Russian Federation: Complying With Legal Requirements On Controlled Foreign Corporations

Dentons' Russia Tax practice would like to remind readers that starting in 2017 individuals and legal entities that are deemed Russian tax residents must annually file notices about foreign entities and unincorporated structures that meet the criteria of controlled foreign corporations of Russian tax residents set by the Russian tax legislation. The Federal Tax Service (FTS of Russia) approved the form and procedure for completing the notice about controlled foreign corporations with its Order No. MMV-7-13/679@ dated 13 December 2016 (the Order is currently being registered with the Ministry of Justice). In addition, in 2017 Russian tax residents must declare the retained earnings of controlled foreign corporations for 2015 as their income and pay profit tax (for companies) or personal income tax (for individuals) on them.

Who is affected?

The requirements to file a notice about controlled foreign corporations affect all those considered Russian tax residents for whom foreign legal entities or unincorporated foreign structures (trusts, funds, partnerships, etc.) are deemed controlled foreign corporations, namely:

• Russian companies;
• Russian and foreign citizens and stateless persons who have been in the Russian Federation at least 183 days as at 31 December 2016;
• foreign companies considered Russian tax residents according to the procedure set forth in Article 246.2 of the RF Tax Code.   

When is a foreign company or unincorporated structure deemed a controlled foreign corporation of a Russian tax resident?

The tax legislation sets different criteria for deeming foreign structures controlled foreign corporations of Russian tax residents for foreign companies (legal entities organized under the laws of foreign states and possessing civil legal capacity) on the one hand, and unincorporated foreign structures (organizational forms established in accordance with the laws of foreign states that in accordance with their personal law may engage in activity to earn income or profit on behalf of their participants or other beneficiaries) and foreign legal entities whose personal law does not provide for equity interest, on the other hand.

Foreign legal entities whose personal law provides for equity interest are deemed controlled foreign corporations of Russian tax residents provided at least one of the following conditions is met:

• the equity interest of the Russian tax resident in the foreign legal entity (for an individual, together with their spouse and minor children) is more than 25% (more than 50%  for 2015); OR
• the equity interest of the Russian tax resident in the foreign legal entity (for an individual, together with their spouse and minor children) is more than 10% AND the total equity interest of all Russian tax residents (both individuals and legal entities) in that foreign legal entity is more than 50% ; OR
• the Russian tax resident exerts or is able to exert a decisive influence on decisions made by the foreign legal entity with respect to the distribution of its after-tax profit (income) due to direct or indirect participation in that legal entity, participation in a contract (agreement) the subject of which is the management of that legal entity, or other specifics of the relationship between the Russian tax resident and the foreign legal entity and/or other persons.

An unincorporated foreign structure (fund, partnership (partnerstvo, tovarishchestvo), trust or other form of collective investment and/or fiduciary management) and the foreign legal entity whose personal law does not provide for equity interest is deemed a controlled foreign corporation of a Russian tax resident:

(1) if the Russian tax resident is the founder of the unincorporated foreign structure and/or foreign legal entity without equity interest, provided at least one of the conditions listed below is met:

• the Russian tax resident may receive, directly or indirectly, all or part of the profit (income) (claim receipt of profit (income)) of the unincorporated foreign structure/foreign legal entity without equity interest; OR
• the Russian tax resident may dispose of the profit (income) of the unincorporated foreign structure/foreign legal entity without equity interest or part thereof; OR
• the Russian tax resident reserves the right to the property transferred to the unincorporated foreign structure/foreign legal entity without equity interest (the property is not transferred on an irrevocable basis); OR
• the Russian tax resident reserves the right to receive any rights mentioned in the previous three bullet points in the future; OR 
• the Russian tax resident exerts or is able to exert a decisive influence on decisions made by the person managing the assets of the unincorporated foreign structure/foreign legal entity without equity interest with respect to the distribution of its after-tax profit (income) in accordance with the personal law and/or constitutive documents of that structure/legal entity;

