New taxation of controlled foreign companies

The Federal law, which has made series amendments on the foreign entities to the Tax law has entered into the force on February, 2016.

In particular, such modifications has affected the taxing of the revenue of the foreign companies as well as profits had been payed to the foreign entities.

The beneficiary owner of the income

First, it should be clarified, that before the effective date of the Federal Law, this term meant both individuals and legal entities, which had the right to dispose their income due to the circumstances.

This time it has series amendments as following:

1. The term may apply to those foreign structures, which has no the status of the legal entity.

2. The profit right they have received, could by performed by third parties, which would act in the interests of the beneficiary.

3. The possibility of applying of this term for the purposes of foreign contracts has been excluded.

Here, we have to demarcate terms the Foreign Contract and the Tax Law.

The foreign Contract has the priority over the Tax Law, and the standards therein can't change its provisions.

We may suggest that the foreign contract refers the specific situation without the regulation of the ensuing consequences, but in the Tax law there is an algorithm for this situation.

So that, if the beneficiary is nonresident of the Russian Federation, there should by applied the foreign contract. If the profit will be handovered to the tax resident of the Russian Federation, this situation shall be regulated by the Tax Law. Besides, the Tax Law regulate those cases, when the foreign beneficiary don't claim to use the foreign contract, and the beneficiary owner is unknown for the taxing agent.

Affirming documents for the purposes of applying of international treaty concerning avoidance of double taxation

Beginning from 2017 foreign organizations shall present not only the certificate of tax residence of the Russian Federation, but also the document confirming the de facto right to gain profit for the purposes of avoidance of double taxation.

The following documents shall be considered as those:

  • data regarding foreign shareholders (or participants);
  • a letter of assurance;
  • a completed application form;
  • founding instruments;
  • financial statements.

Tax agent individually selects the set of relevant documents depending on the circumstances. The analysis of functions and risks bearing by the receiver of the profit shall be proceeded afterwards on the basis of such documents.

Such confirming documents can be provided for before as well as after the direct earning of income. The Tax Code does not provide for any sanction for the delay concerned. Similar peculiarity is referred to the confirmation of actual rights to profits of the foreign organization.

A tax on benefit order during the independent incomes of different international organization’s payments

The main change in that case concerns a point 1.1. of the article 309 of the Tax code. According to the code, any incomes which flows from Russian Federation are the subject to taxation. It is executed by the tax agent. It is noted that earlier the tax had not been executed in cases when more that 50% of assets are the realty which are located on the territory of Russian Federation and financial equipment, its assets production.

Other incomes are taxed also. The Russian organization provided the tax agent obligations. It calculated, withhold and paid the taxes on incomes of international citizens. Taking into account the amendments which have come into force, the defined norm clash was removed.

Notification order about participation in international organizations

The amendments have been made in the Tax code concerning the notification about the participation in international organizations with follows:

1. The obligatory notification of the tax authority removal about the international structures  control which have not the status of the legal entity and the right on the income which the structure receives. There is no exception in such situations where the tax payer is an individual who has the right on the income or is the founder of the structure.

2.  The common concept introduction as  “notification  about the participation in international organizations”. This concept uses in document indication, using  for notification about the participation or participation termination in international organization or the organization of international structure which has not the status of the legal entity (fund, community, trusts, etc.)

3. For the time being, confidential CEO (Chief Executive Officer) shall inform about the participation in the international organizations who invests the capital in the establishment of the international structure. They had sent the notification as the organization earlier.

4.  The new notification form about the individual assignment who provides the control of the international structure has included the space for information indication about the  founder and she/he is the control individual of the authority or not. New notifications have also included such information as the register number, registration reason code of the tax payer and ITN.

5. According to the new law, the terms of notification service about the participation in the international organizations have increased  up to 3 months. It has been 1 month earlier. The individuals, taking part in the international organizations trough public Russian companies have not the necessity to provide such notifications.

Types of responsibility for not providing notification about taking part in CFC

Notification about taking part or end up in international organizations received not in mentioned terms or with false information are imposed by a fine of 50 000 RUB. As for foreign structures without forming of legal entity Tax Code not include information about providing of such notifications. Respectively, a responsibility for expiration of providing with such documents is not considered (or about providing of false data).

