Relevant information about CFC

If you pay attention to the transformation of the norms of the Tax Code of the Russian Federation, which were caused by the entry into force of the relevant Federal Law No. 376-F3 on taxation of income of controlled foreign companies and incomes of foreign enterprises, you will have many questions.

This article is intended to clarify the problematic aspects that are caused by the current legislative changes in order to help in the regulation of the commercial activities of your enterprises in accordance with the changes in the Russian legislation in the field of deoffshorization.

The first question that should be posed is which information should be submitted to the Tax Service?

Following the place of registration, each taxpayer must submit information to the Tax Service about:

  • personal participation in foreign companies, if this participation is more than 10% of the total share;
  • regarding the formation of foreign structures without registration of a legal entity, and exercising control over them, as well as the right to profit that this organization receives. The foregoing also applies to cases where the taxpayer is the organizer of such a company or the subject that has the right to profit of the organization in the event of its distribution, which implies that the subject is the beneficial owner of the company;
  • controlled foreign companies, where they act as controlling persons.

Also, it is necessary to highlight the date up to which it is necessary to submit information to the Tax Service.

The Federal Law No. 376-F3 on the taxation of profits of controlled foreign companies and the income of foreign organization prescribes that, according to part 3 of Art. 4, the taxpayer needs to notify the tax service before June 15, 2015.

As for the determination of the term of controlled foreign company, a controlled foreign company is a company that is defined in its activity by two main criteria.

Firstly, it is a company that is recognized as a tax resident of the Russian Federation. Secondly, those legal entities or individuals that will be recognized as tax residents of the Russian Federation will be also identified as controlling persons.

It is also necessary to determine whether you are the controlling person of a controlled foreign company.

There are also two main criteria for determining the person of the CFC: the share of involvement of an individual or a legal entity in an organization should be more than 25 percent, the share of participation of an individual or a legal entity is more than 10 percent, if the share of participation of all entities that are recognized by tax residents of Russia will account for more than 50 percent. It should also be noted that spouses and minor children of individuals are also taken into account.

Can a subject be recognized as a controlling person if he/she is neither a shareholder of the company nor a director, and the only documents mentioning his/her name and company name are the Trust declaration and the power of attorney?

Yes, he/she can. The subject can be recognized as the controlling person if he/she is the beneficial owner of this company, that is, if he/she has the ability to influence or already influences the decision-making of the company with respect to the receipt or distribution of income after all taxes have been paid, with regard to direct or indirect participation in such company, participation in a specific contract, the subject of which is the management of this company or other parties to the relationship between specific subject or entity and the company or other persons.

The foregoing means that if the subject somehow influences decision-making in the company and bears certain risks for the organization's making decisions in accordance with the tax rules of the Russian Federation, that is, he/she exercise control over the activities of this company, and therefore he/she is the controlling subject of this enterprise.

Based on the above, he/she needs to notify the Tax Service that he/she is the controlling person.

Also, the following question is of interest: Should the subject notify the tax authority of the presence of his/her controlled foreign company in the event that he/she does not use a foreign company that he/she has previously controlled and does not pay state duties and fees?

Again, yes, he/she should. In the situation described above, the subject must provide relevant information to the Tax Service.

It is possible not to notify about companies in which the subject was the controlling person in cases where:

  • this enterprise was liquidated in accordance with the legislation of the Russian Federation until June 14, 2015. That is, the subject has a certificate on liquidation of the enterprise;
  • the given enterprise was completely re-registered into another person, and the procedure of re-registration was duly legalized and fully complied with the tax norms. But, depending on the means according to which the enterprise was re-organized, the subject must have the relevant documents that represent the transfer of the company.

If you are wondering if anyone can notify the Tax Service in addition to you and whether there is a certain formula for this, then we can assure you that no, noone can.

Only You are the person who can fill out and file a declaration on a controlled foreign company by indicating all the data on your companies and only once a year. You can submit the declaration to the Tax Service not only yourself, but you can also entrust this procedure to another person through a power of attorney, which must be notarized.

The power of attorney should contain a number of powers to represent the interests of the principal in state bodies, where a specific tax authority should be indicated.

But, in the event that you want to notify the Tax Service, you should know that there is a special form for notification, and you can familiarize yourself with the above forms by contacting the appropriate authorities.

