Deoffshorisation in Russia

11-12 June 2015

Alexei Ryabov

Tax Partner

Page 2

Contents

5

2

3

1 Deoffshorisation campaign

CFC rules

Tax residency

Tax amnesty

6 Questions and answers

4 Beneficial ownership

DEOFFSHORISATION CAMPAIGN

1

Page 4

12 December 2013

27 May, 26 August,

22 October 2014

18 March 2014

24 November 2014

1 January 2015

President message to the Federation Council on

“Deoffshorisation” of Russian economy

The first draft of the “Deoffshorisation” legislation

Revised versions of the Draft Law, the Draft Law

was submitted to the State Duma

The Law 376-FZ was enacted

The Law 376-FZ came into force

The Draft Law on Capital Amnesty was adopted by

the Federation Council 3 June 2015

3 June 2015

The amendments to the 376-FZ were adopted by

the Federation Council

Deoffshorisation campaign: background

Page 5

Deoffshorisation Campaign Tax vs non-tax measures

TAX MEASURES NON-TAX MEASURES

Controlled Foreign

Company

Tax Residency

Beneficial Ownership

Introduction of local codified GAAR (planned)

Amnesty of Capital

Extension of criminal liability

THE CONTROLLED FOREIGN COMPANY (“CFC”) RULES

2

Page 7

CFC rules Controlling person

► Individuals – Russian tax

residents (more than 183 days

in Russia) - taken together with

spouses and infants

► Legal entities – Russian tax

residents (established or

managed and controlled in

Russia)

PHC

(BVI)

SubHoldCo

(Cyprus)

HoldCo

(Russia)

DutchCo CyprusCo

BVICo

Russian tax residents – Controlling Persons

100% 40% 45% 15%

PHC

(BVI)

CFC

CFC

Page 8

CFC rules CFC – foreign legal entity

More than 50%

Participating interest* in 2015

1

Controlling Persons

More than 25%, or

More than 10%, if participation of

all Russian tax residents (even unrelated)

exceeds 50%

1

2

Participating interest* starting from

1.01.2016

Control : • decisive influence on decisions affecting a controlled company’s

distribution of profit; and (or)

• ability to influence the entity that manages such structure’s assets as regards decisions on profit distribution

Leg

al

part

icip

ati

on

C

on

tro

l

OR

*Participating interest - direct (indirect) participation, including participation

through structures (i.e., trusts, funds, foundations etc.)

Page 9

CFC rules CFC – foreign structure: significant amendments

Trust /

Foundation

Settlor is a

controlling person

Has the right with respect

to:

- Income OR

- Management of the

income or

- Property (revocable trust)

OR

Carries out control

Beneficiary is a controlling

person

Has the right with respect to:

- Income

- Management of the property

- Property upon liquidation and

- Carries out control

Settlor is not a controlling

person

Does not have right with respect

to:

- Income

- Management of the income

- property

- Property upon liquidation

Does not carry out control

Beneficiary is

not a

controlling

person

- Does not carry

out control

Companies

Page 10

CFC Profits

Local audited FS

►Treaty country

AND

►Company subject

to mandatory audit

subject to “lex

personalis”

Russian Tax Rules

Any other

cases

Recommendation:

► Unless the Law is amended, seek legal advice on mandatory audit

for all CFCs. In addition, seek clarifications from the Russian

Ministry of Finance

CFC rules Calculation of CFC profits (1 of 2)

Page 11

Profits

Dividends

13%

20%

Russian tax

Tax paid by CFC

Distributed in the current and next year

In Russia or abroad

CFC Income deemed received by the controlling person as of

31 December of the year following the CFC financial year

CFC rules Calculation of CFC profits (2 of 2)

Excluded income:

• FOREX differences

• Income on reassessment

Page 12

CFC rules Issues to consider for Cyprus

“Grey” areas in definition of control and determination of participating interest (e.g., voting vs. non-voting shares)

No practice of exempt structure – matter of judgment

Main exemptions of CFC profits (e.g. ETR test) may not be applicable to typical Cypriot companies (e.g. holding, financing)

Carefully consider simplification of structures/ restructuring and related accounting treatment to avoid CFC leakages

Prospects of using audited financial accounts as CFC profits basis still unclear!

