Russia’s Deoffshorization and the importance of substance
What is Deoffshorization?
At this point in time it is hard to give a definitive answer to this question, mainly because the Russia Government has not finalized the legislation yet. President Putin announced the new Deoffshorization legislation in March 2014; the date set to finalize the legislation was July 1st, however, that was postponed to late summer and again further postponed, the now expected finalization is set for some time around the beginning of 2015. According to the new deoffshorization rules, Russian tax residents both individual and legal entities will be obliged to pay corporate profit tax to the Russian authorities on profits derived from CFC (Controlled Foreign Companies) at a rate of 20% or personal income tax at a rate of 13%.
Clarification on what exactly a CFC is. A CFC is a foreign company or an entity, including funds and partnerships, or any other form of collective investment vehicles that are resident in one of the jurisdictions from the “black list” of the Ministry of Finance. They do give the exception to companies whose shares are being traded on a qualifying foreign stock exchange. The black list is yet to be clarified.
Taxpayers are those Russian tax residents (individuals and legal entities) who are deemed to control CFCs, in particular, who directly or indirectly hold more than 10% of the capital in the CFC.
Control refers to influencing decisions of the CFC with regard to distribution of its profits.
Income of a CFC includes undistributed income computed in accordance with the RF Tax Code in relation to all activities of a CFC (active or passive). The income of the CFC is apportioned pro-rata and attributed to a Russian taxpayer.
Foreign legal entities effectively managed from Russia would be treated as taxpayers (i.e. tax residents) in Russia. In accordance with the proposed rules a legal entity would be deemed to be effectively managed in Russia if one of the following criteria is satisfied:
- Meetings of the board of directors (or another management body of the legal entity) are held in Russia;
- Steering management of the legal entity is performed from Russia;
- Top managers of the legal entity perform their activities in Russia;
- Book-keeping is performed in Russia;
- Archives of the legal entity are stored in Russia.
It should be noted, however, that the term “Steering management” had not been defined yet.
How does this affect you and what can we do about it?
While we are waiting for the final draft and for clarification on some terminology, it is difficult to say how exactly this will affect both Russian businessmen and the rest of the world.
One thing is for sure, this upcoming legislation is a clear indication of the need for substance. If you have a clear structure with substance, you will be in a much better position to ward off any legislation, including future moves by various governing bodies. Substance can be made up of various things, as to what will depend on your individual situation and the jurisdictions you are dealing with. Simply put, a registered address alone in today’s world is just not enough. The range can be from a phone line to a full blown office with staff to operate it, and everything in between. Of course, this will have a cost, so everything should be looked at and weighed up, but generally speaking, the more substance you have the better you will sleep.