Since 2014, new legislation has been in force, according to which controlled foreign companies are now subject to other tax rules. It is worth noting that the introduction of the new law provoked a real “boom” in the financial environment, and its significance for many has become simply unprecedented.
What kind of law is this?
The current tax legislation, to which controlled foreign companies are subject, is present today in almost any developed country, and since 2015, Russia has also been included in their number. In particular, the law in question first introduced the following norms:
- A specialized mechanism is introduced for taxation of profits that any controlled foreign companies (primarily offshore) receive through the fact that their retained earnings are included in the tax base of those who control them if the controlling organization is a tax resident of the Russian Federation. Also, additional liability of taxpayers is introduced in case of failure to fulfill the relevant obligations.
- The rules for recognizing various organizations as tax residents of the Russian Federation are completely changed, which led to the introduction of the criterion of “place of actual management”.
- The existing norms of the Tax Code of the Russian Federation, related to how controlled foreign companies were taxed, were substantially supplemented.
- The use of various international agreements on which double taxation was avoided when applying the “actual recipient of income” rule was limited.
All these changes have become effective since 2015. It is worth noting that the provisions on which various offshore companies now operate are used in the process of determining the tax base for relevant taxes regarding the profits of foreign organizations, and it has been determined since 2015.
What are these firms?
Controlled foreign (including offshore) companies are organizations from other states that simultaneously satisfy the following conditions:
- not considered a tax resident of the Russian Federation;
- as individuals in it are various individuals who are tax residents RF
It is also worth noting that there are certain exceptions to the rules - a foreign company may be recognized as a foreign structure that did not take the form of a legal entity controlled by individuals or organizations that are tax residents of our country.
In this case, a foreign organization without prior formation of a legal entity is a certain organizational form, which is created in full accordance with the current legislation of another country, but does not provide for the formation of a legal entity. faces. At the same time, according to his personal law, such a company has the right to engage in activities whose main focus is making profit in the personal interests of its participants or any other beneficiaries.
Who is considered a controlling entity?
In accordance with applicable law, the controlling person of a company may be:
- legal entity or individual who owns more than 25% of this organization;
- a legal entity or individual who owns more than 10% of this organization, if the total share of all persons who are tax residents of Russia is more than half (50%).
It is worth noting that the total share of participation of a certain organization in any other, like an individual, is determined in accordance with the current legislation under Article 105.2 of the Tax Code of the Russian Federation. Moreover, if we consider the exceptions to the rules, then regarding the share of an individual in the organization, an account is taken of his sole participation, as well as participation with minor children or spouses.
Share
The total share of one organization in any other is determined by a certain amount of shares of direct and indirect participation, expressed as a percentage.
In this case, direct participation refers to the presence of a certain company of a part of the voting shares of another company or some part that is directly owned by one company in the charter capital of another. If it is not possible to determine their amount, then in that case the share that belongs to one organization and is determined in proportion to the number of participants in another is taken into account.
The current rules provide for the establishment of additional circumstances in the process of determining the exact share of one company in another in a judicial proceeding. The rules that are provided by applicable law are also used in the process of establishing the share of a certain individual in a company. Thus, the legislator has significantly increased the overall percentage threshold for ownership of foreign companies to recognize a person as controlling, up to 25%, however, in fact, if the owners of this structure are several Russian residents owning more than half of this company, then, to recognize them as controlling persons, it will be quite enough to have a share of more than 10%.
At the same time, it is worth noting that during the transition period (until the beginning of 2016), various persons who invested in foreign companies could be called controlling only if their share was 50%.
Particular attention should be paid to the fact that a certain person who does not meet the above criteria, but who is directly involved in the work of this organization in his own interests, as well as in the interests of his minor children or spouse, can be called a controlling person. Thus, the current legislation does not limit the established concept of “control” only to what share a person has when investing in foreign companies in Russia or abroad.
What is “control”?
Under this concept, in accordance with the norms of the current legislation, it is customary to envisage the provision or the possibility of providing decisive importance to any decisions that this organization takes regarding profit made after taxation. Such control can be obtained not only through indirect or direct participation in this company, but also through participation in the concluded agreement, the subject of which is the management of this company, as well as other features of the established relationship between the organization, person and (or) any or other persons.
The opportunity to control Russian companies (foreign companies officially) without forming a legal entity is recognized as a situation in which a person provides or has the ability to have a decisive influence on various decisions made by a person involved in managing the assets of this structure regarding the distribution of profits after tax between all participants in accordance with the specifics of the legislation of a particular foreign state or composition lennogo contract.
It is also worth noting that, in accordance with the new laws, this can be ensured as follows:
- various circumstances, such as participation in a contract, one of the subjects of which is the management of the company;
- relations conducted within the framework of the trust agreement if, in accordance with it, the shares of the company are owned by a certain nominal shareholder in the interests of a certain person;
- relations conducted under the general power of attorney, which was issued by the company to a certain person.
This is not a complete list of how a foreign company can be controlled. In other words, sometimes not only the titular owner of certain shares of a given company, but also the various beneficial owners who manage there one way or another, acts as a controlling person.
Moreover, the criteria for exercising control, which are specified in the current legislation, can hardly be called completely defined. For example, if we take a literal interpretation of the norms of this legislation, then we can say that if a person is the founder or beneficiary of a private fund, which is a legal entity, but at the same time, in accordance with the constituent documents, he was previously suspended from various decisions or distribution of profit, it is believed that he is not controlled by this organization. Tax residents of the Russian Federation can create a large number of disputes between payers and authorized bodies.
In what situations can they be exempted from taxation?
