The law on making amendments and addenda to the Tax Code of the Russian Federation was adopted on November 25, 2014, and it will come into force as of January 1, 2015. This law relates to taxes on income of foreign companies under control and revenue of foreign organizations. This law is otherwise called as an anti-offshore legislation.
1. This law introduces a definition of a party under control (a foreign company being controlled) and a controlling party. This law stipulates that the Russian tax residents will declare an entire amount of income received by a foreign company controlled by them on a mandatory basis. A legal entity or a physical person (jointly with a spouse or children under age of 18) shall be recognized as the controlling party, provided that its stake of participation in a foreign company being controlled exceeds 25% (until January 1, 2016 – 50%). Furthermore, if a stake of participation of all physical persons and legal entities, being the tax residents of the Russian Federation in a foreign company being controlled, exceeds 50%, then each of such legal entities and/or physical persons (jointly with a spouse or children under aged of 18) having more than 10% shall be recognized as a person enjoying a stake of participation in a foreign company being controlled.
Foreign companies not being tax resident of the Russian Federation and being under surveillance of the tax residents of the Russian Federation shall fall within a category of companies being controlled.
Russian taxpayers shall be obligated to provide information about their participation in foreign companies if their stake of participation exceeds 10% and/or information on a company being controlled in relation to which it acts as a controlling party. A violation of such obligation shall entail a liability in payment of certain fines.
Moreover, the tax residents of the Russian Federation shall be obligated to provide declarations confirming an amount of income of a company being controlled. Such requirements shall be applied to those foreign companies whose income would exceed the following amounts:
- in 2015 – 50 million rubles;
- in 2016 – 30 million rubles;
- in 2017 – 10 million rubles.
The law contains a number of reasons due to which an income of a company being controlled shall be released from taxes in the Russian Federation.
Any tax evasion or a premeditated failure to include an entire amount of income into a base shall result in a liability of penalty payment. An amount of penalty shall be established on the basis of a total non-paid tax and shall constitute 20% thereof, but at least one hundred thousand rubles. Failure to notify or improper notification about a company being controlled or participation in foreign organizations shall result in imposing a certain tax payment.
2. The law introduces a definition of place of an actual management of the company. Foreign business companies which place of actual management is within the territory of the Russian Federation, shall be recognized as the Russian tax residents, in other words they will be subject to taxation in compliance with the legislation of the Russian Federation on common grounds. Apart from that, the requirements on keeping tax records on income tax and tax control shall be applied to such companies.
This new legislation is pursuing an implementation of a world-wide tendency on transparency of borders for fiscal authorities of all countries. It is adopted in a rather rough version and by all means it requires that the existing mechanisms of tax planning be reconsidered. For instance, in order to execute a double tax treaty agreement it will be necessary to provide information about a beneficial owner of a receiver of income, and it will be possible to use the regulations of a double tax treaty agreement only in cases when such a beneficial owner is not recognized as a tax resident of the Russian Federation.
It should be noted that within a period of last years certain norms appeared in our legislation which introduced a definition of a beneficial owner and provide for a disclosure of information thereon. Thus, for example, all legal entities having accounts in the Russian banks are bound to provide information pertaining to the beneficial owners of such legal entity. Similar information is submitted to the antimonopoly authorities upon conclusion of transactions falling under the antimonopoly regulation.
These regulations of the Russian legislation adhere to a world-wide tendency of anti-trans-border tax evasion. In October this year in Berlin, the representatives of 51 countries signed an Agreement pertaining to an annual automatic exchange of data on non-residents’ accounts. This agreement shall be applied by different countries in different manners but, supposedly, by September 2017 more than 120 countries shall take part in such an exchange of information. As such, an implementation of these tendencies in practice shall assimilate a trans-border tax planning with an evasion of tax payment in a sense familiar to us.
This notice refers to only some key provisions of the new legislation of the Russian Federation and the world-wide tendencies of the process which is in Russia called as anti-offshore campaign. Should you require any particular information about new laws introduced by the anti-offshore legislation as well as a detailed analysis of risks and tax consequences for the companies whose beneficial owners are Russian tax residents, we would be happy to answer any of your questions.