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By Roustam Vakhitov
Attention should ﬁrst be drawn to several
1. Controlled foreign companies.
2. Beneﬁcial ownership.
3. Tax residence determination by the
company’s management place.
4. Taxation of real estate transactions.
5. Criminal liability for the use of
It should be also noted that these
amendments should be considered
within the context of the international
1. Controlled foreign
Trusts and funds: General provisions
of the Tax Code have been amended to
deﬁne the concept of an international
structure without legal personality.
It is a structure which can carry out
activities aimed at deriving income for
the beneﬁt of shareholders (members,
trustees or other persons), or other
beneﬁciaries. The mentioned activities
should not necessarily be of business or
commercial nature, therefore trusts and
similar structures receiving dividends
and other income which can be used for
the beneﬁt or in the interest of “trustees
or other persons” are clearly covered
by the deﬁnition of the structure subject
to CFC legislation. Consequently, as we
have expected, multilevel, discretionary
trusts and other sophisticated structures
cannot be an eﬀective way of mitigating
the impact of CFC legislation. At the
same time such structures unnecessarily
complicate the control over property and
increase the risks of losing thereof.
Moreover, the threshold for Russian
beneﬁciary to disclosure participation
in the case of a foreign legal entity if
10% if Russian residents control 50%
of such foreign company and 25% in
other cases. It is worth noting that
there is no threshold in respect of the
unincorporated structures (trusts).
Although the law contains a number
of provisions which appear to allow an
eﬀective use of such structures in certain
cases, in general, trusts and similar
structures should not be considered as a
strategically successful solution.
Companies: Public companies which
were to be excluded from the scope of
CFC regulations during discussions on
earlier stage of drafting the law are not
given any exemptions in the ﬁnal text of
The following companies shall not be
regarded as CFCs:
• Banks and insurance companies
operating in countries which conduct
eﬀective information exchange with
• Structures of eurobonds and similar
• Companies participating in the
Production Sharing Agreements;
• Companies registered in the countries
of the Eurasian Economic Union
(Russia, Kazakhstan, Belarus,
Armenia; possibility of joining by
Kyrgyzstan and Tajikistan).
• Qualifying companies with at least
80% of ‘active’ income. It should be
noted that many types of income, e.g.
leasing, management, consulting fees
etc., are deﬁned as ‘passive’ for this
Among all the countries listed above,
only Kazakhstan provides with tested
and eﬃcient system of participation
exemption for inbound and outbound
dividends (under certain conditions),
and possibly the country’s companies
can be used for intermediate placement
of dividends, sourced from covered
by Russian CFC taxation companies.
However, Kazakhstan has its own CFC
legislation; therefore using Kazakhstan
will not solve the issue of tax deferral
regarding funds, sourced from oﬀshore
In case of direct or indirect control of
the trust or fund, and 10% (25%) in
respect of a foreign company, the entity
must submit a notiﬁcation to the tax
authorities by the 1st
April 2015 in respect
of control existing as of the 1st
2015. If the control occurs after this date,
the notiﬁcation shall be submitted within
a month after such control arisen.
On taxation of controlled foreign companies
and other anti-offshore measures in Russia
The amendments to the tax code on controlled foreign companies (CFC) and other anti-oﬀshore measures are one
of the most fundamental game-changers over the few decades in respect of taxation of the international structures
and the ﬁght against tax evasion in Russia. ROUSTAM VAKHITOV provides an analysis of the new legislation.
It should be noted, that most likely this
information will be compared with
the data on control for the purpose of
transfer pricing, therefore reports on
transfer pricing and CFC must be in line
with each other.
Under certain conditions, the main of
1) The amount of proﬁt of CFC is RUB50
million (US$872,609) in 2015, RUB30
million (US$523,566) in 2016 and
RUB10 million (US$174,522) as of
2) Any degree of control over the trust/
fund; participation in a foreign
company more than 25% or 10%, if
Russian residents control not less
than 50% in total.
3) The taxation of foreign proﬁts of CFC
not more than 75% of comparable
Russian tax (eﬀectively 15% in
general and 9.75% for dividends).
The proﬁt of a foreign company shall be
subject to taxation as a Russian company
at the rate of 20% or individual tax at the
rate of 13%. Obviously, the threshold for
CFC taxation is much higher, than the
threshold for disclosure of participation,
therefore quite often reported entities
will not be subject to eﬀective taxation.
Upon receipt of dividends from the
Russian company with tax paid in Russia
at a minimum rate of 5% (the lowest rate
of tax on dividends at source under the
Russian tax treaties), the eﬀective amount
of the surcharge to be paid, which
qualiﬁes the foreign company into the
category of exempt from CFC taxation,
will constitute 4.75% for the dividends.
This amount of tax in many cases can be
easily reached through the provision of
any type of services or generating other
income by a foreign entity.
Therefore, the adverse eﬀects on the
level of European holdings with Russian
subsidiaries are not likely to arise.
However, the problems will occur in the
structures, in which the classic oﬀshore
territories operate as proﬁt centers.
2. Bene icial ownership
The law deﬁnes the concept of beneﬁcial
owner of income.
Russian beneﬁcial owner test shall be
applied only in cases when such test is
established by the relevant international
double tax treaty.
The key test evaluates the eﬀective right
to use and (or) dispose the income. The
functions and risks incurred by beneﬁcial
owner are also taken into account.
If a person exercises limited powers and
performs just an intermediary function
without incurring other risks and
functions, he/she will not be regarded
as a beneﬁcial owner. Therefore such
a person will have no right to use the
beneﬁts of international tax treaties.
