSAs and similar agreements
• Operators of oil shelf project or its shareholder
4
5
Page 17
Tax residency Self-recognition
Self-recognition is pre-conditioned by:
A permanent establishment in Russia
Activities in Russia via an autonomous subdivision
Documents in Russia that can serve as a basis to accrue and pay taxes
Page 18
Tax residency Issues to consider
Managing historical risks (PE via place of management)
No practical procedure / official form regarding registration
Internal regulations and “defense files” for proper management of the current risks. Professional directors start being viewed as insufficient substance!
VAT, property tax and other tax implications
CONCEPT OF ‘ACTUAL RECIPIENT (BENEFICIAL OWNER) OF INCOME’
3
Page 20
Beneficial ownership Application of reduced rates under DTTs
WHT on dividends
5% ? 15%
► Conditions for applying reduced rates under DTTs:
► Ability of CypCo to use and/or manage income received
► Ability of CypCo to derive benefits from income received
► Ability of CypCo to decide on the further utilization of income received
► Justification of “real” business activity and substance based on Russian unjustified tax benefit concept (recent court practice)
Russian
tax
resident
BVICo
CypCo
RusCo
100%
100%
100%
Page 21
Beneficial ownership Dividends - «Look-through» approach
Key considerations :
► Confirmation of the actual right/absence of actual right on income
► Confirmation of the Russian tax residency
► Calculation of the CFC profit (risk of double taxation) – resolved through recent changes in the Law
► Exemption of dividends at the level of the Russian tax resident
Russian
tax
resident
BVICo
CypCo
RusCo
WHT 0% or 13%
depending on
participation
interest
> 50 – WHT 0%
< 50% - WHT
13%
TAX AMNESTY
4
Page 23
Tax amnesty General overview
• Draft Law N 754388-6 «On the Voluntary Declaration of Property and Bank Accounts (Deposits) by Individuals»
• Relief from liability upon provision of a special declaration
• Period – 1 July till 31 December 2015
• Declaration may be filed only once with no right to make amendments
• Period covered – till 1 January 2015
• No declaration fee or tax payments
Page 24
Assets
Tax amnesty What may be declared (1)
Offshore
company Cash Nominee
Assets
May be declared Grey area
Page 25
Tax amnesty What may be declared (2)
NB !
► Cash is not clearly included in the list of the property
► Yachts and aircraft may be treated as real estate
► Precious metals, art objects are not covered
Property (including placed into
trust and received from a
nominee owner):
Land plots, other real estate
Vessels
Securities (shares,
participatory interest and
equity units)
CFCs
Foreign bank accounts, as
well as accounts in Russian
and foreign banks, with
respect to which the person
is considered as a beneficial
owner
Page 26
Tax amnesty What is exempt
Criminal liability
Evasion to repatriate of the
currency to Russia
Evasion of payment of
customs duties
Evasion to pay taxes
(fees)
Failure to perform the
duties of a tax agent
Concealment of monetary
funds or property on which
the taxes and (or) fees
should be levied
Administrative liability
(including upon foreign
exchange operations)
Tax liability
QUESTIONS AND ANSWERS
5
Page 28
Alexei Ryabov
Tax & Law Partner
Outbound Tax Leader, Russia / CIS
Tel: +7 (495) 641-2913 Mobile: +7 (905) 543-0716
Email: [email protected]
Contacts
Page 29
Non-commercial organizations which do not distribute profits
Companies in the Eurasian Economic Union
Companies, which effective tax rate exceeds 75% of the blended Russian tax rate
Industry exemptions:
• Banks or insurance
companies
• Issuers of traded bonds
• Foreign companies
involved in projects
under oil&gas
production-sharing,
concession and similar
agreements in the
“corresponding” country
provided that over 90%
of the company’s profit
for the financial year is
from such projects
Foreign companies participation in which is realized exclusively via Russian public companies
“Active” foreign
companies (including
