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New Russian rules affecting tax planning
18/08/2014

The Russian government is moving very quickly to introduce legal and tax measures which would bring more transparency into the economy. Most of these measures already exist in OECD countries but they are introduced in Russia with slightly different approaches.

The Russian State wants to set up TIEAS with tax heaven countries (a new Russian model of TIES is being implemented), and is revising many Double Tax Agreement’s.

Amongst other measures, such as new anti-money laundering rules, introduction of abuse of rights, changes on real estate CGT, Russian FATCA proposal, we have selected four measures which will impact Russians clients investing or residing out of Russia:

From 4th August 2014, Russian citizens will be obliged to declare they have, another citizenship or a residence permit in a foreign country.

This obligation does not apply to citizens residing outside of Russia, providing they prove their status of non-resident.

The Russian nationals residing in Monaco therefore need to ensure they fall outside of the scope of this measure (indeed they could still be tax resident in Russia).

A failure to report within 60 days, leads to criminal liability, which would open a criminal record causing problems when obtaining visas, opening bank accounts, creating a company, etc.

The second key measure is the draft law which will introduce controlled foreign companies (CFC) for the first time in Russia. The goal is the ‘de-offshorization’ plan, announced by President Putin in December 2013. The latest official draft (published on 27th May 2014) and is still under discussion.

Russian residents holding at least 10% ownership or controlling (exercising a determining influence) a foreign company, will be taxable in Russia on the company’s profits. Special exclusions exist, the main one being when the foreign company’s revenue has been taxed abroad at more than 75% of the Russian statutory rate. The effective tax rate test will be applied countries that have tax treaties with Russia. Monaco has not signed such treaty.

According to the current draft, non-commercial entities which do not distribute profits should not be concerned by this law. We would need to determine whether a Monegasque SCP can fall into this category.

It is worth noting that holding more than 1% in a foreign company may not lead to taxation, but will have to be declared to the Russian tax authorities.

The impacts of the CFC disclosure requirement mean that the Russian Tax Authorities will now be aware of the existence of certain offshore structures and could investigate them.

New corporate residency rules should be considered as well as residency by election.

The draft law provides that foreign organizations that have their place of effective management in Russia could be considered as tax resident in Russia (so taxable on worldwide income).

The scope of this measure would be very wide as it will apply also to structures like trusts. The current draft mentions three main criterion (e.g.: the place where the Board of Directors is usually convened) and three subsidiary ones.

Companies could elect to be resident in Russia and, therefore, will not be concerned by the CFC rules. It could then be an alternative for existing companies to avoid the inconvenience of CFC (subject to anti-abuse rules).

Should a foreign entity be considered as tax resident in Russia, then all the subsidiaries can be taxable in Russia through the CFC rules!

Finally a new definition of “Beneficial Owner” is proposed to be implemented into Russian internal law for the application of DTA’s, which will limit the benefit of tax treaties for any interposed structure.

Conclusion:

Most of these new measures are likely to evolve, leading to uncertainty and risk. It is important to assess the potential consequences for Russian beneficiaries of existing offshore and onshore companies, trusts and similar structures, to adapt and maybe re-structure them. More substance will have to be put in place, with effective control and management in the place of registration and real commercial purpose. Trusts and foundations can still be considered, but discipline should be observed to avoid the “decisive influence” criteria. Consideration will need to be given- whether and to what extent non-commercial structures, such as civil companies, are concerned by these measures.

For any enquiries on worldwide tax and inheritance planning, and French or Monaco tax residence planning, do not hesitate to contact us.

For further information on Rosemont Consulting SARL and services provided please visit www.rosemont.mc
 
Please do not hesitate to contact Cecile Acolas at c.acolas@rosemont.mc for queries on these topics.

This article was published in MONACO БИЗНЕС (Monaco Business) Magazine.

If you follow the web link below, this will also take you to the online magazine pages 32 & 33 where the article is featured:

http://issuu.com/monacobusinessmagazine/docs/monaco_business_10/35?e=5069758/8658012