1. New Russian CFC Rules and Cyprus Structures

2. New Major RF Tax Rules
Definition of Beneficiary for Application of DDT relief;
New Rules on Russian Tax residency;
New CFC Rules: taxation of undistributed profits of foreign companies/structures;
Reporting Obligations of RF tax residents;
Liability for failure to comply with new rules;
History of CFC Rules;
Taxation of sale of “real estate rich” companies;
New reporting obligations of foreign companies and structures directly owning real estate in Russia.

3. Beneficiary (1) (p. 2 art. 7 and art. 312 RF Tax Code)
Art. 7 RF Tax Code: new criteria for application of tax relief under relevant DTAs and treatment of qualifying beneficiary, i.e. the person who has the actual right for the relevant distributed proceeds (beneficiary).
is entitled to use independently and/or dispose proceeds by virtue of direct/indirect participation in a payer- company or by virtue of controlling of such payer- company or by virtue of other circumstances of control of the payer-company,
or another person in whose interest the recipient of the proceeds can dispose of such proceeds.
Qualifying Beneficiary

4. Beneficiary (2) (p. 2 art. 7 and art. 312 RF Tax Code)
Tax reliefs provided by the DTAs shall not apply if a foreign person is not considered to be a beneficiary of relevant proceeds.
has limited powers in relation to disposing of income,
exercises intermediate functions in the interest of the other person without exercising any other functions and undertaking any other risks,
directly/indirectly pays such income (fully or in part) to such other person who would not have been entitled to applying such reliefs under the DTA if such income was received by the latter directly from sources in RF.
Non-qualifying beneficiary
Art. 312 para 1 RF Tax Code “Special Provisions” was amended to include the right of the Russian withholding agent to request from the foreign recipient of the proceeds confirmation that such foreign recipient has the actual right for relevant proceeds (beneficiary confirmation).

5. Russian Tax Residency (1) (art. 246.2 RF Tax Code)
A foreign company may be recognized as RF tax resident and treated equally to Russian companies for corporate profit tax purposes if Russia is place of its actual management, i.e.:
most of Board of directors’ meetings (or meetings of any other similar body, except for an executive body) are conducted in Russia, or
executive bodies of the company regularly carry out it’s activities in RF, or
CEOs of a foreign company primarily perform their functions in Russia
The foreign company can also be recognized RF tax resident if accounting (financial or management) or record keeping or operative staff management is carried out in Russia.

6. Russian Tax Residency (2) (art. 246.2 RF Tax Code)
A foreign company may voluntarily choose to be treated as RF tax resident if one of the following conditions is met:
foreign company has a permanent location in a country with which Russia has DTA, and is tax resident of a foreign country under provisions of DTA;
foreign companies participate in projects under production share, concession, license, service agreements or other similar agreements;
foreign company whose shareholder is a Russian controlling person holding share at least 50% during 365 calendar days if meets conditions specified in para 3 p. 6 art RF Tax Code;
foreign company operates a new subsea field of petroleum commodities or is a shareholder of such company.

7. New CFC Rules vis-à-vis Typical Cyprus Structure
Individual – RF resident
Cyprus company
Operating companies
Interest/dividends
100%
BVI company / JV / Trust / etc.
Before January 1, 2015
RF resident was not subject to RF tax on undistributed profit of all CFCs (BVI, Cyprus, etc.)
From January 1, 2015
RF resident could be subject to RF tax on undistributed profit of all CFCs (BVI, Cyprus, etc.)
Interest/dividends

8. Main Tests and Criteria for Treatment of Structure as CFC

9. Controlled Foreign Companies (CFCs)
Foreign Company
(p.1 art RF Tax Code)
Controlled
Foreign Structure
(p. 2 art. 11 RF Tax Code)
Is not a legal entity (trust, fund, partnership, foreign company, etc.)
Shall NOT be RF Tax Resident;
Is established under the foreign legislation;
Is controlled by RF Tax Resident.
Is entitled to carry out income generating activity;
Is controlled by RF Tax Resident.

10. Controlling Persons Controlling person
(p. 3, 5 art RF Tax Code)
Exercising control over the company
Exercising control over the structure
RF Tax resident:
holds share in a foreign company of more than 25% (until more than 50% ); or
holds share in the foreign company of more than 10% (if cumulatively with other RF tax residents share in the company exceeds 50%); or
controls the company in its own favour or in favour of his spouse and minor children.
Exercising a “decisive influence” on company’s decisions regarding distribution of company’s profit after taxation due to:
direct/indirect participation in the company;
participation in a management agreement;
other relationships between the person and the company and /or other persons.
Exercising a “decisive influence”:
on the individual managing assets
regarding distribution of profit after taxation among participants or other beneficiaries under foreign legislation or agreement.

