SIGNIFICANT changes to Russia’s tax code could lead to an increased use of corporate and trust entities based in the Channel Islands in the structuring of Russian corporate and private wealth arrangements.
The changes, dubbed the 'deoffshorisation law', are intended to tax the profits made by controlled foreign companies and other non-Russian structures in a similar manner to that seen in many countries around the world. In addition, the new rules require the disclosure of beneficial ownership interests in non-Russian structures and provide a framework under which a foreign structure might itself become tax resident in Russia.
‘What these new controlled foreign company rules, which came into effect on 1st January 2015, mean is that undistributed profits made by a foreign company, trust or other structure, which is controlled by a Russian tax resident, will be liable to profit tax in Russia, and in certain circumstances the entities themselves may be deemed Russian tax resident,’ said Collas Crill group partner Nicholas Davies.
‘We believe that this will see an increased use of structures such as cell companies, foundations and trusts for Russian tax planning going forward, and jurisdictions like Guernsey and Jersey, which have a reputation for the quality and flexibility of such products and the on-island services that accompany them, will ultimately benefit.’
Nick added that the new Russian tax rules offered both opportunities and challenges to the Channel Islands.
‘Russia and the wider CIS region continue to be a significant source of business for those involved in the structuring of offshore corporate, finance and private wealth arrangements in the Channel
Islands but it’s important that they understand the implications of these tax code changes, as well as the effect of sanctions and the current economic and geo-political environment that Russia finds itself in,’ said Nick.
To look at these opportunities and the challenges in more depth, Collas Crill has organised a seminar as part of its Spring Seminar Series.
‘It will provide an excellent opportunity to hear from speakers from the legal, tax and accounting worlds on the new controlled foreign company and tax residency rules introduced by Russia, and their potential impact on the use of Channel Islands structures by Russian tax residents going forward. We will consider the effect of sanctions and the political and economic backdrop more generally, and discuss some of the opportunities and challenges in doing business in Russia and the CIS in the current climate,’ said Nick.
Nick will be joined on the panel by chartered accountant and UK licensed insolvency practitioner Alan Roberts whose experience includes Protected Cell winding ups, contentious insolvency issues, complex asset recovery, forensic accounting investigations and multi-jurisdictional insolvency litigation cases, and Neil Hoolahan whose expertise is in international tax compliance and advice for collective investment vehicles, trusts and offshore companies.
The event will be held in Guernsey on Tuesday 14th April at the Duke of Richmond and in Jersey on Wednesday 15th April at Pomme d’Or Hotel. More information is available from email@example.com
The new Russian tax rules
Under the amendments to the Russian tax code that came into effect from 1 January 2015, Russian tax residents are required to disclose their beneficial interests in any offshore structure (subject only to de minimis exemptions) by 1 April 2015. However, this date will almost certainly be pushed back to at least October 2015 under further amendments that we understand are being prepared.
The new rules introduce the concept of controlled foreign companies into the Russian tax code. From 1 January 2015, a Russian tax resident must pay profits tax on the undistributed profits of any foreign entity controlled by it, in proportion to such controlling stake or participation, at the rate
of 13% (if an individual) or 20% (if a corporate entity).
A Russian tax resident is deemed to have control of a foreign entity for the purposes of the CFC Rules, if, for the purposes of calculating tax in 2015, its direct or indirect ownership stake or participation (when taken together with that held through a spouse or close relatives) exceeds 50%.
From 2016, the threshold to establish control for the purposes of the CFC Rules will be lowered to 25%, or, if the aggregate participation of Russian tax residents in the foreign entity is greater than 50%, just 10%.
There is also a broad catch-all element to the control definition, intended in part to capture structures for which a threshold controlling stake is not relevant, but which still allow a Russian tax resident to "exercise a determining influence" on the distribution of profit of such entity.
There are a number of exemptions, which include non-profit organisations, non-corporate foreign entities where the right to receive or control the distribution of profits is limited or prohibited, certain banks and insurance companies, and foreign entities that can rely on an applicable double tax treaty with the Russian Federation. Otherwise, key to the Russian tax analysis will be the extent to which a Russian tax resident has control of the distribution of profits of any offshore entity for the purposes of the Russian tax code.
In addition, the amendments to the Russian tax code set out 'place of effective management' criteria, intended to make foreign entities, which are in practice managed from Russia, Russian tax resident.
The new rules for the first time also seek to define who is the 'beneficial owner of income' for double tax treaty purposes.