PIT and CFC Rules: Key Changes

24.11.2020

Legal Update No 812

Bryan Cave Leighton Paisner (Russia) LLP (formerly Goltsblat BLP in Russia) advises that, on 9 November 2020, Federal Law No. 368-FZ dated 9 November 2020 (the “Law”) amending personal income tax (PIT) rules was published.

The most important changes to the taxation of individuals are summarised below.

PIT on CFC profits: Alternative Payment Regime

Individual taxpayers may claim an alternative payment regime for Controlled Foreign Companies’ (CFCs) profits. This allows them to pay PIT on all CFCs on a fixed profit basis.

The taxable fixed profit will be:

  • RUB 38,460,000 for the 2020 fiscal year;
  • RUB 34,000,000 starting from 2021.

Consequently, the tax on the fixed CFC 2020 profit will be RUB 4,999,800 (13%*38,460,000) and, starting from 2021, it will be RUB 5,000,000 or RUB 5,100,000 (subject to the proposed PIT increase up to 15% in 2021).

If taxpayers opt for the alternative payment regime, they will no longer:

  • be exempt from PIT on dividends received from undistributed CFC profits accumulated during the period when the alternative payment regime was applied;
  • offset foreign taxes paid by an individual or taxes withheld in Russia or abroad by tax agents paying income to the CFC.

Nor does the alternative payment regime override the requirement to provide an annual CFC notice.

Taxpayers returning to the general CFC regime are entitled to carry forward losses accumulated during the period they applied the alternative regime.

New Deadline for Providing a CFC Notice

From 2021, the deadline for providing a CFC notice is transferred from 20 March to 30 April of the year following the reporting one.

In addition, controlling persons are obliged to provide tax authorities with CFC financial statements together with the CFC notice.

Stricter Liability for Failure to Provide CFC Reports or Documents

Controlling persons are currently liable for failure to provide documents requested by a tax authority by the specified deadline (one month). This applies to:

  • documents confirming the conditions for tax exemption of CFC profits are met (Clause 9, Article 25.13-1 of the Russian Tax Code);
  • documents confirming the amount of CFC profits (losses) (Clause 5, Article 25.15 of the Russian Tax Code, as amended), to be submitted together with a CFC notice.

Tax authorities may request these documents if the controlling person has not submitted them voluntarily.

Such an offence committed by controlling persons may be punishable by a fine of RUB 1 m (Clause 1.1-1, Article 126 of the Russian Tax Code). Similar liability is prescribed for deliberate submission of documents containing unreliable information.

The fine for the following offences is increased from RUB 100,000 to RUB 500,000:

  • failure to provide a CFC notice by the specified deadline or deliberate provision of a CFC notice containing unreliable information (Clause 1, Article 129.6 of the Russian Tax Code);
  • failure to provide the tax authority with documents confirming the amount of CFC profits (losses) by the specified deadline or deliberate provision of such documents containing unreliable information (Clause 1.1, Article 126 of the Russian Tax Code).

Additional Conditions for a CFC to be Recognised as an Active Holding (Sub-holding) Company

The following additional criteria are introduced for a CFC to be recognised as an active foreign holding (sub-holding company):

  • the foreign company holds no less than 50% in at least one foreign company;
  • the foreign company holds at least a 15% share in other foreign companies (if any).

Please note that the status of an active foreign holding (sub-holding) company constitutes grounds for tax exemption of the CFC’s profits.

In addition, the list of profits of a foreign holding (sub-holding) company that do not qualify as “passive” income is extended.

The above amendments apply to calculation and payment of PIT for fiscal periods starting from 2020.

Apart from the amendments relating to PIT, the Law also introduces certain other significant changes to the effective tax legislation. These apply to targeted financing, money contributed to company assets to be included in revenues, clarification of the investment tax deduction rules and other provisions.

We also advise that the Federation Council is currently examining another law passed by the State Duma introducing further amendments to the taxation of individuals: in particular, an increased 15% PIT rate is established under certain conditions. The new tax rate will apply to income received from 1 January 2021. The given law also introduces some other significant changes to the effective tax legislation, which will be addressed in a separate information letter.

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