NEW TAX RULES ON FOREIGN ASSETS
Russian business needs to decide where to store the money. On November 21 the Russian State Duma imposed new tax rules for controlled foreign companies (CFCs). New legislation obliges Russian residents (both individuals and legal bodies) to pay tax on undistributed profits from their foreign assets.
The initiative is designed to fight profit withdrawal through foreign companies, e.g. collecting dividends (including dividends received from Russian subsidiaries and affiliates), interest for the use of the funds or intellectual property, etc. This is one of the most popular instruments of wealth management used by Russian entrepreneurs.
Whose interests are actually affected?
New mechanism defines beneficial owners of CFC as individuals or legal bodies which own:
- At least 50% stake in CFC (in 2016 this threshold will be lowered to 25%)
- At least 10% stake in CFC, if total amount of Russian tax residents, owning this company, exceeds 50%
Those residents who control such stakes are now obliged to pay taxes in Russia.
The law also defines certain categories of controlled companies that are not affected by these tax measures: e.g. non-commercial organizations; companies operating in jurisdictions which have international treaty on double taxation with Russia.
Current law applies only to those companies that earn undistributed profits exceeding 10 million rubles.
Controlling individuals’ income from undistributed profit earned by CFC will be taxed at the rate of 13%; controlling legal entities will pay 20%. In order to avoid double taxation, the income tax of the country where CFC is registered will be reduced from the tax amount. In fact, if the tax rate of certain foreign jurisdiction surpasses Russian rate, the company will be taxed at the highest one.
Russian entrepreneurs will have to adapt to new tax environment. Hardly anyone will abandon their foreign assets. Not every company even has such an option в«Т some Russian investors own shares in the companies that actually operate outside the Russian Federation.
Some business owners will cease to be Russian tax residents, especially those who already own foreign real estate or considers purchasing it. Nevertheless, running a remote business may be quite tricky.
According to Paragraph 2 of Article 207 of the Tax Code of the Russian Federation, a tax resident is an individual residing in the Russian Federation for at least 183 calendar days within 12 consecutive months.
There is no doubt that some entrepreneurs will attempt to hide their foreign assets. They are facing following options:
- transferring business to certain jurisdictions which provide the maximum level of confidentiality (for example, Cayman Islands)
- creating additional barriers between beneficiaries and nominee shareholders, who are not Russian tax residents or quickly cease to be ones
Taking into account criminal responsibility for concealing foreign income and assets which is coming into effect in 2017, such actions may bring serious consequences. However, without a well-functioning mechanism of obtaining information from the jurisdictions that traditionally respect the confidentiality of investors, new tax measures would rather create fertile ground for various abuses and put Russian business under additional pressure. Some entrepreneurs have already been hiring private intelligence companies to identify beneficiaries and providing acquired information to regulatory agencies.