Draft law with CFC rules submitted to State Duma Tax Flash Report

Tax Flash Report
from PwC experts
Draft law with CFC rules submitted
to State Duma
October 2014 / Issue No. 31
In brief
A draft law on deoffshorisation, including Controlled Foreign Company (CFC) rules and other new
developments, has been presented to the Russian State Duma.
( http://asozd2.duma.gov.ru/main.nsf/(Spravka)?OpenAgent&RN=630365-6).
The wording of this draft law has again been substantially modified. Without delay, we would like to
inform you of the most significant amendments compared to the version we commented on in
September.
We would like to note a reduction in the administrative burden for business with respect to a CFC's
auditable statements in treaty jurisdictions (such companies will not have to recalculate their profits
under Russian tax rules). The new draft law also clarifies the rules for applying a foreign company
liquidation benefit and clarifies many other clarifications, including a comparison of the effective tax
rate of a foreign company to an average weighted tax rate, rather than a 20% tax rate.
The draft law may still go through further changes. Draft laws are often amended after the first
readings in the State Duma.
In detail
Who is recognised as a CFC?
The following changes were made to the list of
institutions not subject to Russian profits tax
under CFC rules:
 The provision on public companies
and
participation
through
public
companies has been removed. Now,
participation through public companies
is not a recourse for avoiding CFC rules;
 The "white" list was again replaced by a
"black" list. However, this is not the same
list currently used for the purposes of
Article 284.3.1 of the Russian Tax Code.
The Russian Federal Tax Service (FTS)
will have to develop another list of
territories that do not exchange
information with Russia;
 The effective tax rate now is compared to
a specified rate instead of a 20% rate.
This approach helps to avoid a lot of

confusion and narrows down the list of
companies subject to the CFC rules;
Companies that derive predominantly
active income are no longer under the
scope of the CFC rules.
A company is not subject to profits tax if it is
from a treaty state (except for those states that do
not exchange information with the Russian tax
authorities) and if the effective tax rate is at least
75% of the average weighted rate [1], or if the
company’s share of income from passive
activities is not more than 20%;

In order to exempt a CFC’s profits from
Russian tax, the share of income from
production sharing agreements
(PSA) (for respective companies) must
come to at least 90% of the
organisation's total income. Operators of
newly developed sea-based hydrocarbon
[1] So the application of different tax rates will be accounted for in a special formula.
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