* ETR - effective tax rate

TAX RESIDENCY OF FOREIGN COMPANIES BY PLACE OF EFFECTIVE MANAGEMENT

2

Page 14

Tax residency General provisions

Definition

► A foreign company can be treated as

Russian tax resident if:

the place of management of the foreign

company is in Russia; OR

it is tax resident in Russia under an

applicable double tax treaty (tie breaker

procedures)

The introduction of the “place of

management” principle enables Russian

taxes to be levied on worldwide income of

foreign companies, if they are effectively

managed from Russia

This creates an exposure for Cypriot

companies instructed from Russia

HoldCo

(Russia)

Dutch Co Cypriot Co

BVI Co

100%

Management

Page 15

Tax residency Determination of place of management

KEY CRITERIA:

Executive management is

exercised from Russia

The company’s chief (executive)

officers perform their duties

mainly in Russia

SUPPLEMENTARY CRITERIA:

Accounting records or management

accounts are maintained in Russia

The company’s corporate records

are maintained in Russia

Day-to-day management of

personnel takes place in Russia

Chief officers are persons

who oversight an enterprise’s

activities and responsible for

planning, management and

If the key criteria are met both in Russian and in other foreign state, the supplementary criteria should be considered (at least one of them is a sufficient trigger)

Page 16

Tax residency Exemptions

Operating companies

• Own qualified personnel and assets in DTT countries only

Shareholder control

• General shareholder’s meeting

• Standards, methodologies and/or policies that apply to the group or are strategically important for shareholders

Issuers of “qualifying”

bonds

• Foreign issuers of traded bonds (special conditions should be met)

1

2

3

Active holding

companies • Active holding and subholding foreign companies

O&G projects

participants

• Foreign companies with main activities under PSAs and similar agreements

• Operators of oil shelf project or its shareholder

4

5

Page 17

Tax residency Self-recognition

Self-recognition is pre-conditioned by:

A permanent establishment in Russia

Activities in Russia via an autonomous subdivision

Documents in Russia that can serve as a basis to accrue and pay taxes

Page 18

Tax residency Issues to consider

Managing historical risks (PE via place of management)

No practical procedure / official form regarding registration

Internal regulations and “defense files” for proper management of the current risks. Professional directors start being viewed as insufficient substance!

VAT, property tax and other tax implications

CONCEPT OF ‘ACTUAL RECIPIENT (BENEFICIAL OWNER) OF INCOME’

3

Page 20

Beneficial ownership Application of reduced rates under DTTs

WHT on dividends

5% ? 15%

► Conditions for applying reduced rates under DTTs:

► Ability of CypCo to use and/or manage income received

► Ability of CypCo to derive benefits from income received

► Ability of CypCo to decide on the further utilization of income received

► Justification of “real” business activity and substance based on Russian unjustified tax benefit concept (recent court practice)

Russian

tax

resident

BVICo

CypCo

RusCo

100%

100%

100%

Page 21

Beneficial ownership Dividends - «Look-through» approach

Key considerations :

► Confirmation of the actual right/absence of actual right on income

► Confirmation of the Russian tax residency

► Calculation of the CFC profit (risk of double taxation) – resolved through recent changes in the Law

► Exemption of dividends at the level of the Russian tax resident

Russian

tax

resident

BVICo

CypCo

RusCo

WHT 0% or 13%

depending on

participation

interest

> 50 – WHT 0%

< 50% - WHT

13%

TAX AMNESTY

4

Page 23

Tax amnesty General overview

• Draft Law N 754388-6 «On the Voluntary Declaration of Property and Bank Accounts (Deposits) by Individuals»

• Relief from liability upon provision of a special declaration

• Period – 1 July till 31 December 2015

• Declaration may be filed only once with no right to make amendments

• Period covered – till 1 January 2015

• No declaration fee or tax payments

Page 24

Assets

Tax amnesty What may be declared (1)

Offshore

company Cash Nominee

Assets

May be declared Grey area

Page 25

Tax amnesty What may be declared (2)

NB !

► Cash is not clearly included in the list of the property

► Yachts and aircraft may be treated as real estate

► Precious metals, art objects are not covered

Property (including placed into

trust and received from a

nominee owner):

Land plots, other real estate

Vessels

Securities (shares,

participatory interest and

equity units)

CFCs

Foreign bank accounts, as

well as accounts in Russian

and foreign banks, with

respect to which the person

is considered as a beneficial

owner

Page 26

Tax amnesty What is exempt

Criminal liability

Evasion to repatriate of the

currency to Russia

Evasion of payment of

customs duties

Evasion to pay taxes

(fees)

Failure to perform the

duties of a tax agent

Concealment of monetary

funds or property on which

the taxes and (or) fees

should be levied

Administrative liability

(including upon foreign

exchange operations)

