Russia – Deoffshorization

The Russian President, Vladimir Putin on November 24 signed the “deoffshorization” law, requiring Russian companies and individuals to pay tax on undistributed controlled foreign corporation (CFC) profits.

The new law, effective January 1, also contains provisions clarifying the tax residency status of foreign legal entities, adds new rules on indirect transfers of immovable property through share transfers, and requires that a recipient of treaty benefits be the beneficial owner of the income.Known as the “deoffshorization” proposal, the bill would require Russian companies and individuals to pay tax on undistributed CFC profits, with credits for tax paid in the foreign country.
The law is certain in that it will affect many Russia tax residents accumulating income through controlled foreign companies (CFCs),  including  many Russian held international structures.

There are several notable exemptions to the legislation:

•    The profit of companies which produce active income in over 80 per cent of their activities;

•    The profit of companies registered in a jurisdiction where the effective tax rate applicable to the CFC is at least
75 per cent of the weighted average Russian profits tax rate (calculated on a predetermined formula);

•     The profit of foreign structures that do not comprise legal entities such as not?for?profit organizations which cannot, under applicable law or their constitutional documents, distribute profits among their shareholders, members, founders etc;

•    The profit of licensed banks and insurance companies operating in a jurisdiction with exchange of information mechanisms with the Russian Federation;

•    Issuers of certain traded bonds (ie Eurobonds) if the revenues from such bonds make up at least 90 per cent of the aggregate revenue of the issuer organizations;

•    The profit of companies that are involved in certain industrial projects (ie projects concluded at governmental level on matters such as oil and gas) resulting in income of not less than 90 per cent of their total income.

Threshold exemptions apply to including the profits of CFCs in a Russian tax resident’s tax base, the threshold for inclusion being set at 50 million RUB in 2015, 30 million RUB in 2016 and 10 million RUB from 1 January 2017 onwards.

HOW CAN AMS ASSIST YOU?

We can assist our clients to conduct a preparatory audit of their group structures to identify companies that will qualify as CFCs and individuals that may be recognised as controlling Russian tax residents based on their place of management and control and to further consider potential restructuring opportunities to achieve compliance.

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