The Russian Federation is moving quickly with the de-offshorization process and clients need to adapt their structures in order to avoid some potentially undesirable risks and penalties. This evolution should be considered together with the international trend and rapid move towards tax transparency and information exchange.
What are the most important aspects to be considered at the moment for Russian outbound investments?
Up date of controlled foreign company (CFC) rules
Russian tax residents holding foreign structures can be subject to taxation in Russia due to Controlled Foreign Corporation rules applicable since 2015.
Russian clients who own or control such entities could be taxed at 13% on their income even if not distributed.
In addition, CFCs which are considered to be managed in Russia can be viewed as Russian resident and will be subject to 20% corporate Russian tax regime. In certain cases individuals risk to be double taxed on their CFC.
Russian tax residents owning CFCs can choose either to declare them and pay the Russian tax or liquidate them. Some clients also decide to make their entities Russian tax resident.
In case a Monaco SCP is owned by a Russian tax resident it is important to be able to show to the Russian tax authorities proper accounting done under IFRS standards in order to declare its income under CFC rules.
It is interesting also to consider that it may also be more expensive for the client at the end to not be taxed under the CFC rules on an annual basis. Indeed when the non-CFC entity will distribute dividends to a Russian tax resident these dividends will be taxable in Russia without the possibility to deduct the annual taxes paid by the entity abroad. This contrasts with the CFC regime, where foreign taxes are usually deductible from the Russian ones.
Practical limits imposed by Russian currency control regulation
Russian currency control residents have a number of restrictions to operate their foreign bank accounts. The right to take loans abroad is regulated and the gain realised thanks to lower interest rate is taxable. These regulations limit the banks in terms of management of their client portfolio. One needs to consider that commonly used leverage which could increase the yield of a portfolio could be in contradiction with these rules too.
Other constraints concern the obligation to repatriate the proceeds of the sale of a property as well as the income or gain realised by a client on their investment portfolio.
Penalties are important and amount to 75-100% of the transaction value.
The use of foreign legal entities such as Monaco SCP which are outside the scope of the indicated currency control legislation can resolve these issues.
What about liquidating your company in 2017?
The amnesty granted to individuals liquidating their CFC in 2016 allowed individuals to receive their assets tax free. For CFCs which will be liquidated from 2017 it will be necessary to provide the accounting of the company complaint with IFRS standards or with Russian tax accounting norms. Details of the CFC should be filed and risks relating to corporate tax residency should be managed with caution. We would recommend Russian residents to look at this risk carefully particularly if they act as director of their foreign company, including Monaco ones.
What are the impacts on changing tax residency this year?
It is important to note that Russians tax residents who would become tax resident outside Russia from this year would still need to report their participation on existing CFCs for 2015-2016. It is also important to note that the sole Russian tax residency criterion is the number of days spent in Russia during a calendar year. As soon as at least 183 days will be spent in Russia in 2017, Russian tax residency will be retained. Dual tax residency between Russia and Monaco is technically possible but not necessary recommended.
Automatic exchange of information between Russia and Monaco.
Monaco and the Russian Federation have signed and ratified the Mutual Administrative Assistance Convention (MCAA) in the field of tax information. From the 1st April 2017, Monaco and Russia can exchange tax information on request or spontaneously.
Monaco and Russia have also signed and ratified the MCAA which set up the legal bases for the automatic exchange of financial account information. Both countries accepted to implement it from 2018 subject to the conclusion of a bilateral agreement.
Russian tax planning for inbound investment
Russia has signed many double tax agreements which should be used for compliant and efficient structuring. Similarly to what happen in other countries, tax treaty protection is more and more scrutinized by Russian Courts. The Courts apply the concept of ultimate beneficial owner to ensure the recipient of the income is effectively the real one and not an interposed holding company. In these analyses Russian Courts are using similar criteria to that used by Western European jurisdictions such as checking the substance and performing an analysis of who is assuming the risk and exercising the functions to exercise the activity.
This article is published in issue 21 of MONACO БИЗНЕС (Monaco Business) Magazine -
https://issuu.com/monacobusinessmagazine/docs/monaco_business_21
Rosemont Consulting SARL assists clients to achieve their estate planning objectives through other alternative legitimate compliant structuring of their assets. Please feel free to contact us.
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For any enquiries in worldwide tax and inheritance planning and for French or Monaco tax residence planning, do not hesitate to contact us:
Cécile Acolas – Partner c.acolas@rosemont.mc