The stated goal for the proposed amendments is to combat the abuse of double taxation treaty benefits and to create tax incentives for companies moving from operating in offshore zones into Russian jurisdiction.
The draft introduces a concept of an “ultimate beneficiary.” This is a physical or legal entity with a full legal right to control profits. It can also be an entity on behalf of which another entity has a right to use and/or to manage this profit.
It is specifically noted that a physical or legal entity such as an agent, trust manager, or other authorized representative making independent decisions on behalf of other interested parties, is not recognized as an ultimate beneficiary.
The draft would introduce a new regulation stating that any monetary funds transferred by a Russian taxpayer for works, services, securities, or property rights to a resident of an offshore jurisdiction included in Order #108 of the Ministry of Finance from November 13, 2007, will be viewed as taxable income of the Russian taxpayer and may not “by default” be counted as expenses.
The only case in which this regime will not be used is upon simultaneous fulfillment of the following conditions: if the taxpayer is not the ultimate beneficiary and has presented, along with the tax declaration, the following data at the date of payment:
- Information about the ultimate beneficiary of the corresponding foreign company;
- Information, authenticated by the competent authority of the relevant country, confirming the existence of the foreign company within the jurisdiction included in the abovementioned list;
- Information, authenticated by the competent authority of the relevant country, confirming that the foreign company is operational (pursuing a business goal);
- Information, authenticated by the competent authority of the relevant country, about the tax amounts paid by the foreign company from these payments in their jurisdiction.
If all the mentioned criteria are fulfilled but the amount of tax paid within the foreign jurisdiction is less than 50% of the amount of tax that would have to be paid for the transaction in Russia, the difference must be paid by the taxpayer into the Russian budget.
If the Russian taxpayer is not able to fulfill all mentioned requirements or is considered the ultimate beneficiary/affiliated person of the ultimate beneficiary, payments made to an offshore resident will considered the income of the Russian taxpayer and taxed at the rate of 9%.
If the taxpayer presents inaccurate information and the tax authority has trustworthy information qualifying the taxpayer as the ultimate beneficiary, the payment amount is treated as taxable income, is taxed at the penalty rate of 20%, and is not eligible to be recorded as an expense.
The Federal Tax Service introduced proposed amendments as Controlled Foreign Corporation (CFC) Rules. However, the proposed regulations of payments made to offshore companies, bear no relation to the internationally accepted concept of CFC. At the same time, proposed rules are not unique in light of international tax legislation. Similar regulations exist in Kazakhstan, Venezuela, and Italy. Therefore, although the proposed draft definitely requires further improvement, the concepts it presents, after passing through the usual editing, will, most likely, become a part of Russian Tax Code.
Translated by Alinga Consulting Group.
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