11. Exempted Foreign Companies’ Income from CFC Taxation

12. Key Exemptions from CFC Rules (p. 7 art. 25.13 RF Tax Code)
Even if a CFC, it’s profit shall not be taxed in RF:
Non-profit entities and structures not distributing their profit;
Companies from Eurasian Economical Union (Belarus, Kazakhstan, Armenia, from May 29, Kirghizia);
Companies from qualifying jurisdictions with effective tax rate equal to at least 75% of Russian corporate profit tax rate, i.e. minimum 15%;
Companies from qualifying jurisdictions with predominant “active” income (at least 80%);
Banks or insurance companies operating in qualifying jurisdictions;
Issuers of listed bonds or companies authorized to receive interest on listed bonds issued by another foreign company, if interest on them is at least 90% of the issuer’s income;
Companies participating in projects under production share agreement, concession, license, service agreements or other similar agreements;
Companies operating a new subsea field of petroleum commodities or their shareholders.

13. Whether Cyprus International Trusts Would Qualify as CFCs

14. Cyprus International Trusts (CIT)
Key parties to a trust:
Settlor:
establishes a trust by transferring assets to it;
may have some reserved powers (e.g. to revoke or amend trust terms, give directions for making payments, etc.);
Trustee: holds assets of the trust for the beneficiaries’ benefit;
Beneficiary: is entitled to receive income and/or capital of the trust;
Protector: exercises oversight over trustees on settlor’s behalf;
Enforcer: enforcers a trust made for a specific purpose.
Key CIT features:
governed exclusively by Cyprus law;
may exist in perpetuity;
powerful asset protection mechanism;
a trustee has unlimited investment powers.

15. Typical Structure 78,5% 21,5% 100% 100% 50% 50% 100% Shareholder Trust
Other company
Holding company
BVI company
100%
100%
Company 1
Company 2
50%
50%
Company 3
100%
Russian company

16. Criteria for Considering a Trust as CFC
The relevant trust can be treated as CFC if one the following conditions are met (para. 5, p. 7 art RF Tax Code):
founder of the trust is entitled to receive assets of this trust in his property;
settlor’s rights can be transferred to another person;
founder is entitled to receive directly/indirectly (via an affiliate) any profit of the trust distributed among all its participants (shareholders, trustees or other persons);
possibility to distribute its profit among all its participants (shareholders, trustees or other persons).

17. Use of Foundations, Investment Funds, Insurance Wrappers

18. (does not participate in management)
Foundations
Founder
(does not participate in management)
Key Features of
Foundations:
separate legal entity (not a trust);
closely regulated by statutory rules;
only statutes of Foundation shall be registered;
civil law rules on forced heirship can apply to foundations formed in such jurisdictions;
cannot undertake certain activities, e.g. commercial activities.
appoints
establishes
Protector
FOUNDATION
a legal entity
controls
in favor of
Council Members
Beneficiary (s)

19. Monetary Authority/Regulator (Cayman Islands, Jersey, Cyprus)
Investment Funds
Monetary Authority/Regulator
(Cayman Islands, Jersey, Cyprus)
No formal obligation of RF Tax resident to notify RF tax authorities on controlled participation in the Fund – if portfolio is less than 10%;
No obligation on notifying RF tax authorities on foreign account and activity on it;
Potentially is not a CFC.
Managing company
Fund
Portfolio 1
Portfolio 2
Client 1
Client2

20. Life insurance company
Insurance Wrappers (1)
Policy holder
(non-Russian person/entity)
nominates
SPV
Investment Manager
Life policy
assets
manages
appoints
Life assured person
(RF tax resident)
Beneficiary (non-Russian person/entity)
Life insurance company

21. Insurance Wrappers (2) Insurance: Investment:
Life assured person (Russian tax resident):
not a founder/settlor/establisher of the SPV;
not a controlling person or beneficiary of the SPV;
cannot withdraw, surrender, pledge the policy or take up advantages on the policy.
Investment:
Investment manager:
has to manage the assets according to the agreed investment strategy, in line with the risk profile of the Policyholder and rules of the regulator
cannot dispose of assets
cannot withdraw or surrender the policy
Policyholder:
can withdraw or surrender the policy
Life assured person (Russian tax resident):
not a founder/settlor/establisher of SPV;
not a controlling person or beneficiary of SPV;

22. Reporting Obligations of Controlling Person on CFC

23. Reporting obligations of controlling person of CFC (art. 25
Reporting obligations of controlling person of CFC (art RF Tax Code, art. 4 of Federal law as of No. 376-FZ)
(original deadline)
(new deadline)
СFC Law came into force;
Commencement of CFC’s income tax assessment.
Notification on participation in a foreign company (more than 10% share)
- Notification on establishment of a foreign structure
Annual deadline for notification on controlled foreign companies
Charging penalties for failure to pay taxes from CFC’s income.

24. Risks and Liabilities for Non-disclosure and Non-payment of CFC Tax

25. Tax Code Penalties (art. 129.5, 129.6 RF Tax Code)
For RF tax residents:
failure to notify on a CFC – RUB in relation to each CFC;
failure to notify on participation in foreign companies or undue notification – RUB in relation to each company.
failure to pay profit /income tax on CFC’s income – 20% from the tax underpayment.
Fines will apply from January 1, 2018.