(2) if the Russian tax resident is not the founder of the unincorporated foreign structure/foreign legal entity without equity interest, then provided the conditions listed below are met:

• the Russian tax resident exerts or is able to exert a decisive influence on decisions made by the person managing the assets of the unincorporated foreign structure/foreign legal entity without equity interest with respect to the distribution of its after-tax profit (income) in accordance with the personal law and/or constitutive documents of that structure/legal entity; AND

Subject at the same time at least one of the following conditions:

• the Russian tax resident is beneficially entitled to the income (or part thereof) of the unincorporated foreign structure/foreign legal entity without equity interest; OR
• the Russian tax resident is entitled to dispose of the property of the unincorporated foreign structure/foreign legal entity without equity interest; OR
• the Russian tax resident is entitled to receive the property of the unincorporated foreign structure/foreign legal entity without equity interest in the event of its termination (liquidation, termination of contract)

Where are notices filed?

Notices about controlled foreign corporations are filed with the tax inspectorate at the place of residence (for an individual Russian tax resident) or place of business within the Russian Federation (for a legal entity Russian tax resident).

Notice filing deadlines in 2017

Notices about controlled foreign corporations due in 2017 must be filed by 20 March 2017.

What else should Russian tax residents remember to do for their controlled foreign corporations?

In addition to filing notices about controlled foreign corporations with the tax authorities, the Russian tax legislation provides for:

• Declaring the profit of a controlled foreign corporation by filing a personal income tax return (for individual Russian tax residents) and annual profit tax return (for legal entities) with attached financial statements of the controlled foreign corporations for the financial period for which the Russian tax resident is declaring profit as that resident's income. The personal income tax return for 2016 must be filed by a Russian individual tax resident for 2015 profit of controlled foreign corporations on or before 2 May 2017,  and the profit tax return for 2016 must be filed by a company that is a Russian tax resident on or before 28 March 2017. 
• Payment of personal income tax (for individual Russian tax residents) on profit of controlled foreign corporations at the rate of 13% on or before 17 July 2017,  and for companies that are Russian tax residents, payment of profit tax on profit of controlled foreign corporations at the rate of 20% on or before 28 March 2017 (provided that the profit of the controlled foreign corporation is not exempt from tax on grounds provided for by Russian tax legislation).

How can we help?

Dentons' Russia Tax practice provides its clients with a wide range of services related to compliance with legislation on controlled foreign corporations, including:

• Advising clients on technical aspects of application of the controlled foreign corporation rules;
• Analysis of the applicability of the controlled foreign corporation rules to the client's corporate structure:
  • Determining whether or not there are grounds to apply the rules on foreign corporations to specific foreign companies of the client;
  • Determining whether it is possible to use benefits provided for by the controlled foreign corporation rules;
• Evaluating the degree and magnitude of risk associated with application of the controlled foreign corporation rules to the client's corporate structure:
  • Calculating the taxable profit of controlled foreign corporations;
  • Calculating the tax liabilities of Russian tax residents with respect to profit of controlled foreign corporations;
• Reviewing the financial statements of controlled foreign corporations and auditor's reports for completeness of information required to confirm tax base calculation for personal income tax and profit tax with respect to profit of controlled foreign corporations, including interacting with auditors;
• Assisting clients in completing and filing notices about controlled foreign corporations with the tax authorities (and, if necessary, notices of participation in foreign companies and/or establishment of unincorporated foreign structures);
• Assisting clients in declaring profit of controlled foreign corporations as income of Russian individual or company tax residents;
• Interacting with tax authorities and the Russian Finance Ministry on matters of compliance with the legislation on controlled foreign corporations, supporting tax audits in matters related to compliance with the legislation on controlled foreign corporations;
• Handling disputes between the tax authorities and Russian tax residents regarding compliance by the latter with the legislation on controlled foreign corporations at both the pretrial stages and at all levels of the commercial courts and courts of general jurisdiction.  

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.