What is a controlled foreign company?

The CFC is a foreign organization or foreign structure without the formation of a legal entity, which is also not recognized as a tax resident of the Russian Federation and is controlled by organizations and/or individuals recognized as tax residents of the Russian Federation.

What is a controlling person?

Who can be considered a controlling person?

The controlling person of a foreign organization is a natural or legal person whose share in the organization is more than 25%, or more than 10% if the share of all Russian tax residents in the authorized capital exceeds 50%. Determining the share of participation, it is also necessary to remember about the interdependence of persons whose shares are added together to determine the final values (Article 25.13 of the Tax Code of the Russian Federation). According to the Law, interdependent persons are spouse and minor children.

How is the profit of the CFC calculated?

- It is taken into account when determining the tax base, if its amount was more than 10,000,000 rubles
- It is reduced for the amount paid as dividends
- If the profit of the CFC is directed to increase the authorized capital, such profit is not taken into account when determining the tax base of the taxpayer - the controlling person
- Offset of the tax calculated in respect of the same profits in a foreign country

What is an active foreign company?

This is a company in the revenue structure of which there is not more than 20% of so-called "passive" income, such as dividends, interest income from debt/bonds of any kind, income from the use of rights to intellectual property and others. It is difficult to imagine a company that does not receive profits from the list of "passive" income, especially given the last point - "Other similar incomes".

What is an active foreign holding company?

To be recognized as an active holding company, the following conditions should be met:

- it is a foreign organization in which the share of direct participation of the Russian organization, the controlling person, in the authorized capital is at least 75% for no less than 365 consecutive calendar days;
- income is absent, or the share of passive income (excluding "active" dividends) is no more than 5%;
- direct participation in active companies is at least 50% for no less than 365 consecutive calendar days;
- it is not included in the "black list" of the Ministry of Finance (Order No. 108n of November 13, 2007). 

In which cases will it be beneficial for the owner of the company to recognize the CFC as a tax resident of the Russian Federation?

Let’s suppose a client uses a foreign company not for tax purposes, but purely for technical purposes: settlements with counterparties, late repatriation of proceeds, simplification of document circulation, etc. That is, there are companies that have practically no profit, but they play an important role in the group. Perhaps, in this case, it would be expedient to recognize the company as a tax resident of the Russian Federation.

What are the limitations here?

Article 246.2:

- The tax residents of the Russian Federation for the purposes of the Tax Code of the Russian Federation are ... foreign organizations which place of management is the Russian Federation, unless otherwise stipulated by the international treaty of the Russian Federation on taxation matters.
- Unless otherwise provided by the international treaty of the Russian Federation on taxation matters, as well as this article, a foreign organization having a permanent location in a foreign country and carrying out activities in the Russian Federation through a separate subsidiary or branch may independently recognize itself as a tax resident of the Russian Federation.
- At the same time, the said organization is obliged to ensure that in a separate subsidiary or branch in the territory of the Russian Federation there are documents that serve as the basis for calculating and paying the relevant taxes.
- In the event that a foreign organization has independently recognized itself as a tax resident of the Russian Federation, if the foreign organization observes the provisions of the Tax Code and other regulatory legal acts of the Russian Federation with respect to tax residents of the Russian Federation, the said foreign organization is not recognized as the CFC.