As for the information that should be included in the notification, it is necessary to focus on the following aspects in accordance with the current law on the CFC:

  • the period within which this notification will be submitted should be indicated;
  • the name of a foreign company (the name of a foreign company without due registration of a legal entity);
  • registration number that was given to a foreign company on the territory of the state where it is registered. Also, the codes of the foreign company that acts as a taxpayer at the place of registration or their analogues must be available;
  • the date must be taken into account, which is the last day of the period during which the financial statements of the enterprise, that is, the foreign organization without registration of a legal entity, are compiled for that fiscal year that corresponds to its internal law;
  • the date of formalization and registration of financial statements of a foreign organization for the financial year should be taken into account, referring to its internal law and the end date of the tax period for the tax on income of the organization under its internal law;
  • the date of the audit report on the documented financial activities of the foreign company for the fiscal year should be present in case of carrying out audit in accordance with the organization's internal law;
  • allocation of a share of the taxpayer's participation in a foreign company, disclosure of the principle of participation of the taxpayer in a foreign company in the presence of indirect participation with the publication of data on the share of participation in each subsequent structure through which indirect participation in the activities of the foreign organization takes place. Also, provision of data enshrined by subparagraphs 2 and 3 in accordance with each subsequent company, through which indirect participation in a foreign organization is carried out;
  • the subject falls under the list of grounds in order to recognize him/her as taxpayer, as the responsible subject of a controlled foreign company;
  • also the Tax Code provides for compliance, according to which the income of the CFC is exempt from taxation.

So we ask you to register your unconsolidated financial statements of the company in order to avoid problems in the future.

Is the income of a controlled foreign company taxed in accordance with the provisions of the Tax Code of the Russian Federation?

The income received from the activity of the CFC will be taken into account when forming the tax base for the relevant period with regard to the specified tax if the income exceeds ten million rubles.

But, referring to the above ninth point, we see that the income may not be taxed on the territory of the Russian Federation.

At the moment, there are less than ten reasons why the income of a controlled foreign company will not be taxed in Russia.

  • the enterprise is registered as a non-profit organization that, according to its internal law, does not distribute the income received between founders, shareholders, participants and other entities;
  • this enterprise was formed and registered according to the norms of the country's legislation, which acts as a member of the Eurasian Economic Union;
  • the enterprise is located in the territory of the country with which the Russian Federation has concluded an international agreement on taxation issues. But this does not include countries that do not facilitate the exchange of information on the payment of taxes with the Russian Federation. The effective rate for paying taxes on the company's revenues is determined based on the results of the period, according to the company's internal law, and financial statements for the fiscal year are compiled, where the rate is at least 75 percent of the weighted average tax rate according to the company's income tax;
  • the organization is located in the territory of the country which has signed an agreement with the Russian Federation on taxation, that provides for the exclusion of double taxation of profits, except for countries that do not provide mutual data transfer for tax purposes with the Russian Federation, and part of the company's profits from passive activities for the period according to internal law of a foreign company is taken into account in the formation of financial statements for the complete fiscal year, whereby implying all of the company's profits according to the information on financial reporting, formalized by the foreign organization in accordance with its internal law for the indicated period of not more than twenty percent;
  • this organization is a foreign company without registration of a legal entity to which the following provisions apply:

- the founder of this organization after its establishment in accordance with the internal law of this organization and the constituent documents can not receive the assets of this company into its ownership;

- the rights of the founder of this company, connected with his personal position in this organization (taking into account the competence of alienation of property, determination of beneficial owners, and other rights) according to the norms of this organization and its agreements can not be directed to another subject after the establishment of this company, not taking into account transferring these rights in the form of universal succession or inheritance;

- the founder of this organization can not participate directly or indirectly in the receipt of the company's revenues, which are distributed among its other participants, that is, trustees, shareholders and other entities.

