Dentons tax experts would like to remind you that 20 March 2019 is the deadline for filing notifications of controlled foreign companies (“CFC”) with the Russian tax authorities. Controlling persons must file CFC notifications in respect of corporate and non-corporate CFC (trusts, funds, partnerships). In 2019, controlling persons must declare CFC profits or losses that were recognized by Russian taxpayers in 2018.
The Russian Tax Code (hereinafter – “the RTC”) provides certain cases where a controlling person does not pay tax on the undistributed profits of a CFC. For example, if the CFC is taxed at a high effective profit tax rate in its country of tax residence, or the CFC is an “active company”, or in other cases provided by the RTC. When a CFC’s profit qualifies for a tax exemption under the above conditions, then the controlling person must file relevant supporting documentation with the Russian tax authorities (translated into Russian) along with CFC notification.
The official CFC notification form and filing deadlines applicable last year (approved by Federal Tax Service Order of 13 December 2016 № MMV-7-13/679@) remain effective for 2019. Kindly note that corporate controlling persons are not allowed to file paper notifications, such notifications are deemed not properly filed even if filed on time.
Controlling persons must file CFC notifications with their local tax inspectorates. Notifications filed with other tax authorities (even a tax authority dealing with major taxpayers) are not deemed properly filed.
Failure to submit a CFC notification in time, or submitting inaccurate information, is subject to a fine of 100,000 rubles per notice. If the controlling person has several CFCs, the total fine may be quite significant. Therefore, it is of grave importance to double-check the accuracy and correctness of the information provided in CFC notifications.
In addition to filing of CFC notifications, controlling persons (Russian tax residents) must take the following action in relation to the taxable profits of a CFC:
1. Declare profit earned by the CFC (whether corporate or non-corporate) in the 2017 financial year which was not distributed during the 2018 financial year;
Kindly note that since the 2017 financial year, controlling persons must declare a CFC’s profit exceeding 10 million rubles. When calculating the CFC’s profit, controlling persons must consider the adjustments and exemptions provided by the RTC. Controlling persons must provide financial statements of their CFCs for the 2017 financial year along with the tax return. In certain cases, the controlling person must also provide an auditors’ report.
According to the RTC, 31 December 2018 is the date of receipt of income qualified as CFC profits declared in 2019. It is also the date for determination of the tax residency status of controlling persons. This is especially important for individual controlling persons whose tax residency status may vary during the calendar year. Russian tax resident individuals must file a tax return by 30 April 2019. Corporate taxpayers must file a tax return with the Tax authorities no later than 28 March 2019.
2. To pay tax on CFC profits;
The personal income tax and profit tax rates are unchanged: 13% and 20% accordingly. Russian tax resident individuals must pay personal income tax due no later than 15 July 2019. Corporate taxpayers must pay corporate income tax no later than 28 March 2019.
What we can do for you?
Dentons’ Russia Tax practice will be pleased to provide you with comprehensive legal support of CFC compliance including:
• Advice on practical issues in applying CFC legislation;
• Analysis of the applicability of the CFC rules to a particular corporate structure: determination whether a particular foreign corporate or non-corporate entity is subject to CFC rules;
• Determination of the eligibility of a CFC for tax incentives as well as assistance in the formation of a set of supporting documents to be provided to the Russian tax authorities;
• Assessment of risks associated with the application of CFC rules in relation to a particular corporate structure;
• Support in audits of a CFC conducted by foreign service providers;
• Analysis of CFC financial statements and audit reports to determine whether the information necessary to confirm the calculation of the tax base for personal income tax and profit tax in respect of CFC profits is complete;
• Calculation of CFC profits according to RTC rules;
• Calculation of the tax payable by Russian tax residents on CFC profits;
• Assistance with drawing up and filing CFC notifications with the Russian tax authorities (we also may assist with filing notifications of participation in foreign organizations and (or) establishment of structures without formation of a legal entity);
• Assistance with declaring the income of Russian Tax residents in relation to CFC profits;
• Support in communication with the Russian tax authorities and Russian Ministry of Finance concerning CFC compliance, as well as support during tax audits of issues related to CFC compliance;
• Legal support in resolving court disputes between the Russian tax authorities and Russian tax residents regarding CFC compliance started at any judicial level of review as well as pretrial dispute resolution.