foreign holding and
sub-holding companies)
Addendum 1. Russian CFC exemptions (1)
Page 30
Addendum 1. Russian CFC exemptions (2)
• Direct interest > 75% for 365 days;
• Income (profit) is absent or
• Share of passive income > 5%;
• Direct interest in active foreign companies > 50% for 365 days;
• Direct interest in active foreign subholding companies > 75% for 365 days
• Direct interest > 75% for 365 days;
• Income (profit) is absent or
• Share of passive income > 5%;
• Direct interest in active foreign companies > 50% for 365 days
“Active” company – share of “passive” income < 20%
HoldCo
SubHoldCo
Active
Companies
>75%
>50%
>75%
Active
Company
>50%
Active foreign holding company
Active foreign subholding company
Page 31
Addendum 1. Russian CFC exemptions (3)
How to calculate effective tax rate (ETR):
where
T is amount of corporate income tax paid by foreign company in jurisdiction of its incorporation
P is amount of profit of foreign company calculated based on CFC rules (see above)
Blended tax rate (BTR):
where
R1 is Russian profit tax rate (20%)
R2 is Russian tax rate for dividends (9%, it is expected that it will be increased to 13%)
P1 is sum of profit of foreign company (except of dividends received by this foreign company and dividends paid by foreign company)
P2 is sum of dividend income received by foreign company
BTR = 𝑅1∗𝑃1+𝑅2∗𝑃2
𝑃1+𝑃2
ETR = 𝑇
𝑃
Page 32
Addendum 2. Recent amendments (Draft Law No. 714002-6)
Definition
of CFC
• The rules for recognizing “structures” as CFCs are refined
• Direct or indirect participation via “public companies” is scoped out
Exemptions
• Profits of “active” holding and sub-holding companies are exempt from taxation under the CFC rules
Calculating
CFC profit
• The CFC profit should not include dividends, on which the CFC has no actual rights (look-through approach)
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Addendum 2. Recent amendments (Draft Law No. 714002-6)
Definition /
Criteria
Place where BoD meetings are held is not the criteria for the effective place of management anymore
Additional
Criteria
Clearance how to apply supplementary criteria
Improvement of the self-recognition procedure
Self-recognition
Page 34
Addendum 3 CFC schedule (1)
2014
June 15
Notification on participation in foreign legal entities (25% and more + transitional period)
Notification about participation in foreign structures
March 20
2015 2017
March 20
Annual income tax return including CFC’s profit (if CFC’s profit is RUB 50mln. (EUR 0.96mln.) or more)
2016
March 28
Annual income tax return (no CFC reporting and payments)
March 28
No fines will be charged for the tax periods of 2015-2017 for nonpayment or underpayment of tax as a result of non-inclusion in the tax base of CFC’s profit
2018
March 28
Annual income tax return including CFC’s profit (if CFC’s profit is RUB 30mln. (EUR 0.57mln.) or more)
Notification regarding participation in CFCs 25%/10% (50%)
Notification regarding participation in CFCs (50% and more)
March 20
Page 35
Addendum 3 CFC schedule (2)
Nonpayment or underpayment of tax as a
result of non-inclusion in the tax base of a
share in the CFC’ profit
20% of the amount of unpaid tax, but
no less than RUB 100,000
A transitional period is established: fines will not be charged for the tax periods 2015
–2017 when decisions are made to impose tax liability for such tax offenses.
Failing to notify the tax authorities of
participation in a CFC
RUB100,000 (<EUR 2,000) for each
CFC
Failing to provide the tax authorities with
information or for submitting documents
containing inaccurate information on a
controlled entity
RUB100,000 (<EUR 2,000) for each
CFC
Failing to notify the tax authorities of
participation in a foreign entity
RUB 50,000 (<EUR 1,000) for each CFC
Criminal liability (up to 6 years) for nonpayment or underpayment of taxes due to a
CFC tax underpayment. For tax periods 2015 - 2017 does not apply if the damage is
recovered
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