A Time to Cast Away Stones and a Time to Gather Stones Together (CFC Calendar)
For the owners of foreign companies 2015 became crucial. President Vladimir Putin’s statement on the need to pay taxes from offshore companies slowly, but steadily comes true, and now the country is going through the so-called transition period, when everyone learns to live and pay taxes according to new rules.
The main objective of the changes that have been introduced into the tax legislation is that tax residents of the Russian Federation should either refuse of using foreign companies for business and optimization of taxation or pay taxes under the rules established for income taxation of foreign companies.
Notice of Participation in a Foreign Company
The foundation for the new era was laid by the introduction of liability for tax residents of the Russian Federation to inform about their participation in foreign entities, if the share of such participation exceeds 10%.
The deadline set for the submission of notices regarding the existing foreign companies was limited by June 15, 2015. Precisely until this day taxpayers had to inform tax authorities on their foreign assets in the form of stocks or shares of foreign companies.
For newly registered foreign companies period for notice submission was initially one month, and later the legislator extended it up to three months from the date of accrual of the grounds for notice submission (participation in a foreign company).
Thus, the key period, which the owners of foreign companies should keep in mind, is as follows:
- June 15, 2015 – deadline for the submission of notices of participation in a foreign company registered before June 15, 2015;
- Three months – deadline for notice submission for newly registered foreign companies.
For entities, which decided to hold their horses in disclosing information, there is a rather substantial fine of 50,000 rubles stipulated.
“Tax-Free” Liquidation of a Controlled Foreign Company
Upon the receipt of information about foreign assets of Russian taxpayers, legislator has fixed a grace period, which specifies tax exemption of income in form of property and property rights received in the course of liquidation of foreign entities. Thus, if the procedure of liquidation of the company is completed before January 01, 2018, the income received by the taxpayer in the course of liquidation shall be exempt from taxation1.
If the decision on liquidation was made before January 01, 2017, but the liquidation procedure cannot be completed until January 01, 2018 due to restrictions established by personal law of this entity or by its participation in judicial proceedings, the grace period shall be extended until the end of such restrictions and (or) judicial proceedings.
If the private law of the foreign entity stipulates a condition in the form of a minimum period of ownership by the taxpayer of shares (stocks, equities) of this entity and (or) its subsidiaries and (or) foreign structures without formation of a legal entity, failure to observe which results in creation of obligation with such taxpayer to pay the relevant amount of a foreign tax, and upon that the beginning of this period fell on the date before January 01, 2015 and the end of this period falls on the date after January 01, 2018, the temporary condition shall be deemed fulfilled, if liquidation of such foreign entity is completed within 365 consecutive calendar days starting from the ending date of such minimum period of ownership.
In addition to observing the abovementioned deadlines, along with tax returns the taxpayer must submit to the tax authority an application drawn up in any format on tax exemption of income specifying the features of the received property (property rights) and of the liquidated (dissolved) foreign entity (foreign structure without a legal entity) attaching documents containing information on the cost of property (property rights) according to accounting data of the liquidated foreign entity (foreign structure without a legal entity) as of the date of receipt of property (property rights) from such foreign entity.
Thus, there has been a deadline for deciding on the future of the company set for the owners of foreign companies. If the taxpayer intends to use the preference in the form of exemption of income received from the foreign entity from individual income tax, the foreign entity must be liquidated before January 01, 2018. If it is impossible for objective reasons, the decision on liquidation must be made before January 01, 2017.
In addition to the fact that the income in the form of property or property rights received by the taxpayer upon liquidation of the foreign entity is exempt from taxation, subsequently, upon disposal of property (property rights) the individual income may be reduced by the amount equal to the cost of property (property rights) according to accounting data of the liquidated foreign entity as of the date of receipt of property (property rights) from such entity, specified in the documents attached to the taxpayer’s application, but not more than the market value of such property (property rights)2.
However, it should be noted that if as a result of liquidation of the controlled company the tax payer received a property right in the form of a right of claim, against which cash funds have been subsequently received (for example, under a loan agreement), such income shall be subject to taxation following the standard procedure3.
If the decision on liquidation of the foreign company is not made within the specified deadline, there is a risk that the foreign entity may be deemed a tax resident of the Russian Federation based on the place of company management4.
If a foreign entity is deemed a tax resident of the Russian Federation, it shall be governed by regulations of the Tax Code of the Russian Federation in terms of income taxation of the company with all that it entails in the form of tax payment.
Grace or transition period for shareholders and members of foreign entities consists not only of possibility to receive the company property without paying income tax. Since mid-2015, there has been a capital amnesty campaign taking place in Russia. The essence of the campaign is that taxpayers are given once an opportunity to file an application to the tax authority about all assets including foreign accounts belonging to individuals by virtue of ownership or registered with nominees.
