Controlled Foreign Companies on the horizons of the Russian legislation

10.08.2012 First of all, it should be noted that controlled foreign companies are the most transparent forms of business in order to prevent avoidance of offshore’s withholding tax payment. The reason is that today many companies don’t distribute income between shareholders of offshore companies, id est don’t pay withholding tax. Nevertheless, the legal regulation of CFC provides that undistributed income is presumed to be distributed, consequently, shareholders obtain duty to pay taxes.
In the Russian legislation there is no analogue to CFC yet, but the Ministry of Finance has developed a strategy of introducing of such form which is traced in “General directions of tax policy of the RF for 2013 and planning period of 2014 and 2015”.
In the section 5 of the above document the measures aimed at prevention of tax payment avoidance through low-level taxed jurisdictions are named:  
1) introducing of taxation of undistributed profit of CFC – undistributed income of company can be assumed as income of its owner (parent company) for purposes of profit taxation;
2) introducing of notion “CFC” on the base of the notion of affiliated person and strategic participation in organization and also introducing of notion “tax payer – resident of the RF”  and notion “factual receiver of income” (persons who are factually entitled to income);
3) introducing of duty for the Russian companies and companies – tax residents in the RF to indicate in tax declarations all foreign affiliated persons and share in CFC;
4)  introducing into legislation conditions which inflict the duty to pay profit tax in relation to income of CFC;
5) strengthening of cooperation in tax sphere with other jurisdictions.

Expert’s opinion

Nowadays the Russian tax legislation is directed at complying with international standards of tax policy of the leading countries. For this reason the Ministry of Finance of the RF is aimed at active cooperation with other jurisdictions in tax aspects, including signing of bilateral and multilateral agreements on exchange of tax information.
The main purpose of introducing such radical changes is effective resistance to national taxation avoidance through accumulation of income in offshore jurisdictions.
However, it should be noticed that one of the key factors of tax policy of most of OECD countries is non-disclosure of information on tax payers to other countries.  It won’t significantly let the Russian initiators solve all problems of concealment of income from taxation immediately.    
On the one hand, the effect of strengthening the tax administration for bona fide tax payers will be positive as it is aimed at improving of legislation, concluding of new tax agreements with other countries. On the other hand, the duty for full disclosure of information (on affiliated persons, shares in capital of companies) can jostle away the potential investors from conducting of business in Russia and lead to termination of business by the Russian companies having foreign incorporators.

On the basis: http://www.minfin.ru/common/img/uploaded/library/2012/04/ONNP_2013-2015.pdf

Julia Akhmetova ( Paralegal of Moscow office of Honest & Bright Ltd)