Taxpayer concessions included in latest draft of Russian CFC regime

05.09.2014

International Tax Review

A new draft of the Russian CFC law expected to be implemented in January 2015 is less severe than previous versions, but still presents a number of challenges to taxpayers.

A key concession included in the latest draft, released Tuesday is that the threshold of Russian ownership at which foreign companies based in certain jurisdictions will constitute a CFC (and therefore pay the proposed Russian tax on undistributed profits) has been raised from 10% to 25%. The list of jurisdictions affected, however, has grown.

"The Finance Ministry has reluctantly accepted only a few proposals of the business community," said Artem Toropov, international tax senior associate at Goltsblat BLP. "They have suggested some interim thresholds and agreed not to levy certain fines from 2015 to 2017."<…>

"The proposed Russian CFC regime is still quite harsh, arguably more so than in the UK and even in the US," said Toropov. "It is definitely harsher than the one suggested by the RSPP, and has been drafted with clear fiscal objectives in mind."<…>

"The Finance Ministry effectively rejected this in favour of the effective tax rate (ETR) test, which extends the CFC regime to holding companies with passive assets in any jurisdiction rather than only in the ones that are blacklisted," said Toropov.

"Taxpayers will not be able to avoid rules simply by jurisdictional jumping."<…>

"It introduces for the first time an incentive for corporate taxpayers to liquidate offshore subsidiaries tax-free before 2019," said Toropov. "If Russian companies decide to liquidate their offshore subsidiaries, they would be exempt from tax on liquidation profits."

"This is hugely important," he continued. "It will provide a relatively simple mechanism for corporate taxpayers to deal with the CFC tax and to simplify their corporate structures."<…>

"Despite the harsh regime one could argue that the law is already achieving its deoffshorisation purpose," said Toropov. "Many companies have started to realise that their offshore structures are not always necessary and cause more trouble than obvious benefits. Some restructurings to onshore Russian shareholding vehicles have already started."

"However, the sustainability of these solutions will most likely be seen only as of 2016/2017 when Russian tax authorities will start using the new rules along with enhanced information exchange procedures to challenge international structures in Russian courts in relation to periods starting in 2015," said Toropov.

Joe Stanley-Smith

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