Persons who have declared their assets in the course of capital amnesty shall be relieved of administrative, tax and criminal responsibility for violations and certain crimes committed during the formation of the capital before January 01, 2015.
Initially the amnesty period was established until January 31, 2015, however, the legislator has resolved to extend this period until July 01, 2016.
Currently there is a bill, which stipulates the extension of the amnesty period for one more year, pending in the State Duma of the Russian Federation.
Submission of Notice of CFC
In view of the above mentioned, it can be noted that taxpayers enjoy the most favorable conditions for refusal to use foreign companies in their business for the purposes of optimization of taxation.
A shareholder or a member of the foreign entity may exercise the capital amnesty by specifying the foreign entity in a special declaration and therefore, get a guaranteed relieve of liability for violations committed before January 01, 2015. After that he/she may submit a notice of a foreign entity (if it has not been done within the established deadline) and then decide on liquidation of the foreign company upon the receipt of the company property without paying the individual income tax.
If the shareholder (member) of a foreign entity does not intend to terminate the company activity and is deemed a controlling party of a controlled foreign company as of December 31, 2016, such taxpayer shall submit the notice until March 20, 2017.
The deadline for notice submission is justified by the fact that taxpayers, which have been deemed controlling parties, shall take into the account retained earnings of the controlled foreign company for the first time at determining its tax base for financial year 2016, if the financial year of the company is determined as from January 01, 2015 until December 31, 2015. The controlling party must take into the account the retained earnings of the foreign company for the first time at determining its tax base for 2016 and accordingly, submit the notice of controlled foreign company not later than on March 20, 2017.
In order to determine whether the taxpayer is a controlling party, a combination of the two following conditions is necessary:
- First, the shareholder (member) of the foreign company must be a tax resident of the Russian Federation;
- Second, meet the criteria established by tax legislation:
- Participation interest in a foreign entity exceeds 25%;
- Participation interest in a foreign entity (for individuals – together with their spouses and minor children) exceeds 10%, if the participation interest of all persons deemed tax residents of the Russian Federation in this entity (for individuals – together with their spouses and minor children) exceeds 50%5.
The controlling party of the foreign entity shall also be deemed a person, whose participation interest in the entity fails to comply with the conditions expressed in fractions of participation interest, but who at the same time exercises control over such entity for his/her own benefit or for the benefit of his/her spouse and minor children.
In order to apply the exemption of its profit from taxation, the taxpayer being the controlling party of the foreign entity shall submit to a tax authority together with the notice of controlled foreign company documents confirming compliance with conditions for such exemption.
Documents confirming compliance with the grounds for tax exemption of the profit of the controlled foreign company may be as follows:
- Tax accounts of the controlled foreign company for the relevant period;
- Calculation of the effective taxation rate of income (profit) of the controlled foreign company and average weighted rate of tax on profit of entities determined pursuant to Article 25.13-1 of the Tax Code of the Russian Federation;
- Certificate of tax residency of the controlled foreign company for the relevant period.
If the profit is not subject to tax exemption, the taxpayer (controller) shall submit tax returns on the tax in determination of the tax base, on which the profit of the foreign company controlled by this person is taken into the account, together with the following documents:
- Financial statements of the controlled foreign company;
- Auditor’s report on financial statements of the controlled foreign company.
The profit of the controlled foreign company shall be taken into the account in determination of the tax base for the tax period on the relevant tax, if it exceeds 10 000 000 rubles6.
The following increased minimums of profit of the controlled foreign company, which are not taken into account in returns on the applicable tax, have been established for the transition period:
- for 2015 – 50 million rubles;
- for 2016 – 30 million rubles.
In summary of the above mentioned, we can say that now all owners of foreign assets in the form of shares or participation interests in foreign companies face a dilemma: to liquidate a controlled foreign company and use preferences on tax exemption of income received as a result of such liquidation or annually submit to the tax authority financial statements of the foreign company and pay taxes from retained earnings of the company to the Russian budget.
There is still time to make a decision, and such decision will be a personal choice of everybody.
- June 15, 2015 – Notice of Foreign Company;
- January 01, 2017 – deadline for decision on liquidation of the company;
- March 20, 2017 – Notice of CFC;;
- April 20, 2017 – submission of tax returns on individual income;
- January 01, 2018 – liquidation of the company in order to use the tax preference (the deadline may be extended for objective reasons).
- Clause 60 of Article 217 of the Tax Code of the Russian Federation.
- Sub-clause 2.1 of Clause 2 of Article 220 of the Tax Code of the Russian Federation.
- Letter of the Ministry of Finance N 03-04-05/54046 dated September 21, 2015.
- Article 346.2 of the Tax Code of the Russian Federation.
- Clause 3 of Article 25.13.
- Clause 7 of Article 25.15 of the Tax Code of the Russian Federation.
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