TOPIC IN FOCUS: Business devises back-up plans to face CFC law
A law on controlled foreign companies (CFC) will take effect January 1, 2015. It means that Russians will have to inform tax authorities by April 1 if they own more than a 10% stake in foreign a company. If the stake exceeds 50% and the company earns more than RUB 50m (approx. USD 922,312), they will have to pay a tax. The rules will change in 2016 and a tax would be imposed on owners of more than a 25% stake in a CFC earning more than RUB 30m (approx. USD 553,387). The tax rate stands at 20% for companies and 13% for natural entities. Up to 70% of Russian entrepreneurs resort to offshore schemes, says Alexander Zakharov, partner at Paragon Advice Group. These businessmen have much to worry about. Such schemes are used for tax optimization and for asset protection, said Alexey Ryabov, partner at EY. Then there are other inconveniences such as a requirement to disclose detailed information, record-keeping for tax purposes under Russian standards, translation of primary documentation, etc. says Anna Voronkova, partner and the head of the international corporate tax group at KPMG Russia and CIS. The easiest way to dodge a new law is to switch to another tax residency, said a top federal official and a source in administration bureau at the Russian Union of Industrialists and Entrepreneurs. The latter noted that tax consultants and Big Four auditors were inundated by client requests to search for optimal jurisdictions. Two of the Big Four companies and two legal firms confirmed the growing number of such requests. "We polled our clients and most of them think that forfeiting tax residency status in Russia will allow them to keep foreign ownership structure without the corresponding tax burden and the requirement to reveal information," Zakharov pointed out. According to his estimates, up to 40% of clients are considering this option. To stop being a tax resident in Russia, a person should be outside the country during the period of 183 days. "If a natural person loses its tax residency status in Russia, then the new law will not apply to foreign companies it owns directly," said Voronkova. The law on CFC affects only Russian tax residents, confirms Artem Toropov, senior lawyer at Goltsblat BLP. However, if a natural person stayed at least 183 days or more in Russia in 2014, it is still obliged to inform tax authorities about its stakes in a foreign company. Still, if next year a natural person leaves Russia, it will not be obliged to pay taxes on CFC's undistributed profit earned in 2015. Those who do not want to spend their life on Malta or in Switzerland have another option. They can reregister business in the Customs Union (CU), which will become the Eurasian Economic Union on January 1, 2015, i.e. in countries such as Belarus, Kazakhstan, and Armenia, which will join the CU next year. According to the law, profits of CFCs located in the Eurasian Union are exempt from taxes, which can serve as a good incentive to consider doing business in these countries, said Ryabov, adding that many companies think of expanding their operations there. The Eurasian Economic Committee (EEC) does not intend to harmonize anti-offshore rules within the union, the EEC's Economy and Financial Policy Minister Timur Suleymenov told RBC. "Tax policy is a sovereign issue. As far as anti-offshore laws and CFCs are concerned, countries will keep their own approaches," he added.
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