Russian CFC Rules

Private Wealth

What is a CFC

According to the Russian tax authorities, a Controlled Foreign Company ("CFC") is:

• a foreign company the controlling person of which is a Russian tax resident; or

• a foreign structure which is not a legal entity the controlling person of which is a Russian tax resident.

What is a Controlling Person of a CFC

In February 2017, the Russian Ministry of Finance ("Minfin") has published a letter (“Minfin Letter”) providing clarifications on key CFC issues:

For the Russian tax authorities, the controlling person of a CFC with legal personality is:

1) any person with a stake of over 25% in the CFC;

2) any person with a stake of over 10% in the CFC if the total stake of Russian residents exceeds 50%.

For the Russian tax authorities, the controlling person of a CFC structure without legal personality is:

1) the founder (or settlor) of the CFC;

2) any person exercising control over the CFC via the possibility to (i) "decisively influence after-tax profit distributions" (including the right to block such distributions);

AND

(ii) any person at the same time meeting at least one of the following criteria:

• the person is effectively entitled to receive the CFC’s income (or part thereof);

• the person is entitled to dispose of the CFC’s property;

• the person is entitled to receive the CFC’s assets in the event of the structure’s termination (liquidation, dissolvement).

The cut-off day for the determination of the identity of a controlling person is (i) the date of the profit distribution decision or (ii) in absence thereof, the 31 December of the year following the respective accounting year.

Effective Place of Management of a CFC

A controlled foreign company whose effective place of management is Russia may nevertheless be deemed a Russian tax resident (and be subject to the Russian 20% corporate income tax rate) if certain indicia are present:

• A majority of board meetings are held in Russia;

• C-level executives perform their duties in Russia;

• The company’s beneficial owner ("BO") who is a Russian tax resident acts as the company’s director;

• The company’s BO (a Russian tax resident) acts as a signatory on the company’s bank account;

• The company’s BO (a Russian tax resident) has a power of attorney on behalf of the company enabling him to act on the company’s behalf;

• The company’s BO (a Russian tax resident) actively participates in the company’s investment decisions.

Determination of the Profit (Loss) of a CFC Based on its Financial Statements

According to the Russian tax authorities, the profit of a white-listed CFC can be calculated and declared "in accordance with the accounting standards established by the CFC's local laws [or] in accordance with the International Financial Reporting Standards (IFRS) or other internationally recognized financial reporting standards" - a clear advantage over the more stringent requirements of the Russian generally accepted accounting principles (GAAP).

The specifics of CFC accounting under Russian law are provided here (in Russian only).

Carryforward of CFC Losses

Losses based on the CFC's financial statements as prepared in accordance with its local laws can be carried forward without restrictions and taken into account when determining the CFC's subsequent profit.

Russian Fixed Tax on CFC Income

Starting with tax year 2020, Russian individual taxpayers have the opportunity to pay a fixed tax on CFC income (here).

To this effect, interested taxpayer must provide the Russian tax authorities at their place of residence with a corresponding notification not later than 31 December of the tax year under consideration.

In a nutshell, the fixed-profit calculation method replaces the effective-profit calculation method at the discretion of the Russian taxpayer for a minimum period of 5 years. In other words, tax on effective CFC profits is replaced with a substitute tax on a (hypothetical, that is, fixed) CFC profit regardless of the number of CFC structures of the Russian taxpayer.

The fixed CFC profit is capped at RUB 34,000,000 (approximately $450,000) and the effective tax would hence be capped at RUB 5,100,000 (approximately $70,000).

Exemption from CFC Financial Reporting Duties

Russian taxpayers switching to the fixed-tax regime are exempted from the following reporting duties:

• no more need to calculate annual CFC profits;

• no more need to submit the annual financial statements for the CFC;

• no more need to submit additional CFC related documents (within a month) at the request of the Russian tax authorities;

• no more need to submit Form B “Information on the financial statements of a controlled foreign company” of the CFC notification.

However, Russian controlling persons must still submit their CFC notification on an annual basis.

In addition, Russian taxpayers are entitled to invoke CFC losses incurred under the fixed-tax regime if they subsequently decide to opt out.

Opting Out of the Fixed-Tax CFC Regime

The mandatory minimum period for benefitting from the Russian fixed tax on CFC profits is:

• 3 years - for taxpayers switching during the tax years 2020 or 2021;

• 5 years - for taxpayers switching during the tax year 2022 and thereafter.

Russian taxpayers have the right to opt out of the fixed-tax regime (i) upon expiration of the mandatory period or (ii) if, during its application period, the tax on the fixed CFC profit is increased on the legislative level.

To this effect, interested taxpayer must provide the tax authorities at their place of residence with a corresponding notification not later than on 31 December of the corresponding tax year.

Notifications forms for switching into, and out of, the Russian fixed-tax CFC regime can be downloaded here (in Russian only).

CFC Filing Procedure

Russian taxpayers must submit a CFC notification before 20 March following the year in which CFC profits (or losses) accrued to them.

> Any documents submitted must be translated into Russian to the extent necessary to confirm compliance with the conditions for exempting the CFC's profits from taxation.

In the absence of a tax exemption with regard to the CFC's profits, the controlling person is obliged to confirm the amount of the CFC's profits by submitting the following documents:

• The CFC's financial statements for a given years as prepared in accordance with the CFC's local laws or, in absence of such financial statements, other documents confirming the CFC's profits (losses) for a given financial year;

• An auditor's report of the CFC's financial statements if, under the CFC's local laws or pursuant to the CFC establishment documents, such an audit is (i) mandatory or (ii) voluntary.

These documents must submitted every year on March 28 (in the case of corporate taxpayers) and on April 30 in the case of individual taxpayers. Starting from the tax period of 2020, these documents must be submitted regardless of whether there is an obligation to account for income in the form of CFC profits in the tax base of the controlling person.

In addition, controlling persons must declare CFC profits in excess of RUB 10,000,000 ($140,000) in their personal tax declaration to be submitted before April 30 of each year.

Importantly, undistributed CFC profits below the threshold of RUB 10,000,000 ($140,000) are not subject to taxation.

Penalties Related to CFC Filing in Russia

Failure to pay or incomplete payment of tax amounts by the controlling person as a result of non-inclusion of the CFC's profit share in the tax base will result in a fine of 20% of the unpaid tax amount, but not less than RUB 100,000 ($1,250).

The penalty for late (or knowingly inaccurate) filing (of both a CFC notification and/or of the CFC's financial results) is RUB 500,000 ($7,000) per CFC and disqualification from the exemption regime.

Failure to submit documents to the Russian tax authority, or the submission of documents with deliberately inaccurate information, results in a fine of RUB 1,000,000 ($12,500). Such penalties may be imposed multiple times.