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Leading the Way in Russian Law

KSENIA STEPANISCHEVA SENIOR ASSOCIATE LIDINGS

CFC RULES AND FOREIGN

CAPITAL IN RUSSIA

June 7th 2016, Lotte Hotel, Moscow, Russia

INTAX EXPO RUSSIA

CFC: THE ESSENTIAL LEGISLATION


Tax Code of the Russian Federation (with amendments on 05.04.2016 introduced by Federal law No. 102 dated 05.04.2016):

The Federal Law No. 85-FZ of 06.04.2015 The Federal Law No. 150-FZ of 08.06.2015 The Federal Law No. 32-FZ of 15.02.2016 Letter of Russian Ministry of Finance No. 03-08-05/22689 of 21.04.2015; «On the definition of tax residence»

Letter of Russian Ministry of Finance No. 03-01-11/25295 of 30.04.2015; «On the definition of tax residence»

Letter of Russian Federal Tax Service No. OA-3-17/87@ of 16.01.2015; «On the loss of tax resident status of the Russian Federation by the individual»

Letter of Russian Federal Tax Service No. CA-3-14/460 of 12.02.2015; «On the recognition of individuals as tax residents of the Russian Federation»

OECD Public Discussion Draft BEPS ACTION 3: STRENGTHENING CFC RULES of 12 May 2015

CFC: DEFINITION-CRITERIA


Controlled foreign company (CFC) – a registered corporate entity that conducts business in a jurisdiction or country different from the residence state of the controlling persons

In Russia CFC is defined as a foreign company that:

1) Simultaneously meets all the following criteria: The organization is not a tax resident of the Russian

Federation; Controlling person is an organization and (or) an individual,

which are recognized as tax residents of the Russian Federation

2) Has a controlling entity (company or individual), which is recognized as tax resident of the Russian Federation

Controlling entity (company or individual) of a foreign company is recognized as such if:

Has a total share in the foreign company of more than 25% since 2016 (clause 1 Art. 25.13 of Tax Code)

Has a share in the foreign company (for individuals - together with their spouses and minor children) of more than 10%, if a total share of all shareholders, which are tax residents, is more than 50% (clause 1 Art. 25.13 of Tax Code)

1

CFC: DEFINITION-CRITERIA


If the individuals’ interest is less than the given limits, he is also recognized as the controlling entity in case of exercising control for his own benefit or in the interests of its spouse and minor children Exercising control over a foreign company: (clause 7 of Art. 25.13 of Tax Code) Participation in the management contract (agreement) of

the foreign organization The impact or the ability to cause a decisive impact on the

distribution of profits (income) upon taxation Other specific aspects of relations between individuals

and legal entities and between foreign organization and (or) third persons

2

EXERCISING CONTROL OVER THE NON-CORPORATE FOREIGN COMPANY


Exercising control over the non-corporate foreign company is considered as such when: The impact or the ability to cause a decisive impact on the decisions regarding distribution of profits, by person managing assets of the company (clause 8 of Art. 25.13 of Tax Code) The controlling person of a non-corporate foreign company is the Founder of such company (clause 9 of Art. 25.13 of Tax Code) Individual-tax resident of the Russian Federation can independently declare himself as the controlling person of a foreign organization (clause 13 of Art. 25.13 of Tax Code) CFC taxable profit = profit of organizations or individuals recognized as controlling entity of CFC (clause 2 of Art. 25.15 of Tax Code)

NOVELTIES ON CFC LIQUIDATION


Clause 2.2. of Article 277 of the Tax Code provides so called «benefit» for the CFC shareholders if a foreign company is liquidated Benefit: income received in the form of the cost of property (property rights) is not included in the shareholders’ taxation base, recognized as the controlling entity when CFC is liquidated Validity period of the benefit – up to 01 January 2017 (Liquidation to be terminated till 01 January 2018) Criteria to be met to go for benefit: Shareholder must be a controlling person Controlling person shall submit a notification on

liquidation to the tax authority not later than 3 months from the date of occurrence or changes in participation interest in a foreign company

Foreign entity is considered as controlled

CFC: TAX EXEMPTIONS CRITERIA


CFC is a non-profit organization that does not distribute profits to shareholders or other persons, in accordance with its personal law CFC is formed in accordance with the legislation of the member-state of the Eurasian Economic Union, and has a permanent location in one of the countries of the union The effective income tax rate for CFC is not less than 75% of the average weighted tax rate on corporate profits CFC is:

Active foreign company Active foreign holding company Active foreign sub-holding company

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CFC: TAX EXEMPTIONS CRITERIA


CFC is a bank or insurance company CFC is: Issuer of marketable bonds A company, authorized to receive interest income is to be

paid on the marketable bonds A company, whose rights and obligations on marketable

bonds, issued by other foreign company were yielded to CFC is involved in mining projects CFC is an operator of the new offshore hydrocarbon deposits or a direct shareholder of the operator of the new offshore hydrocarbon deposits

2

ACTIVE FOREIGN COMPANY


Active foreign company – a company, passive income amount of which is not more than 20% of a total company’s income for the given tax period

Kinds of passive income (clause 4 of Art. 309.1 of the Tax Code):

Dividends Income resulting from the distribution of assets Interest return Income from the use of intellectual property rights Income from the stock (shares) sale Income from the realty sales Income from the realty rental Income from forward financial instruments (derivatives) Income from mutual funds Income from outsourcing and outstaffing Other

Other income is considered as active

Federal Law No. 32 of 15.02.2016 «On amending the first and second part of the Tax code of the Russian Federation» introduced that income derived from the derivatives for banks is considered as active if there is a license for such activity and this income is also the main purpose of such activity

FOREIGN HOLDING/SUB-HOLDINGS


A foreign company is considered a holding if: A share of the direct participation of the Russian controlling entity is not less than 75% A period of ownership of these shares shall be not less than 365 consecutive calendar days

OBLIGATION TO SUBMIT NOTIFICATIONS TO THE TAX AUTHORITIES


Article 23 of the Tax Code provides for the need for taxpayers to notify the tax authority about: Participation in foreign organizations, if the share is more than 10% CFC in respect of which the taxpayers are the controlling entities Establishment of foreign non-corporate legal structures, as well as control over them, or beneficial owner of the income

NEW «BLACK LIST» OF FEDERAL TAX SERVICE


In March 2016, the Federal Tax Service (hereinafter – «FTS») of Russia has issued an Order* approving the List of states and territories which do not provide required level of information exchange for tax purposes with the Russian Federation

The List includes:

Bermudas Brazil British Virgin Islands Hong Kong and Macao SAR** Liechtenstein Monaco Isle of Man and the Norman Isles (Guernsey, Jersey, Sark,

Alderney) United Arab Emirates Others *Order of FTS of Russia dated 04.03.2016 No MMV-7-17/117@ «On approval of the list of states (territories) that do not provide the exchange of information for tax purposes with the Russian Federation» **Special Administrative Region

FOREIGN CAPITAL IN RUSSIA


In 2015 a requirement for disclosure of foreign assets was introduced. Up until 15 June 2015 the beneficiaries were obliged to notify the FTS of participation in the CFC*

The interest, which needs to be calculated – 10% and above

Starting from 2017 taxes on the CFC undistributed profits will need to be paid at rates:

20% for companies 13% for individuals-owners of the 50% share

Tax is imposed on the companies the profit of which by the end of 2015 amounted to 50 million RUB and more

Since 2016 the tax shall be paid by the holders of 25% up to 50% shares, even with the profit of 30 million RUB, and 10 million RUB since 2017

There is a penalty for providing false information or failure to pay tax – 20% of the underpaid amount and accrued interest (Article 123 of the Tax Code)

NEED FOR DISCLOSURE AND RELATED LIABILITY

*The Federal Law of 08.06.2015 N 140-FZ «On a voluntary declaration of assets of individuals and banks accounts (deposits) and on amendments in certain legislative acts of the Russian Federation»