  • the organization is an insurance company or a banking structure/institution which activities are conducted according to its internal law based on a license or other credibility document for the authorization of insurance or banking activities. This organization should also be located in the territory of the country, which has signed an international agreement with the Russian Federation on taxation;
  • this organization is an issuer with regard to transferable bonds or is an entity that has the right to receive interest income that is paid on the relevant bonds or is a company to which rights and obligations were transferred on outgoing bonds issued by another foreign company with accompanying compliance with the provisions of this structure/institution and bonds. But for this, in order to comply with the above provision on the part of the allocated profit for the period for which, according to the law of the foreign company, the financial statements for the complete financial year are formed, the profit will be at least ninety percent of the total amount of the entire profit of such company for the term indicated;
  • the enterprise participates in activities in accordance with the production sharing agreement, license agreement, concession agreement or service contracts, similar production sharing contracts at own risk or other similar agreements with the authorities of the appropriate state or authorized representatives;
  • the enterprise is the operator of a new marine field of carbohydrate raw materials or is a direct participant or holder of the operator's shares of a new marine field of carbohydrate raw materials.

What documents need to be provided to calculate the profits of a controlled foreign company?

Documents supporting the indicators of profitability of the organization are financial reporting documents that are compiled in accordance with the legislation of the state in which territory the registration took place. Financial statements are also unconsolidated financial statements of the organization.

The controlling person (taxpayer) submits a tax declaration on income when determining the tax base to the relevant authorities. This declaration takes into account the income of the foreign company controlled by this subject, together with accompanying documents, among which is the financial statements of the CFC, or in the absence of financial statements, other documents, the audit report on the financial statements of the CFC, in the event that conducting audit is mandatorily provided in accordance with the company's internal law.

It is also possible to ask such question: if in accordance with the legislation of the country where the registration was made there is no need to submit a financial report, then should you submit financial statements in general? If the answer is affirmative, according to what country legislation should the reporting be submitted?

Yes, such a necessity is mandatory, because only this financial statement will be able to confirm the financial performance indicators of your organization. The importance of this reporting lies in the fact that you must provide it if you plan to exempt the CFC’s profit from taxation in accordance with the issues indicated above.

In the event that there is no condition on mandatory reporting prescribed by the jurisdiction where the company is registered, then it is required to submit the financial statements in accordance with international accounting and auditing standards.

But, if the Tax Service is not notified about the presence of a controlled foreign company, will this be considered as violation of the law?

No, this is not punishable by law. The subject that did not provide a notification about the fact that he/she participates in a foreign company within the prescribed period and according to the grounds will not be liable in accordance with paragraph 2 of Article 129 of Part One of the Tax Code of the Russian Federation.

In addition, it is worth paying attention to the fact that, if the Tax Service has data provided to it by the state bodies of other countries for the purpose of exchanging information in the tax sphere referring to the international agreement concluded with the Russian Federation that the subject is the controlling person of the foreign company and he/she did not notify thereof, this subject must send the necessary explanations within the specified term or give notice within the established term after receipt of the corresponding requirement from the Tax Service.

Deliberate failure to submit the notification to the Tax Service by a controlling person on the controlled foreign companies for a complete calendar year, or submission of false information by this subject about its role in foreign organizations, entails charge of a fine of one hundred thousand rubles for each controlled foreign company regarding which the information was not presented in general or inaccurate information was submitted .

Also, deliberate failure to submit a document confirming participation in a foreign company or providing unreliable and false information on the participation of a taxpayer in a foreign company to the Tax Service entails the fine of fifty thousand rubles imposed for each controlled foreign organization regarding which the information has not been provided or such information was found to be unreliable.

Full or partial non-payment of the total amount of tax in consequence of not including a part of the profit of the CFC in the tax base by the controlling entity that acts as the payer of taxes (an individual or a legal entity) entails charging of the fine of twenty percent of the total unpaid tax in relation to the income of the CFC, which is subject to inclusion in the database of tax authorities on the income of controlling persons that are individuals. For controlling persons who act as taxpayers-entities, payment is at least one hundred thousand rubles.

Summing up, the question that arises is how it is possible to properly organize own business in terms of all of the abovementioned.

Actual changes in legislation tell us that it is worth noting that the first step in protecting your business from unwanted lawsuits with tax authorities is a complete and reliable collection and submission of information on your business, accompanying business structures, as well as their participants. The second step will be drafting a financial statement, which will lead to the possibility to make a conclusion whether there is a chance to exempt your organization's income from taxation.

It is also necessary to focus on the individual approach to each enterprise in the light of deoffshorization of the tax legislation of the Russian Federation.

For more detailed information and advice on conducting your business, please, contact the consultants of Law&Trust International.