There are many interesting features in the new legislation. In particular, in accordance with the laws, the profits earned by CFCs (controlled by foreign companies) can be exempted from taxes if at least some of the following conditions are met:
First
She does not conduct commercial activities, nor does she, in accordance with her personal laws, distribute the profit received between shareholders or any other persons
In this case, the law of the country in which it was established is perceived as the personal law of a legal entity. If a non-commercial status is awarded, under which a controlled foreign company will then work, taxation is carried out according to the legislation of the country in which it was established, as well as according to the documents drawn up. In many countries, it is often customary to confer the status of non-profit educational, religious, charitable and human rights companies, as well as all kinds of clubs, chambers of commerce, professional associations and even a huge number of other structures.
Second
The company was established in full accordance with the current legislation of the state that is a member of the EEC.
In addition to Russia itself, such states also include Armenia, Kazakhstan and Belarus. Accordingly, profits of controlled foreign companies cannot be taxed if the organization operates in the territory of these countries, but at the same time is owned by residents of the Russian Federation.
Third
The permanent location of the company is carried out in the country with which Russia has an international agreement on various tax issues.
Moreover, the law on controlled foreign companies here also provides for certain exceptions. In particular, we are talking about those countries that do not exchange information to ensure taxation with the Russian Federation. It is also worth noting that this rule does not apply to those companies with respect to which the effective tax rate, which is determined by the end of the year, is at least 75% of the total weighted average rate.
The general list of countries that do not exchange data to ensure taxation with Russia is approved by authorized executive bodies that monitor and supervise fees and taxes.
How is this rule enforced?
To use the latter option of exemption, foreign banks and other organizations must meet two main conditions at once:
- the state in which the company is constantly located has an agreement with Russia regarding taxation issues;
- the effective tax rate of this organization in her country amounted to more than 75% of the weighted average Russian tax rate.
It should be noted that if the state does not provide a tax exchange with the Russian Federation (even if there is an agreement that double taxation with the Russian Federation should be avoided), then the profit of a foreign company operating on its territory will not be exempted from the need to pay taxes. However, for now, an exact list of such countries does not exist, since it must first be approved by the Federal Tax Service of Russia.
Also, special attention should be paid to the fact that in our time in Russia there is already a list of territories and states that provide a preferential tax regime or that do not provide for the possibility of disclosing and further reporting in the process of conducting financial transactions or, in other words, offshore zones. This list was approved by the relevant order of the Ministry of Finance back in 2007. In particular, this was done to determine the possibility of using the zero rate of the established tax on dividends. However, the use of this list will not be carried out for various purposes of CFC related legislation.
Fourth
The permanent place of stay of this company is a certain territory with which the international treaty of the Russian Federation was previously concluded, related to taxation issues and providing for the exclusion of double taxation. The only exception in this case are states that do not provide data exchange.
In this case, to exclude taxation, the company must meet two conditions:
- the state of regular location should have an agreement concluded with Russia that ensures the avoidance of double taxation;
- the total share of passive income is not more than 20% of the total profit.
In other words, for this subparagraph to take effect, the company’s revenues should be mainly provided by vigorous activity. It is worth noting that this paragraph also does not apply in any way to companies that are included in the "black list" of the Federal Tax Service.
Example
A certain company was officially registered in Cyprus, and the vast majority of its revenue comes from the sale of various goods. Moreover, a certain part of her income is made up of all kinds of royalty payments that she receives from foreign organizations that use her trademark on the basis of a license agreement. Given the financial statements of a Cypriot company, the total share of royalty income among total profits is less than 20%, and there is an existing agreement between this country and Russia, that is, Cyprus provides the exchange of necessary information for taxation with the Russian Federation. Thus, all the necessary conditions are met, and the profits of the Cypriot company are completely exempt from the need to pay taxes.
Second example
A Scottish or English limited liability partnership engages in trading activities that bring it profit. There is a concluded convention between the UK and the Russian Federation, drawn up to avoid double taxation, and the UK at the same time provides a complete list of information for taxation. If all these conditions are met, then the profit of this partnership, if it is regulated by a resident of the Russian Federation, should be exempted from paying taxes.
Particular attention should be paid to the fact that neither Scottish nor English partnerships have the ability to use the benefits provided for by the current Russian-British convention, since they do not represent separate subjects of taxation, and therefore they do not have the opportunity to obtain confirmation of tax residency in your state.
Fifth
The company is a foreign structure without an established legal entity, and at the same time fully complies with the following conditions:
- after the formation of this structure, the founder, in accordance with her personal legislation and constituent documents, does not have the right to receive the assets of this organization in her property;
- the rights of the founder of this company related to his status in his work (including all kinds of rights to determine beneficiaries, alienation of property and others), taking into account the personal laws of this structure and the norms of its constituent documents, cannot be transferred to others after the basis, except in situations where this transfer is carried out in the manner of universal succession or inheritance;
- the founder does not have the possibility of indirect or direct receipt of a certain profit of the structure, which is distributed between its participants.
It is worth noting that in this case the indirect receipt of profit is the receipt by the interdependent persons of a certain profit of the organization in the interests of this person.
In order to determine whether a particular foreign structure falls under such an exemption, you first need to establish what specific rules are provided for by this company in local laws, and what specific formulations are spelled out in the constituent documents of this structure regarding the distribution of profits, ownership of assets, certain beneficiaries or the order of their definition. If the establishment of a foreign structure was carried out on appropriate conditions, then in this case its profit can be completely exempted from paying taxes.
Sixth
Foreign firms are a banking structure or an insurance organization that engages in activities in full accordance with their personal laws, based on a license or any other special permit, while the country of its regular location is a certain country with which Russia has contract regarding taxation issues.
In this case, the foreign company must have an insurance or banking license, but this clause, in no way, again, affects states that do not provide information exchange with the Russian Federation.
