New Guidance in Russia on When Foreign Entities ‘Controlled’

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By Sergei Blagov

Russian residents that control less than 50 percent of a foreign company aren’t obligated to report profits of those companies for the year 2015 by the upcoming March 20 deadline, according to recent guidance from the Russian Finance Ministry.

The guidance, in the form of Letter No. 03-12-11/2/9197, contains mainly statements that are favorable for taxpayers, said Damir Nuretdinov, head of Damir Nurettdinov’s Attorney’s Office. The guidance, he said, “appears to confirm that Russian tax residents controlling less than 50 percent in foreign company are not obliged to report profits of such foreign company for the year 2015.” Other Russian residents, however, should submit those returns by March 20—the first reporting deadline for controlled foreign companies—he told Bloomberg BNA in an e-mail Feb. 28.

The ministry clarified that foreign trusts, partnerships, funds, and other forms of collective investment can be regarded as controlled foreign companies (CFCs) in accordance with Section 2, Article 25.13 of the Russian Tax Code.

If Russian tax residents control CFCs via simple partnerships or investment partnerships, then these partnerships aren’t regarded as organizations that control CFCs, the letter said. However, Russian tax residents, members of these partnerships, should be regarded as individuals that control CFCs and hence subject to profit tax liabilities and notification requirements, it said.

According to Section 4, Article 25.15 of the tax code, if CFCs report zero profit, then businesses and individuals who control these CFCs have no obligations to report financial results of these CFCs in their respective profit and income tax returns, according to the letter.

If a fiscal year in jurisdictions where CFCs are registered begins Oct. 1 and ends Sept. 30, then businesses and individuals who control these CFCs must report profit gained between Oct. 1, 2015, and Sept. 30, 2016, during the calendar year that starts from Jan. 1, 2017, the letter said.

Taxation of CFC Members of Foreign Groups

The Russian Finance Ministry conceded that the country’s tax legislation is yet to regulate taxation of CFCs that are members of foreign consolidated groups of taxpayers (CGTs), according to the letter.

“Some clarifications are less favorable, e.g. dividend distribution from CFC can not lower profits of CFC and can not bring it lower than minimal reporting threshold"—50 million rubles ($858,000)—"for the year 2015,” noted Roustam Vakhitov, managing partner at International Tax Associates BV. “In any case this is a very helpful guidance for taxpayers just few weeks before the deadline for submission of first reports on profits of CFC,” he wrote in an e-mail Feb. 28.

Russian businesses and individuals owning CFCs in 2016 must notify the tax authorities about the CFCs by March 20, 2017. According to the amendments to the country’s tax code on taxation of CFCs, effective from Jan. 1, 2015, foreign entities controlled by Russian businesses became liable for the Russian profit tax if the CFCs are based in jurisdictions that have no tax treaties with Russia, don’t share tax information with Russia or have a profit tax rate that is more than 25 percent below Russia’s 20 percent profit tax rate.

To contact the reporters on this story: Sergei Blagov in Moscow at: correspondents@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com

For More Information

Letter No. 03-12-11/2/9197, dated Feb. 17, is available in Russian at http://src.bna.com/mBV.

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