26. Criminal Liability
Tax evasion by failure to file tax returns or other documents or declaring false information
Companies
(art RF Criminal Code)
Individuals
(art RF Criminal Code)
Underpayment of tax in the amount of:
over 2,000,000 RUB for 3 consecutive years if outstanding taxes exceed 10% of all taxes due; OR
over 6,000,000 RUB;
Underpayment of tax in the amount of:
over 600,000 RUB for 3 consecutive years if outstanding taxes exceed 10% of all taxes due; OR
over 1,800,000 RUB;
Fine: from 100K to 300K RUB or in the amount of the salary/other income for 1-2 years
Compulsory service: up to 2 years
Arrest: up to 6 months
Imprisonment: up to 2 years
Fine: from 100K to 300K RUB or in the amount of the salary/other income for 1-2 years
Compulsory service: up to 1 year
Arrest: up to 6 months
Imprisonment: up to 1 year

27. Draft Law. New Criminal Liability
Tax evasion committed with concealing or misrepresenting information in relation to CFCs or controlled transactions
Criminal liability may be introduced for tax evasion of companies through offshore schemes and shell companies (proposed amendments to art. 199 RF Criminal Code)
Underpayment of taxes in the amount of:
over 2,000,000 RUB for 3 consecutive years if outstanding taxes exceed 10% of all taxes due; OR
over 6,000,000 RUB;
Fine: from 200K to 500K RUB or in the amount of the salary/other income for 1-3 years
Compulsory service: up to 5 years
Imprisonment: up to 6 years

28. History of CFC Rules
Order No. 108n of RF Ministry of Finance approving list offshore zones as of November 13, 2007;
Amendments to para 1 p. 3 art. 284 RF Tax Code: non-applicability of participation exemption to foreign companies listed in Order No. 108n (Federal law dated No.76-FZ);
No significant practical effect as concerns medium and small companies which do not distribute dividends to their Russian holding companies;
On December 12, 2013 Presidential Address to RF Federal Assembly on taxation of profit of companies registered in offshore zones. On the same day RF Minister of Finance, Anton Siluanov, on the Government meeting said that the bill on CFC rules would be soon introduced.
Bill on CFC rules was introduced to RF State Duma on October 22, 2014 and was adopted on November 24, 2014

29. Real Estate Rich companies (1)
New provisions on taxation of sale shares in “real estate rich” companies;
As of January 1, 2015 amended version of para 5. p. 1 art 309 RF Tax Code:
“Real Estate Rich” Company – any company in any jurisdiction more than 50% assets of which directly or indirectly consists of real estate in Russia; before only Russian companies were mentioned;
Taxable Base: Proceeds from sale of shares (participations) or derivative financial instruments in qualifying “Real Estate Rich Companies”;
Exceptions: shares in listed real estate companies;
Specific exclusion from Tax Code of withholding agent’s obligation upon payment of proceeds from the sale of shares in “real estate rich” companies (p art. 309 RF Tax Code);

30. Real Estate Rich companies (2)
As of January 1, 2015 the Seller of shares in “real estate rich” company shall be responsible for payment of Russian tax:
Tax rate: for non-resident legal entities – 20%, for non-resident individuals – 30% (p. 2 art. 284, p. 3 art. 224 RF Tax Code);
Enforcement procedures: for legal entities - seizure of funds in the accounts in RF, for individuals – seizure of property under the court decision, including funds in the account and cash; Tax authority is entitled to apply provisional measures, ex: prohibition to sell (pledge) property without its consent or suspension of operations on bank accounts (p. 1 art. 46, p. 1 art. 48, p. 10 art. 101 RF Tax Code);
Consequences for non-payment of Russian tax: fine from 20 to 40% from outstanding tax amount, late penalty (art. 75, p. 1, 3 art. 122 RF Tax Code).

31. Reporting on UBOs of Foreign Companies Owning Russian Real Estate
Who is required to report: a foreign company (structure) directly owning Real Estate in RF including rep-offices (p art. 23 RF Tax Code)
When: upon presentation of relevant tax returns: until March 30, 2016 (for the 2015 tax period), until March 30, 2017 (for the 2016 tax period), etc. (p. 3 art. 386 RF Tax Code);
Extent of information to be provided: tax returns as well as information on participants of a foreign company (founders of a foreign structure) as of December 31, 2015, including disclosure of indirect participation (if any) of an individual or a public company if the share of their direct and/or indirect participation in the foreign company (structure) exceeds 5% (p. 3 art. 386 RF Tax Code).
Failure to comply: a fine in the amount of 100% from the immovable property tax amount, in proportion to the share in the member, information on which was not provided, or to the number of participants (p art RF Tax Code).

32. Thank You For Attention!