Given the close ties between the two countries, our Cyprus experts have produced this overview of Russia’s impending tax code amendments.
Russia’s “deoffshorisation” law - which introduces amendments to the Tax Code of the Russian Federation - comes into force from 1 January 2015. It should be noted, however, that the legislation still remains a work in progress and further amendments will likely be required during the course of 2015 to provide further clarifications on its provisions.
In a nutshell, deoffshorisation introduces four principal changes to Russian tax landscape; the basics of these new “concepts” are briefly covered below.
The law establishes a mechanism for Russia to tax the income of CFCs where such companies do not distribute their income to the benefit of Russian controlling entities. As per the law adopted, the definition of a CFC refers to companies which are controlled by individuals or legal entities that are Russian tax residents.
Control over the CFC shall be determined both by the ability of the controlling persons to exert influence on the decisions of the CFC with regards to the distribution of its profits and by their level of participation in the authorised capital of the company if more than 25%.
Also, in the case where the overall share of Russian tax residents in the company is more that 50%, then the level of participation in the company in order to determine a controlling person shall be reduced to 10%. It is important to note that the transition period which was previously set from 1 January 2015 until the end of 2017 has now been reduced. As such, a level of participation of 50% shall apply for the purposes of determining a controlling person up to the end of the year 2016.
The law also provides for a number of exceptions from taxation of certain categories of CFCs, including non-profit organisations, banks and insurance institutions, and companies from the Eurasian Economic Union.
The beneficial owner according to the law is a person who has an actual right to income or authority to dispose the income in question. If deemed to be a tax resident of Russia, foreign companies directly or indirectly controlled by Russian beneficial owners (individuals or companies) will be subject to tax on profits in Russia.
The introduction of the concept of beneficial ownership aims to reduce abuse of double tax treaties by structures and back-to-back arrangements circumventing Russian withholding tax.
The law extends the principle of effective management and control to foreign entities such that, if it is determined that a foreign entity is effectively managed and controlled from Russia, it will become subject to Russian corporate income tax. The place of effective management will be governed by specific rules set in Russian domestic law rather than international practice and principles.
The effective management and control is established by a combination of various criteria, with much weight given to record-keeping and record management in determining the place of residence.
Russian capital gains tax will apply to the disposal of shares in foreign companies if more than a half of value of such shares is attributed to real estate in Russia. It is worth noting that Russia has been working with other jurisdictions since 2007 to amend its double tax treaties and thus acquire the right to tax such disposals and prevent circumvention of Russian taxation simply by using two-tier offshore structures.
Such relevant amendments to the Russia-Cyprus double tax treaty will come into effect in 2017.
In view of the new law coming into force next year, foreign structures must prepare for changes without delay. Consider an analysis of management processes and an assessment of Russian tax residency risks, as well as development of related risk management strategies.
Inevitably a significant number of Russian-held international corporate groups will undergo revision of current structures to ensure compliance with the law; these will likely include structuring of joint ventures with Russian partners as well.
While it is very Russia-heavy, deoffshorisation will impact the Cyprus business community, too, due to the strong business ties between the two countries. Read more on doing business in Russia or Cyprus.