In light of the new legislation which came into force in 1 January 2015, Russians with offshore considerations will need to analyse corporate structures to identify companies affected by the new CFC rules.
The below is information is intended to identify areas that need to be taken into account when doing this.
The first factor to consider will be the permanent residence of any persons who have participation interest in the foreign entity, if the persons are not tax resident of Russia then the new law will not apply.
Company income will also need to be taken into account as active income that exceeds 80% is exempt.
The structure and management of the offshore entity is very important. If the effective management is in Russia then the overseas company will be regarded as tax resident in Russia. If the persons who effectively control the company and hold directors meetings are not resident in Russia, then it is not tax resident. Persons who hold powers of attorney or give direct instructions concerning the company will also need to be considered as if they are resident in Russia then this shows a level of effective management in Russia. The location of company records should be looked at to see where company documentation and accounting records are held.
If once reviewed it appears that there are persons resident in Russia that have a participation interest or that the level of control means that the company is in fact tax resident in Russia then jurisdiction of any offshore entities should be reviewed. Jurisdictions that perform statutory audits will have the profit calculated from its financial statements as opposed to Chapter 25 of the Russian Tax Code. Russia also has various double taxation agreements signed with some jurisdictions that can be taken into account. Black-listed jurisdictions will have significantly different considerations.
The operation of companies may also be affected by the new legislation. In the past back-to-back financing and dividend structures proved quite popular. However, how the monies are being distributed can effect considerations such as double taxation agreements rendering them invalid.
More information on the new CFC rules can be found in our previous article entitled Russian De-offshorisation law. If you still have questions concerning the structure and management of offshore entities in relation to any of the above we are more than happy to discuss individually.