A person is also not considered as a
beneﬁcial owner, if he/she transmits the
full amount of income or its part to third
In the context of international double tax
treaty application the withholding agent
“has a right” to request a conﬁrmation
of the status of a beneﬁcial owner. This,
in practice, is likely to result in the duty
of such withholding agent to collect
proof on status of income’s recipient as a
beneﬁcial owner thereof.
On the one hand, the test of beneﬁcial
owner is present in almost all Russian tax
treaties in respect of dividends, and often
in the case of interest and royalties. At the
same time, the introduction of deﬁnition
of this term in national legislation, as in
case of Ukraine as of 2011, has resulted a
sharp increase in litigation on this issue.
It would be reasonable to expect similar
scenario to develop in Russia.
3. Tax residence
determination by the
company’s place of
The introduction of this measure has
been discussed for a long time. Its
implementation will also be an eﬀective
way of recognizing the oﬀshore and other
non-residential companies as Russian
taxpayers in case if actual management
of such companies shall be made from
Russia. In particular, similar provision is
implemented in Belarusian practice by
conducting interrogation of employees,
including top managers, within the
tax and administrative investigations.
If it becomes clear that the actual
management over the oﬀshore company
is undertaken by Belarusian individuals/
beneﬁciaries, the appropriate additional
charge shall be made.
Accordingly, transfer of powers for
independent decision-making to the
foreign company and refusal from direct
management instructions by the Russian
resident company/individual shall be a
solution to the above-mentioned issue.
4. Taxation of real estate
The changes of Article 309 of the Tax
Code of Russia concern the companies
whose income from share/equity sales
shall be taxable. In particular, the above-
mentioned will apply not only to the
Russian companies the assets of which
for more than 50% consist of Russian real
estate, but to any companies the assets
of which directly or indirectly for more
than 50 % consist of Russian real estate.
This shall prevent the possibility of the
Russian real estate to be eﬀectively sold
via sale of foreign companies. It should
be noted that the appropriate changes
were made to the Russian double tax
treaties with Cyprus, Luxembourg and
Switzerland. Accordingly, the Russian
rules’ changes will not breach any of
the most actively applied double tax
treaties, except for the double tax treaty
with the Netherlands prohibiting such
will not breach any
of the most actively
applied double tax
for the double
tax treaty with
taxation. This treaty will be most likely
Although an eﬀective mechanism for
application of the new rules is not
established, in similar cases (taxation of
subsoil users) in Kazakhstan an eﬀective
liability for the tax payment is borne by
the buyer, while the property being sold
also serves as a security. It is possible that
the Russian legislator will adapt a similar
5. Criminal liability for the
use of offshore companies
The draft law 599584-6, adopted by the
Russian Parliament in the ﬁrst reading on
November 2014, provides for an
introduction of special criminal liability
for tax and customs duties evasion by the
company through the “concealment or
distortion of information” on controlled
foreign companies and transfer pricing.
The proposed changes stipulate a ﬁne
ranging from RUB200-500 thousand
(US$3,490-8,726), a ﬁne in the amount of
income received by the convicted person
for a period up to three years, as well
as imprisonment of up to six years with
deprivation of the right to occupy certain
positions or to engage in certain activities
for a term up to three years.
In other words, if the tax avoidance
involves the CFC and information is
not fully disclosed, the penalties for tax
evasion in particularly large amounts
will be applied to situations of tax
evasion in cases of underpayment of
10% of taxes and duties or RUB6 million
RUB6 million is currently around
EUR84,000. This is the amount of unpaid
tax in the distribution of, for example,
dividends in the amount of EUR1
million (US$1.24 million) through a
transit Cyprus-controlled company to
an oﬀshore. The tax rate on dividends in
this case shall 5% instead of 15%, which
should be used if a Cyprus company is
not the beneﬁcial owner of the dividends.
This means that the threshold for
criminal liability is actually quite low.
At the same time, the sanctions are not
applicable if the information on CFC and
transfer pricing is fully disclosed.
The purpose of the changes proposed is,
obviously, to encourage the disclosure
of information on CFC. However,
it is unclear what the concept of
“concealment or distortion” covers.
6. The changes within the
context of the provisions of
European legislation, including the
legislation of Cyprus, envisages
severe liability for money-laundering
operations, which cover both the
criminally related transactions and
the funds received as a result of such
The amount of unpaid taxes in Russia
might be considered as such ‘bad’
funds. As a result of application of CFC
provisions the amount of funds subject
to taxation in Russia will signiﬁcantly
increase. Potentially, the failure to pay
taxes on the CFC funds may lead to the
liability of foreign companies’ directors
according to the local anti-money
laundering legislation. Special attention
must be paid to these aspects of the
Russian tax and criminal law application.
The expected joining of Russia to the
G20 initiative on automatic exchange of
information with more than 50 members
of the Multilateral Convention of OECD
and the Council of Europe Convention
on mutual assistance in administrative
matters will give the Russian tax
authorities access to information,
including a large number of the oﬀshore
jurisdictions, as well as will give an
opportunity to verify the correctness of
the information provided in respect of
Concluding our analysis, we should note
that only the most important of the
introduced changes were highlighted.
Recent jurisprudence also delivers
number of adverse decisions in tax cases
against such companies as Mail.Ru,
Oriﬂame and Freshﬁelds Bruckhaus
Deringer. These developments will aﬀect
a large number of Russian and non-
Roustam Vakhitov is a partner at
International Tax Associates. He can be
contacted at email@example.com.
As a result of
of CFC provisions
the amount of
funds subject to
taxation in Russia
will signi icantly