Controlled foreign companies

Since 01.01.2015, the Tax code has been significantly reformed in terms of international taxation. The concept of controlled foreign companies is introduced and the order of accounting of their profit as a part of profit of the Russian resident is established.

A controlled foreign company (CFC) is a foreign organization, the controlling person of which is an organization and (or) an individual recognized as tax residents of the Russian Federation.

This institution was introduced in order to control and account for the receipt of profits by Russian residents in foreign jurisdictions, and, as a consequence, in order to obtain taxes by the state.

The controlling person must meet certain requirements: 1) he must be a resident of the Russian Federation, and 2) must have a certain minimum share in a foreign company.

The minimum share of participation in a foreign company, both for individuals and legal entities is 25%, or 10 % – if the share of participation of all persons recognized as tax residents of the Russian Federation in this company (for individuals – together with spouses and minor children) is more than 50%. It should be noted that the share of both direct and indirect participation in a foreign company is taken into account

Taxpayers recognized as tax residents of the Russian Federation are required to submit the following notifications to the territorial tax office:

– About the participation in the foreign organizations (about establishment of foreign structures without formation of legal entity) within three months from the date of emergence (change of the share) of participation in such foreign organization;

– About CFC no later than March 20 of the year following the tax period.

CFC profit is equal to the profit of the organization (income of individuals) and is taken into account in determining the tax base for taxes from taxpayers recognized as its controlling persons. The supporting documents are the financial statements of the CFC or the auditor’s report.

The first payment of income tax, as well as the first reporting of taxpayers taking into account the profit of the CFC should be provided before 28.03.2017. Thus, persons having business abroad still have time to analyze the requirements of the law and prepare all the necessary documents. We should not forget that, despite the fact that the liability in the form of a fine for non-payment/ incomplete payment of tax (in the amount of 20% of the amount of unpaid tax) will be applied from 2018, there is another responsible for failure to submit notifications about participation in a foreign organization and the CFC.