Draft law on anti-offshore measures passed in Russia

Riga, Latvia, November 19, 2014, 15:00 / Industry News / Jurisdiction: Russian Federation, Source: vedomosti.ru

On Tuesday, in the second and third readings, the Russian State Duma passed the draft law on anti-offshore measures, which determines taxation rules for controlled foreign company (hereinafter — CFC) and foreign organizations. A new mechanism makes Russian residents, both companies and individuals, to pay taxes on retained earnings from their foreign assets. The target is so-called “purses” where dividends and interest on loans are being accumulated.

The new draft was passed in its “strict” edition: the default control threshold of 50% in CFC at which an owner becomes subject to Russian taxation will be valid in 2015 only, and starting from 2017, it will be deducted to 25%. The first reading suggested that until 2017, owners of 50% shares in CFC have to pay taxes in Russia. Companies will be paying 20%, individuals —13% on retained earnings from their foreign assets. At the moment, these foreign structures are used by Russian owners to move out profits of foreign companies from Russia in the way of dividends and interest, in this scheme they can almost avoid paying taxes. Assets do not go straight to an offshore company, but through companies-intermediaries, e.g. in Cyprus: while paying out dividends into Cyprus, in Russia, due to taxation agreements, the withholding tax at source will be 5% instead of 15%, moreover in Cyprus these dividends are at all tax-free.

As government amendments to the draft law were rejected by deputies, certain changes will be introduced to the already passed law on deoffshorisation — possibly, in spring, reported Deputy Finance Minister Sergey Shatalov. As the amendments are rather of softening nature, we could introduce them retrospectively, explained Mr. Shatalov. “I do hope that we will be able to come back to this draft law in spring that by this time becomes the law, so we will be able to introduce changes to it,” said Deputy Finance Minister.

The draft law determines that CFC profits exceeding RUB 10 million will be included in the taxation base under assessment of company income tax or individual income tax. Besides, the definition of a “controlling party” has been introduced. By this definition we understand any individual or a legal entity with equity capital shares over 25% (until 2016 – over 50%). If the total number of Russian taxpayers in the organization exceeds 50%, then a controlling party is an individual or a company owning 10% of capital shares.

The document also sets forth the criteria to be met by CFC to have its profits tax-exempt. This concerns, for example, non-commercial organizations that do not distribute gained profit to shareholders, organizations established pursuant to the legislation of the Eurasian Economic Union member states, banks or credit organizations located in the territory of the country with which Russia has an international agreement on taxation.

The amount of tax on CFC profits will be reduced by the amount of tax paid on these profits according to the legislation of the foreign country. Amenability for failure to report assets and profits in offshore companies will be introduced in 2017. The law comes into force on 1 January 2015.

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