deposits and their direct shareholders
shall not be deemed as CFCs;
The draft law clarifies the rules for not
deeming structures as CFCs (the previous
version was contradictory in regards to
the possibility to distribute profit).
A CFC's controlling party does not
necessarily
have
to
meet
the
participation share criteria, yet it may
control over the CFC for its own benefit
or for the benefit of his/her spouse
and underage children.
Deeming a company or a person carrying
out managerial functions of an
investment fund, as a Russian tax
resident is not a reason for classifying
such a fund as the CFC or a Russian tax
resident.
CFC notifications
If the tax authorities become aware of a CFC that
was not reported by a Russian tax resident, a
relatively "soft" procedure will take place. The tax
authorities will require submission of a
clarification within 20 days or issue a notification
within the prescribed deadline. In its request, the
authorities shall provide detailed information on
the company and describe the grounds for
deeming it as a CFC. Disputes over whether a
company can be qualified as a CFC may be
forwarded to court. If CFC status is not
challenged in three months, the tax authorities
will then rule that the resident agree that it has
CFC. Thus, taxpayers who fail to collect
information on their CFCs in time can enjoy a
short respite.
Calculation of CFC profits
A CFC’s profits are determined:
 in accordance with its financial
statements subject to audit (provided the
CFC is located in a treaty jurisdiction);
 according to Chapter 25 of the Russian
Tax Code for all other instances.
If CFC does not distribute profits due to an
increase in its charter capital, such profits shall
not be taxed in Russia.
A CFC’s profits may be reduced by the dividends
(distributions in case of structures) paid from
such profits.
Losses incurred by a CFC during the three
financial years prior to 1 January 2015 and after
this date (as determined on the basis of its
financial statements) can be carried forward and
accounted for.
The draft law also proposes an instrument in
regards to the sale of securities and property
rights by a CFC to a controlling party (or its
Russian related party). By using this instrument,
the CFC’s income is not taxable in Russia, while
the assets obtained by the Russian buyer will be
registered for tax accounting purposes at the
value they were earlier recorded by the seller
(without an increase in the assets' tax base).
Tax residence criteria
The draft law clarifies residence criteria and
expands on concepts such as "majority" and
"regularity".
It provides examples of activities performed in
Russia that would not result in Russian tax
residency
(budgeting,
preparation
of
consolidated statements, and adoption of
standards and methods for all companies in a
group) [2].
The draft law also describes situations when
company may obtain status of the Russian tax
resident by its own choice only: (1) a company
is located in a treaty country; (2) it is a party to a
PSA; (3) it is a holding structure (over 95% of its
income is dividends subject to certain
conditions); (4) it is an operator or a direct
shareholder of a new sea-based hydrocarbon
deposit.
In order to obtain tax resident status, a company
must notify the tax authorities at the place of
registration of its separate Russian subdivision
(the existence of a subdivision is mandatory to
comply with the procedure) in accordance with
the form developed by the FTS.
Issuers of tradable bonds and other types of
companies may not be deemed as Russian tax
residents.
Concept of beneficial owner of income
If a Russian tax agent is actually aware of the
party acting as the real beneficial owner of
income originating in Russia, then: (1) if the
beneficial owner is a Russian resident, the tax
agent shall not withhold tax but inform
the tax authorities about payment [3]; (2) if the
beneficial owner is a non-resident, the agent may
apply a respective DTT (with a state where the
beneficial owner is located).
At the same time, it remains unclear as to how to
identify a beneficial owner and which documents
may substantiate this fact. Please note that the
draft law uses the following wording: "if the
payment source is aware of..."
[2] There is some inconsistency in the wording with regards to the application of basic and additional conditions (i.e. the use of
such conditions as "at least one" and "only one"). Thus, we expect the draft law to be correctly adjusted or specified in future.
[3] Following this concept, a Russian tax resident (beneficiary owner) must settle its tax payment obligations on an individual
basis.
Tax exempt transfer of property within a
group
Instead of relying on the exemption set in Article
251.1.11 of the Russian Tax Code, the draft law
proposes a new version with additional
conditions. It clarifies that in order to be exempt,
the company transferring property should not
have residence in a country on the Russian
Finance Ministry’s blacklist (this list is drawn up
and approved in order for the proper application
of Article 284.3.1 of the Russian Tax Code).
This version is more preferable for taxpayers in
comparison with the earlier aforementioned
exemption.
Thin capitalisation rules
Amendments to clauses 2-4 of Article 269 of the
Russian Tax Code were removed from the draft
law. The earlier amendments did not change the
existing rules. However, lawmakers may return
to this issue in the future.
Indirect sales of real estate
The new version of the draft law excludes
benefits that were earlier proposed in regards to
sales of shares (participatory interest) in
companies with over 50% of assets represented
as property held in Russia. The earlier version
proposed taxation of such shares (participatory
interest) depending on the number of
shareholders, their respective stakes and periods
of ownership over five years.
Contacts
We will be happy to answer any of your questions or enquiries.
Financial Services
Energy, Utilities and Mining
Legal Practice
Ekaterina Lazorina
Russia Tax and Legal Services Leader
ekaterina.lazorina@ru.pwc.com
Denis Gorin
denis.gorin@ru.pwc.com
Yana Zoloeva
Legal Practice Leader
yana.zoloeva@ru.pwc.com
Vladimir Burov
vladimir.burov@ru.pwc.com
Consumer and Industrial
Products
David John
CEE Tax and Legal Services Leader
david.с.john@ru.pwc.com
Enrika Schevchenko
enrika.schevchenko@ru.pwc.com
Irina Martakova
irina.martakova@ru.pwc.com
Natalia Kozlova
natalia.kozlova@ru.pwc.com
Natalia Sherbakova (St Petersburg)
natalia.sherbakova@ru.pwc.com
Technology, Communication,
Entertainment and Media
Natalia Vozianova
natalia.vozianova@ru.pwc.com
Artem Petrukhin
artem.petrukhin@ru.pwc.com
Ekaterina Malygina
ekaterina.malygina@ru.pwc.com
Stefano Tonetti
stefano.tonetti@ru.pwc.com
Private Company Services
Alina Lavrentieva
alina.lavrentieva@ru.pwc.com
Mergers & Acquisitions
Galina Naumenko
galina.naumenko@ru.pwc.com
Ekaterina Koropova
ekaterina.koropova@ru.pwc.com
Indirect Tax Services and
Customs
Vladimir Konstantinov
vladimir.konstantinov@ru.pwc.com
International Assignment
Services
Maxim Kandyba
maxim.kandyba@ru.pwc.com
Yana Proskurina
yana.proskurina@ru.pwc.com
Tax Management and
Accounting Services
Kirill Nikitin
kirill.nikitin@ru.pwc.com
Ekaterina Ryabova
ekaterina.ryabova@ru.pwc.com
International Tax Structuring
Natalia Kuznetsova
natalia.kuznetsova@ru.pwc.com
Mikhail Filinov
mikhail.filinov@ru.pwc.com
Transfer Pricing
Svetlana Stroykova
svetlana.stroykova@ru.pwc.com
Andrey Kolchin
andrey.kolchin@ru.pwc.com
Karina Khudenko
karina.khudenko@ru.pwc.com
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