Tax liability

QUESTIONS AND ANSWERS

5

Page 28

Alexei Ryabov

Tax & Law Partner

Outbound Tax Leader, Russia / CIS

Tel: +7 (495) 641-2913 Mobile: +7 (905) 543-0716

Email: Alexei.Ryabov@ru.ey.com

Contacts

Page 29

Non-commercial organizations which do not distribute profits

Companies in the Eurasian Economic Union

Companies, which effective tax rate exceeds 75% of the blended Russian tax rate

Industry exemptions:

• Banks or insurance

companies

• Issuers of traded bonds

• Foreign companies

involved in projects

under oil&gas

production-sharing,

concession and similar

agreements in the

“corresponding” country

provided that over 90%

of the company’s profit

for the financial year is

from such projects

Foreign companies participation in which is realized exclusively via Russian public companies

“Active” foreign

companies (including

foreign holding and

sub-holding companies)

Addendum 1. Russian CFC exemptions (1)

Page 30

Addendum 1. Russian CFC exemptions (2)

• Direct interest > 75% for 365 days;

• Income (profit) is absent or

• Share of passive income > 5%;

• Direct interest in active foreign companies > 50% for 365 days;

• Direct interest in active foreign subholding companies > 75% for 365 days

• Direct interest > 75% for 365 days;

• Income (profit) is absent or

• Share of passive income > 5%;

• Direct interest in active foreign companies > 50% for 365 days

“Active” company – share of “passive” income < 20%

HoldCo

SubHoldCo

Active

Companies

>75%

>50%

>75%

Active

Company

>50%

Active foreign holding company

Active foreign subholding company

Page 31

Addendum 1. Russian CFC exemptions (3)

How to calculate effective tax rate (ETR):

where

T is amount of corporate income tax paid by foreign company in jurisdiction of its incorporation

P is amount of profit of foreign company calculated based on CFC rules (see above)

Blended tax rate (BTR):

where

R1 is Russian profit tax rate (20%)

R2 is Russian tax rate for dividends (9%, it is expected that it will be increased to 13%)

P1 is sum of profit of foreign company (except of dividends received by this foreign company and dividends paid by foreign company)

P2 is sum of dividend income received by foreign company

BTR = 𝑅1∗𝑃1+𝑅2∗𝑃2

𝑃1+𝑃2

ETR = 𝑇

𝑃

Page 32

Addendum 2. Recent amendments (Draft Law No. 714002-6)

Definition

of CFC

• The rules for recognizing “structures” as CFCs are refined

• Direct or indirect participation via “public companies” is scoped out

Exemptions

• Profits of “active” holding and sub-holding companies are exempt from taxation under the CFC rules

Calculating

CFC profit

• The CFC profit should not include dividends, on which the CFC has no actual rights (look-through approach)

Page 33

Addendum 2. Recent amendments (Draft Law No. 714002-6)

Definition /

Criteria

Place where BoD meetings are held is not the criteria for the effective place of management anymore

Additional

Criteria

Clearance how to apply supplementary criteria

Improvement of the self-recognition procedure

Self-recognition

Page 34

Addendum 3 CFC schedule (1)

2014

June 15

Notification on participation in foreign legal entities (25% and more + transitional period)

Notification about participation in foreign structures

March 20

2015 2017

March 20

Annual income tax return including CFC’s profit (if CFC’s profit is RUB 50mln. (EUR 0.96mln.) or more)

2016

March 28

Annual income tax return (no CFC reporting and payments)

March 28

No fines will be charged for the tax periods of 2015-2017 for nonpayment or underpayment of tax as a result of non-inclusion in the tax base of CFC’s profit

2018

March 28

Annual income tax return including CFC’s profit (if CFC’s profit is RUB 30mln. (EUR 0.57mln.) or more)

Notification regarding participation in CFCs 25%/10% (50%)

Notification regarding participation in CFCs (50% and more)

March 20

Page 35

Addendum 3 CFC schedule (2)

Nonpayment or underpayment of tax as a

result of non-inclusion in the tax base of a

share in the CFC’ profit

20% of the amount of unpaid tax, but

no less than RUB 100,000

A transitional period is established: fines will not be charged for the tax periods 2015

–2017 when decisions are made to impose tax liability for such tax offenses.

Failing to notify the tax authorities of

participation in a CFC

RUB100,000 (<EUR 2,000) for each

CFC

Failing to provide the tax authorities with

information or for submitting documents

containing inaccurate information on a

controlled entity

RUB100,000 (<EUR 2,000) for each

CFC

Failing to notify the tax authorities of

participation in a foreign entity

RUB 50,000 (<EUR 1,000) for each CFC

Criminal liability (up to 6 years) for nonpayment or underpayment of taxes due to a

CFC tax underpayment. For tax periods 2015 - 2017 does not apply if the damage is

recovered

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