Do I pay tax on a CFC if I am a Russian tax resident?

It may be a surprise that if you are a Russian tax resident and shareholder of a company located and operating abroad, even if that company’s profits were not distributed and formally you did not receive dividends, you may be also taxed on these earnings. Why so?

TAX RESIDENCE

An individual is recognized as a tax resident of Russia if they have stayed at least 183 day within the last 12 months in Russia. Neither a residence permit not citizenship is mandatory for a foreigner to become one. All tax residents file returns and pay taxes to the Federal Tax Service regardless of the income source – whether domestic or foreign. Click here to learn more about tax residence in our country.

CONTROLLED FOREIGN COMPANY LAW IN RUSSIA

Controlled foreign company (CFC) laws exist in about 50 countries – USA, Israel, Canada, European Union countries, Turkey, etc. The main idea of this concept is that it is the retained earnings of the foreign company that are taxed if the controlling owner is a Russian tax resident. Russia equates such profits to the personal or corporate income of its owner.

A controlling owner has one or both of the following characteristics:
1) More than 25% of the shares is owned by this person, or more than 10%, if more than half of the company’s shareholders are Russian tax residents;
2) This person controls the company, either officially or unofficially. The latter can be spotted by, e. g., a trust declaration under which the nominee shareholders shall hold company shares for the benefit and in the interests of that person - the beneficiary. Or if he manages the corporate under a general power of attorney. Or if there is a bank account of a foreign company, the beneficial owner of which is a tax resident of the Russian Federation (authorities of different countries exchange such information).

However, if retained earnings are less than the threshold (currently 10 million rubles) or are subject to exemptions, then this profit is not taxed.

What are these exemptions?
1) It is a non-commercial company;
2) The corporate was formed in accordance with the law of a member state of the Eurasian Economic Union and has a permanent location in this state;
3) It is a bank or insurance agency;
4) In the income structure of this company there is no more than 20% of passive income, such as dividends, interest income from debt obligations, etc.
5) And some other types of companies.

The taxpayer is obliged to notify the tax authorities about holding shares of a foreign company and about the exercise of control over it on his own, and pay 13 to 15% of personal income tax or 20% of income tax.

If the CFC paid dividends, its profit is reduced by the amount of those dividends. The amount of tax calculated on the profits of a company may be reduced by the amount of tax paid by this CFC abroad, as well as by the amount of Russian taxes withheld in the Russian Federation at the source of payment. It is made to avoid double taxation.

FIXED PROFITS

Individuals who control foreign companies have the right to use an alternative option - paying tax on the fixed profits of the CFC. By choosing this option, the controlling person is relieved of the obligation to annually declare and confirm the amount of profit of his CFC using financial statements.

In return, the taxpayer will have to pay personal income tax on a fixed amount established in the Tax Code of the Russian Federation. Currently, this amount is 34 million rubles, and the tax amount is 5 million rubles (calculated at rates of 13% and 15%). Paying this amount of tax per year is sufficient regardless of the number of CFCs available.

Also note that the concept of controlled foreign companies is defined differently in different countries, and the tax to be paid may vary. So if you decide to change the tax residence, it will be a good idea to consult a local financial expert beforehand.



Need legal aid? Feel free to contact us:
Tel: +7 909 961-19-09
Email: legalsolutions@inbox.ru
Visit us: Moscow, Zubovskiy bulvar, building 4/1, office 308

You might also like the articles:
What will happen if you do not pay taxes in Russia?
Citizenship / residency by investment
Parallel import: new opportunities for import of goods to Russia