Anti-offshore law and its impact on the investment fund industry

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1 Anti-offshore law and its impact on the investment fund industry December 2014 Ekaterina Lazorina

2 New legislative provisions CFC rules Tax residency Beneficial ownership Taxation of indirect sales of RE property 2

3 CFC rules Rules aimed at taxation of non-distributed profits of a controlled foreign company or structure 0f a Russian tax resident - At 13% for individuals - At 20% for corporates CFC criteria: - Foreign company or structure - Control - No exemptions Consequences - Taxation in the RF - Reporting RU CY CY RU CY BVI CFC 3

4 CFC rules for investment funds CFC status depends on the legal form: - Participation in capital: voting or ordinary shares? - For organization: exercise or possibility to exercise decisive influence over profit distribution based on management agreement or other grounds - For non-corporate structure: exercise or ability to exercise decisive influence over the manager with respect to profits distribution - Exemption for foreign structures which do not distribute profits (?) RU Fund CY ManCo RU NL 4

CF C rules Some exemptions Effective tax

actual tax amount paid divided by income

dividend and other profits not including

5 CF C rules Some exemptions Effective tax rate Not passive income Effective tax : actual tax amount paid divided by income of CFC Blended tax rate: applies for dividend and other profits not including tax benefits Passive income: Dividends Interest Royalty Capital gains Lease income Consulting income Other similar income

6 CFC rules: main dates Introduction of the law Filing of tax notifications End of tax period for CFC tax notification filing Tax return filing for legal entities Tax return filing for individuals Until

7 Tax residency Foreign legal entities which are managed in Russia may be recognized Russian tax residents Actual place of management based on one of the criteria: 1. Majority of BoD in the RF 2. Regular activity of the executive body in the RF 3. Activity of the main top management in the RF If (1) and (2) are not performed or only one of them is performed then one of the below criteria would lead to a tax residency: 1. Financial and management accounting in the RF 2. Book-keeping in the RF 3. Operational control over employees in the RF 7

8 Tax residency: some exemptions Activity does not create control by itself Decisions in the competency of shareholders meetings Preparation for the Bods Selective planning and control functions with respect to subsidiaries 8

9 Tax residency: some exemptions Recognition of a management company of a foreign investment fund Russian tax resident does not by itself lead to a tax residency of such foreign fund Tax residency of companies from DTT countries only based on DTTs Active business holdings 9

10 DIV Beneficial ownership Limitation for DTT tax benefits application Beneficial owner: Has the right to use (and dispose) of the income taking into account functions and risks or Is a person for whom another entity has the right to dispose of the income Not a beneficial owner: Performs limited functions and does not incur risks Passes income directly or indirectly to another person who would not enjoy DTT benefits otherwise % BVI CY RU 10

11 Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Russia, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it Russia. All rights reserved. Not for further distribution without the permission of Russia. " Russia" refers to IL member-firms operating in Russia. "" is the brand under which member firms of PricewaterhouseCoopers International Limited (IL) operate and provide services. Together, these firms form the network. Each firm in the network is a separate legal entity and does not act as agent of IL or any other member firm. IL does not provide any services to clients. IL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.

Passive Foreign Investment Companies (PFICs) and Controlled Foreign Corporations (CFCs)

www.pwc.com Passive Foreign Investment Companies (PFICs) and Controlled Foreign Corporations (CFCs) Yair Zorea, Tax Partner, Sara Levy, Tax Manager, PFIC Overview The Passive Foreign Investment Company