Russia Stiffened Legalization Rules for Controlled Foreign Companies

3rd of September, 2012

In June,Russia launched the third stage of capital amnesty, which will run until 2020. The second phase ended in February. Unlike the previous stages, the government decided to slightly review the rules that enable the Russians to voluntarily disclose information on controlled foreign companies (CFCs) and other foreign assets. From now on, such assets must be not only declared, but also re-registered. Nevertheless, as before, a person who agrees to voluntarily disclose information will be exempt from liability for violations in previous years.

Rules for re-registration of controlled foreign companies in Russia: new aspects

According to new regulations, anyone willing to disclose information on the CFC and other property to the Russian tax authorities is obliged to register it in one of the special administrative regions. There are two such regions in Russia, namely, Russky Island in Primorsky Krai and Oktyabrsky Island in Kaliningrad Region. Residents registered in these areas are exempt from dividend income tax and pay no income tax on the sale of foreign company shares. Besides, these regions feature a special currency regulation and income taxation rules.

From now on, the person who wants to apply for capital amnesty shall have no control over foreign companies at the time of filing the declaration. Moreover, money from all foreign accounts shall be transferred to Russia. It is also necessary to provide additional information regarding the movement of funds on accounts. Tax liability for the violations will be withdrawn only if those violations occurred before 01/01/2019. At the same time, the legislators did not give an unambiguous answer about the amnesty for the violations committed this year.

The new amnesty regulations provide for some changes concerning the activities of controlled foreign companies. CFC profits will be exempt from taxes only if a person was not a tax resident of the Russian Federation in 2018. In other words, starting from January 1, 2020 the government wants all CFC owners to start paying personal income tax on the companies’ profits. At the same time, the guarantees provided for the assets to be repatriated to Russia remain unclear.

Who will make use of the new CFC registration regulations?

Given the complicated rules of capital amnesty, the most of experts believe even fewer people will use the third chance to return their assets to the homeland. The requirement of compulsory re-registration of a controlled foreign company in Russia made the amnesty practically useless. Moreover, it is even dangerous from the perspective of international business development. Many entrepreneurs are accustomed to using foreign financial instruments and services of foreign banks, which they can hardly get in Russian jurisdiction. While before entrepreneurs had the opportunity of tax-free liquidation of a CFC, now this opportunity has disappeared.

About 20 thousand of tax residents took advantage of the first two stages of tax amnesty but now this figure can be several times less. The only thing that can still attract potential returnees is the absence of restrictions on the use of assets in Russia. Therefore, after legalization, some entrepreneurs may want to put those assets into international circulation again.

By Alexey Shilov