CFC Rules draft law submitted for government review

Transcription

1 CFC Rules draft law submitted for government review Tax Flash Report Russia, Issue No. 15, 2014 No. 1 in Russia is Russian Transfer Pricing Firm of the Year (International Tax Review, 2013)

2 CFC Rules draft law submitted for government review What's new? A new version of the draft law for CFC rules prepared by the Russian Finance Ministry [1] was posted on the Ministry's website on 27 May. The draft law has been discussed in public hearings since March 2014 and the text has been substantially changed over this time. However, many of the most actively disputed issues remain unchanged (e.g. the Finance Ministry has preserved 10% interest as a criterion for recognising a CFC and 1% interest as a criterion for notification on participation in foreign organisations (any, not only CFC). Please see Tax Flash Report, Issue No. 8 of March 2014 for more details about the draft law. This Tax Flash focuses on the changes in the text of the draft law as compared to its previous version. CFC bad news for businesses What is a CFC a reverse approach The black" list of states has been replaced by two white lists [2]. The new version stipulates that a foreign organisation is NOT a CFC if such an organisation: has a permanent presence in a member state of the Eurasian Economic Union [3]; has a permanent presence in a state that maintains information exchange with Russia (the list of such states will be issued by the Russian Federal Tax Service) AND the effective tax rate for this particular organisation is more than 15% (i.e. three fourths of the Russian rate). As there are two white lists now instead of a black list and the tax threshold is as high as 15%, the list of states subject to Russian CFC rules will likely be expanded (as compared to the initial expectations with respect to the black list). Please note that at the same time the draft law still proposes that organisations with listed shares are not treated as CFCs. Businesses will have to file two types of notifications: (1) on a participatory interest in foreign organisations and (2) on a CFC (if a notification on a CFC is filed, a notification on a participatory interest in foreign organisations does not have to be filed for the same organisation). However, all foreign assets (not only assets in the black list as prescribed in the previous version of the draft law) are to be reported (if a direct or indirect interest in such assets is more than 1%). The penalty for a failure to file the first notification (or to report accurate data) comes to RUB 50,000 and the penalty for a default on filing the second notification is RUB 100,000. The first notification is not to be filed if, for instance, an indirect interest is held through an organisation whose shares have been listed. [1] alogoobl_pribyli_kont_in_kom.pdf [2] Note a technical mistake in the text, i.e. not was missing before the word recognised in Cl. 5 of Art However, we assume that once an organisation is on a white list, CFC rules should not to be applied. [3] The Union is to be established on 1 January 2015 and will include Russia, Belarus and Kazakhstan 2

3 Businesses will have to perform complicated calculations on taxable profits of CFCs in accordance with the rules stipulated in Chapter 25, as well as determine the two tax baskets for CFCs, i.e. the profits from active operations and profits from passive operations (losses included in one basket are to be carried over for future periods without being deducted from the profits included in the other). Hence, the tax on a CFC's profits may have to be paid in Russia even if this CFC is loss-making. Meanwhile, there have been several positive developments. The dividends distributed from a CFC's profits reduce the taxable base in Russia and the foreign tax will be credited against the Russian profits tax imposed on a CFC [4]. Furthermore, the draft law provides for the deduction of a CFC's investment costs from its taxable base, even if such costs are not deductible under the rules of its home country. Trusts are now directly mentioned in the definition of a CFC (as a type of structure not forming a legal entity). Trusts are also covered in Cl. 3 of Art of the Russian Tax Code. Thus, an interest held through a trust shall be considered for TP purposes. CFC good news for businesses A foreign organisation is NOT recognised as a CFC if: an indirect interest is held through an organisation with shares that have been listed or admitted for trade on a stock exchange included on the list maintained by the Russian Central Bank / Russian Finance Ministry (the previous version exempts only organisations with listed shares); a foreign organisation is a non-profit organisation which does not distribute profits. If a CFC's profits calculated in accordance with the Russian Tax Code do not exceed RUB 3 million, such profits are not subject to tax in Russia. Nonetheless, it is worth noting that the above threshold may seem too low for many taxpayers. A technical mistake that appeared in the provisions on determining penalties for failure to pay taxes on a CFC has been eliminated. Now the penalty is 20% of underpaid tax, but never less than RUB 100,000. Following the new text of the draft law, the CFC rules are applied to a CFC's profits determined as of periods starting in The date for recognition of CFC's profits in Russia is 31 December of the year following the tax period which includes the final date of CFC s financial statements. Foreign organisations with permanent establishment in Russia will be granted the right to self-declare as Russian tax residents. In such a case they will not be treated as CFCs. The draft law specifies that foreign organisations from black list of states (approved in accordance with Cl. 3.1 of Art. 284 of the Russian Tax Code) and foreign organisations from non-treaty states may not self-declare as Russian tax residents. [4] Note that the draft law provides for credit of a tax paid on a CFC's profits under the laws of foreign states. 3

