Recent changes in Russian tax legislation should be taken into account upon structuring investments from or to Russia. Indeed, the so called ‘de-offshorization law’ (hereafter ‘the Law’) aims at preventing the use of offshore companies and unincorporated foreign structures (e.g. funds, partnerships, trusts, others form of collective investment vehicle and/or trust management) for tax planning purposes. It has been in force since 1 January 2015. The Law has introduced the following concepts into Russian tax legislation:
I. CFC rules
The Law defines a CFC as a foreign company that concurrently meets both of the following criteria:
Furthermore, under the Russian CFC rules, an unincorporated foreign structure is also recognised as a CFC if its controlling persons are Russian tax residents (whether companies or individuals).
For the CFC purposes, controlling person is defined as:
The tax implication of being recognised as a CFC is that undistributed profits earned by such a CFC will be included in the tax base of a Russian tax resident (i.e. the controlling person of the CFC) pro-rata to its participation and will be subject to tax in Russia at a rate of 20% (if the controlling person is a company) or 13% (if the controlling person is an individual).
However, the Law excludes certain entities from the CFC definition, for example:
Furthermore, active foreign holding and subholding companies should be considered CFCs with tax-exempt income (i.e. undistributed profits earned by these CFCs will be excluded from the tax base of a Russian tax resident).
II. Beneficial owner concept
The Law introduced the beneficial owner concept (i.e. a company or individual having the actual right to income) for the purpose of the application of tax treaties provisions. Accordingly, the beneficial owner is a person has, whether by virtue of (a) participating (directly and/or indirectly) in a company; (b) having control over a company; or (c) other circumstances, the right to independently use and/or dispose of a company’s income, or the person on behalf of whom another person has the power to dispose of such income.
When determining the status of a company as a beneficial owner, the functions and risks of the company should be considered. In cases where the company is not treated as a beneficial owner of income, the application of favourable provisions set forth in a double tax treaty may be challenged by the Russian tax authorities.
III. Tax residency concept
In the past, tax residency for companies was determined by their place of incorporation. However, according to changes introduced by the Law, a foreign company whose place of effective management is located in Russia should be considered a Russian tax resident. Foreign entities recognised as Russian tax residents should be subject to tax in Russia at a rate of 20%.
Still, the Law stipulates certain exceptions (e.g. for active companies) regarding the treatment of foreign companies as Russian tax residents.
IV. Taxation of capital gains realised from the sale of property-rich companies
According to the Law, capital gains from the sale of shares (participation interests) in companies whose assets directly or indirectly represent 50% of a real estate property located in Russia as well as finance instruments backed by these shares or participation interests (except for shares traded on the stock exchange) will be taxed at the 20% Russian corporate income tax rate, unless they are otherwise treaty-protected.
For further information, please do not hesitate to contact us.
Russia Desk in KPMG Luxembourg
Luxembourg’s openness to the world and strategic location has already attracted a number of investors from Russia and the CIS region. For this reason, KPMG Luxembourg maintains a Russia Desk to support and facilitate Luxembourg-Russia bilateral business opportunities – for Russian businesses setting up in Luxembourg as well as Luxembourg businesses setting up in Russia. KPMG has built a market-leading position in delivering cross-border services between Luxembourg and Russia with a team which also includes Russian-speaking specialists and a strong presence of KMPG in Russia and the CIS region.
1 a company whose assets directly or indirectly consist of more than 50% immovable property
2 the participation interest of an individual includes the participation interests of the individual’s spouse and minor children.
For queries please contact:
Senior, International tax
Phone: Tel. +352 22 51 51 5512
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.