DIRECT INVESTMENTS FROM RUSSIA ABROAD FROM 2011-2015


81,4 53,9 61,6 153

[ЗНАЧЕНИЕ]*

0

20

40

60

80

100

120

140

160

180

2011 2012 2013 2014 2015

US

DO

LLA

RS

Bill

ion

* - Estimated by Central Bank of Russia

STATISTICS

DIRECT INVESTMENTS FROM RUSSIA ABROAD FROM 2011-2015


A substantial outflow of capital from Russia in 2014 is about 153 billion USD due to the influence of geopolitical factors and the decline in investment in the Russian economy. A similar situation for 2015 – 56.9 billion USD (estimated) In the third quarter of 2015 the inflow of capital to Russia, which amounted to 3.4 billion USD was recorded for the first time in a long period Such data is contained in the assessment of the balance of payments, which the Bank of Russia published on 9 October 2015. The last time the Central Bank recorded a quarterly inflow in the second quarter of 2010 (4.1 billion USD) 78 out of 400 leading Russian companies are owned by foreign investors, and 30% used and continue to use the holding companies in the Netherlands, Cyprus and other countries for investment in Russia* *According to Central Bank of Russia (www.cbr.ru) and Russian Gazette (www.rg.ru)

STATISTICS

DIRECT INVESTMENTS FROM RUSSIA ABROAD FOR I-III QUARTER 2015


STATISTICS

453 535

2274

332

1236

424

4941

541

-195 184

-407

1075

-33

-1000

0

1000

2000

3000

4000

5000

6000

US

DO

LL

AR

S M

ILL

ION

S

DIRECT INVESTMENTS IN RUSSIA FROM ABROAD FOR I-III QUARTER 2015


STATISTICS

51

3777

739

1360 970 675

-905

-4796 -4178

-428

645 257

1174

-622

-6000

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

US

DO

LL

AR

S M

ILL

ION

S

IMPORT OF CAPITAL INTO RUSSIA THROUGH EXPORT CIRCULATION OF CAPITAL IN ECONOMICS


The vast majority of capital outflows is calculated for equity participation of foreign companies, including those located in jurisdictions with preferential tax treatment This is one of the key types of direct investments and an important method of withdrawal of funds abroad Refund in Russia in the form of loans to subsidiaries of foreign companies In the first half of 2015 the average amount of M&A deals amounted to $70.3 million USD (excluding the purchase of “Stroygazkonsalting” for 7 billion USD), which is significantly lower than in 2014

RESTRICTIONS IMPOSED


In January, 2016 the limits for foreigners in charter capital of Russian mass Media companies are set at the level of 20% and foreigners are banned from being founders of the mass Media companies In December, 2015 the amendments to the Federal Law limiting the share of foreign capital in Russian banks (not more than 50%) have entered into force Notice of the Bank of Russia of 28.01.2016 N 3948-U «On the procedure of calculation of the size of foreign capital in the aggregate authorized capital of credit institutions licensed to conduct banking operations» *The Federal Law from 14.10.2014 N 305-FZ «On Amendments to the Federal Law «On Mass Media» **The Federal Law from 14.12.2015 N 372-FZ «On Amendments to Articles 16 and 18 of the Federal Law «On Banks and Banking Activity»

WHAT HAS CHANGED?


The decline of investment interest in Russia due to the geopolitical situation, the Ukrainian crisis, as well as prohibitions of investment in some Russian companies because of the sanctions imposed

The share of companies from countries with preferential tax treatment among the investors in Russia remains significant or increases due to reduced investment from conventional countries

Strengthening and further regulation of CFC legislation may lead to the fact that the ratio between the turnover of direct investments with offshore companies and conventional countries will reduce

In the period from 2016 to 2018, the Central Bank of Russia predicts a decline in investment income flow from Russia to foreign countries, which is the result of slow growth in income payments from foreign investments

Gradual decline in capital outflows from the Russian economy can be projected

CONCLUSIONS

WHAT HAS CHANGED?


Policy of «import substitution», and the State is aimed at: Capital market and investment

Keeping the capital in Russia, reducing its export volumes abroad,

Along with the establishment of additional barriers to foreign investment in Russia Thus, a bet has been made on the domestic market, as opposed to earlier policies to attract foreign capital

CONCLUSIONS


THANK YOU


Q & A

KSENIA STEPANISCHEVA

Senior Associate Corporate and M&A Practice

Lidings

Capital City Complex Presnenskaya nab. 8 Bldg.1

Moscow, 123317, Russia

Tel.:+ 7 (495) 989-44-10 Fax: +7 (495) 989-44-20

E-mail: [email protected]

Lidings is a leading independent national law firm with a broad base of clientele in Russia and the CIS. Since its launch in the mid-2000s, the firm has achieved impressive growth and built a noteworthy reputation. The firm advises its predominantly international clients from its two offices in Moscow and St. Petersburg

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