4 Concept of a corporate tax residence is introduced Unlike in the previous version of the draft law, criteria are now divided into principal and additional categories. Principal criteria have been made less stringent while additional criteria, on the other hand, have been made stricter. Principal criteria for tax residence in Russia: board of directors (or another management body of an organisation) meetings are usually held in Russia; an organisation is usually managed from Russia; the executive officers of an organisation carry out their activities in respect to such a foreign organisation in Russia. If the principal criteria are met for several states, the additional criteria are to be checked, namely: accounting and management reporting of an organisation are done in Russia; an organisation's records are kept in Russia; orders and other guiding and administrative documents regulating an organisation's activities are issued in Russia; recruitment and HR management are executed in Russia. Concept of a beneficial owner of income for purposes of DTT benefits is introduced A beneficial owner of income will be recognised as the person directly holding, or through its direct and/or indirect participation in other organisation or otherwise cumulatively, the right to own, use or dispose of such income, or the person on whose behalf another person is authorised to use and/or dispose of such income. When determining the beneficial owner the functions that a foreign person claiming tax benefits (reduced rates under DTT) and the risks such a person undertakes will be tested. DTT benefits will not apply if a foreign person claiming such benefits has limited powers to dispose of such income, fulfils intermediary functions without performing any other duties or undertaking any risks and paying such income (partially or in full) directly or indirectly to another person who would not be entitled to benefits if such income is directly received from a source in Russia. As we see, the Russian Finance Ministry's stance on beneficial ownership described in Letter No РЗ/16236 of 9 April 2014, has been transformed into a legislative initiative. Taxation of indirect Russian real estate sales The draft law has not been changed in this regard. The draft law imposes taxes on income derived by foreign organisations from sales of shares or interest in any (not only Russian) organisations whose 50% assets or more are directly or indirectly composed of Russian real estate. However, the mechanism for paying this tax has yet to be regulated. Thin capitalisation rules In order to apply these rules, the relations [5] between a Russian borrower and a foreign lender rather than a direct or indirect 20% interest will be tested. Debt owed to a Russian organisation recognised as related to such a foreign organisation or debt guaranteed by such Russian organisation will be also subject to control. To reiterate, the current version refers to affiliation of a Russian organisation with a common foreign member as based on Federal Law No of 22 March 1991 On Competition and Restrictions of Monopoly Activities in Commodity Markets. [5] Technically, there is no reference to Art of the Russian Tax Code. However, we understand that the same relation as for TP rules is implied here. Thus, on the one hand, the ownership threshold will be increased from 20% to 25%, while, on the other hand, the new situations will be covered by thin cap rules. 4

5 What does this mean for you? We will be following further developments. The government will likely review the draft law and submit it to the Russian State Duma. Certain Russian tax residents will likely bear an heightened tax burden as the taxable base will include the profit tax imposed on a CFC. A CFC's profits will be taxed at the regular rates of 13% for individuals and 20% for legal entities. We recommend using the time remaining to get ready for the introduction of the new rules and potential reorganisation of your business. 5

6 Group Contacts TLS Financial Services Ekaterina Lazorina Partner, TLS Leader, Russia Vladimir Burov TLS Consumer and Industrial Products and Services (CIPS) David John Managing Partner, TLS, Central and Eastern Europe Enrika Schevchenko Irina Martakova Natalia Kozlova Natalia Sherbakova (St Petersburg) TLS Communications, Technology, Entertainment and Media (TICE) Natalia Vozianova Energy, Utilities and Mining Denis Gorin Artem Petrukhin Ekaterina Malygina Stefano Tonetti Private Company Services Alina Lavrentieva Mergers & Acquisitions Tax Services Galina Naumenko Ekaterina Koropova International Tax Structuring Natalia Kuznetsova Mikhail Filinov

7 Group Contacts Transfer Pricing Services Svetlana Stroykova Andrey Kolchin Tax, Accounting and Reporting Services Kirill Nikitin Indirect Tax and Customs Services Vladimir Konstantinov Human Resources and International Assignments Services Karina Khudenko Legal Services Yana Zoloeva Legal Practice Leader Maxim Kandyba Yana Proskurina HR Consulting Services Tax Methodology Department Ruxandra Stoian Valeria Efremova Senior Tax Manager Professor, Tax and Taxation Department, Plekhanov Russian Economic University 2014 PricewaterhouseCoopers Russia B.V. All rights reserved. and PricewaterhouseCoopers refer to PricewaterhouseCoopers Russia B.V. or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity The information contained in this flash report does not constitute professional advice. is not responsible for any damages that may be incurred by any parties if their actions or failure to act were based on their reading of this flash report. For assistance with specific questions, we advise that you contact a professional in the relevant line of service.