A sum of penalty payment directly depends on a quantity of discovered foreign organizations, a data about which were not provided or appeared to be false. Also in such case it should be considered that a meaning of a foreign organization and foreign structure without a status of legal entity are differed according to the Tax Code.

Notification on Controlled Foreign Company

A number of changes and amendments, concerning notification on Controlled Foreign Company, was introduced in Tax Code. The following appeared to be among them:

1. Algorithm of procedure of direction by a tax organ requirements of notification on Controlled Foreign Company. Now this procedure has an administrative character, i.g. a judicial order, which was essential earlier is not currently demanded.

2. Specification of notification date from Controlled Foreign Company. Now such date is assigned to be 20 of March of the year following by a tax period. It is about period, during which a controlled entity is recognized an income in the from of a profit of Controlled Foreign Company.

3. A content of notification on Controlled Foreign Company. According to changed they should contain data about a state register number, ITN, name and code of the reasons of registration of a tax payer.

4. Release from responsibility. If entity, which received a demand from a tax organ, during 30 days from the date of receiving provides a notification on CFC, so this entity is released from responsibility for not providing, and also from not paying a tax sum as a result of not including into a tax base by a part of CFC income.

Tax benefits for controlled foreign companies

First of all, to the that category are related Controlled Foreign Company that participate in the projects of ore mining. The membership must be based on such agreements as production dividing agreement; service rendering agreement that is similar to the production dividing agreement; other agreements based on risk distribution conditions. Correspondingly, the profit of the company’s benefits is not a subject to taxation, besides, in such special cases, when the party of the agreement are companies authorized by the government of the state or the state itself.

Besides, the subject of taxation are active foreign companies, as well as active foreign sub-holding and holding companies. In order to acknowledge the company as the active one, it is necessary to follow requirements related to correlation of active and passive profits.

The calculation of the profit sum is made by means of:

  • revaluation of shares at fair cost according to financial reporting standards;
  • currency exchange rate;
  • sum of loss for creation of reserves and profits from its renovation;
  • total amounts of loss or profit from subsidiary companies: they must be acknowledged in the Controlled Foreign Company financial reports according to its personal law (except dividends).

Tax Code contains the list for check active and passive profits. Thus, if profit is not contained in passive list of the list, then it is deemed active by default.

Finally, we should note that from the taxation are free such profits in form of dividends that were received from Controlled Foreign Company, if its profit was declared in the tax authorities earlier and the tax was paid up. Information on such profits must be filled in tax return through the Tax Return of Individuals by individuals.

What Controlled Foreign Company’s profit is subject to taxation?

Organizations that were authorized to receive interest profits were not a subject to taxation earlier, but they are now. Moreover, those profits are subject to repayment according to obligations.

It is essential that this review will be valid only from 2017, thus, the controlling individuals are free from the taxation of profit received in 2015-2016.

Accounting Procedure of Income of Controlled Foreign Company

The following points can be considered as changes of accounting procedure of income of controlled foreign companies:

-The process of accounting procedure of expenditures and income from conversion of securities by foreign company ( as well as property rights, shares etc).

has changed in favor of Russian affiliated persons or the controlled company.

-The income of Controlled Foreign Company will decrease pursuant to the amount of distributed profit if the company is a legal person which is a part in equity participation whereby  norms of foreign institutions without creation of legal person will be applied to legal persons that are not parties of equity participation.

-Profits and expenditures of Controlled Foreign Company in the form of actual cost are not taken into account when counting loses or profits. Such feature is actual in cases when the sell price is equal to the cost indicated in documents and is not higher than the market cost. The above mentioned procedure is valid in cases of conversion of securities both in favor of company and natural person.

In addition, the date of decision of profit distribution has been decided. The following objectives  has been used to define it:

an accounting year has to be finished for Controlled Foreign Company tax period (subject to the closing date of accounting year) for Personal/Individual income tax (PIT) has to be closed. The decision regarding profit distribution is agreed on the next year following the accounting one pursuant to the calendar. When this is not the case, the date of decision is appointed the 31 of December of the indicated year.