Source: http://www.dentons.com/en/insights/alerts/2015/march/3/tax-major-russian-legislation-changes_march-2015
Timestamp: 2016-12-03 00:21:13
Document Index: 84374051

Matched Legal Cases: ['art. 129', 'art. 246', 'art. 7', 'art. 7', 'art. 406', 'art. 54', 'art. 252']

Dentons - Tax. Major Russian Legislation Changes for 2014 Use of cookies on this website
Tax. Major Russian Legislation Changes for 2014 Tax. Major Russian Legislation Changes for 2014
A foreign company is considered to be controlled by a Russian tax resident if that resident exerts or has the ability to exert a decisive influence on the company’s decisions regarding the distribution of its after-tax profits (income) by virtue of direct or indirect participation in the company, participation in a management agreement in respect of the company, or other circumstances of the relationship between the resident and the company and/or other persons. On the same grounds, subject to a number of additional conditions, a foreign structure without the formation of a legal entity (trust, fund, etc.) may be deemed to be controlled.
Note that the grounds for recognizing a foreign company under the law as a CFC are not exhaustive. If a Russian tax resident exercises actual control over a foreign company’s decisions regarding the distribution of earned profits, the tax authorities may treat the foreign company as controlled by that resident even if the resident’s share of direct or indirect participation in the company is less than the threshold values or the resident holds no interest at all in the company.
Russian tax residents are required give notice of the foreign companies they control (according to the above criteria), as well as notice of any foreign companies in which their share of participation exceeds 10%. For foreign structures without the status of a legal entity, the tax authority must be notified of the creation of the structure, of actual control over it, of an actual right to the structure’s income, and of an actual right to income/profits distributed from the structure.
The law makes no provision for exempting a CFC’s profits from taxation in Russia according to jurisdiction (a so-called “white list”), with the exception of companies established in member states of the Eurasian Economic Union. However, the law does allow certain exemptions of such profits from taxation in Russia on the basis of (i) special status (in particular banks and insurance companies, as well as non-commercial organizations that do not distribute profits), (ii) nature of activity (in particular, companies earning more than 80% of their profits from so-called “active” income, in contrast to the “passive” forms of income listed in the law), (iii) level of taxation (effective tax rate in the company’s home jurisdiction relative to Russian rates), and (iv) the company’s total profits (a CFC’s profits are not taxed in Russia if its total profits do not exceed 50 million rubles in 2015, 30 million rubles in 2016, or 10 million rubles in 2017 and thereafter). The criteria of “active” income and level of taxation apply only if the company’s home jurisdiction has a double-taxation agreement with Russia and is not on the “black list” of jurisdictions that do not exchange tax information with Russia.
A CFC’s taxable profits are calculated according to chapter 25 RF TC (for purposes of both profit tax and personal income tax), unless the CFC’s financial statements are subject to a mandatory audit under the domestic law applicable to the CFC and the CFC is located in a state with which Russia has a double-taxation agreement. In the latter case the CFC’s profits are calculated on the basis of its foreign audited financial statements.
Profits of a CFC are booked when the tax base of its controlling Russian resident is determined, pro rata to the resident’s interest in the CFC at the date of the decision on profit distribution, or if such decision is not adopted on December 31 of the year in which the financial year ends—i.e., the year covered by the financial statements of the company in accordance with the domestic law applicable to it—at the end of the relevant period.
Failure to pay the tax on a CFC’s profits in full is punishable by a fine equal to 20% of the unpaid tax, but no less than 100,000 rubles. However, there is a moratorium on the provisions governing liability for that offense (art. 129.5 RF TC): Russian tax residents will be subject to fines for such nonpayment only in respect of profits relating to 2018 and later tax periods.
In addition to the controlled foreign company rules, the law introduces other “de-offshorization” measures, including, first and foremost, rules for determining the Russian tax residency status of legal entities (art. 246.2 RF TC).
According to the new rules, a foreign organization may be recognized as a Russian tax resident if its place of effective management is Russia. An organization’s place of effective management is deemed to be Russia if any of the following is true: (a) the majority of meetings of the organization’s board of directors or other collective governing body (not executive body) are held in Russia; (b) the organization’s executive body regularly performs its activities in Russia (the extent of activities in Russia is equal to or substantially greater than the extent of activities elsewhere); (c) the organization’s key (leading) officials perform their activities associated with decision-making and actions relating to the organization’s day-to-day (current) operations primarily in Russia. If none of the above primary criteria is met or only criterion (a) or (b) is met, secondary criteria are applied; in that case, it is sufficient to satisfy any one of the secondary criteria for Russia to be recognized as the place of effective management. The secondary criteria are: (i) the organization’s accounting or management accounting (disregarding activities relating to the preparation of consolidated financial statements) is performed in Russia; (ii) the organization’s records management is performed in Russia; (iii) operational management of the organization’s personnel is performed in Russia.
The law explicitly states that the performance in Russia of activities of preparation and holding of meetings of a company’s shareholders/participants, preparation for holding meetings of the board of directors, strategic planning, budgeting, preparation and compilation of consolidated accounting statements, internal audit and internal control, and compilation and adoption of internal methodologies, standards, and policies, in the absence of decision-making on the day-to-day management of a foreign organization, does not have the result of making Russia the organization’s place of effective management.
An exception from Russian tax residency rules is also made for passive holding companies—companies in which a Russian controlling person directly or indirectly holds no less than a 50% interest for at least 365 days, more than 50% of whose assets consists of capital in other foreign organizations, whose “passive” income is 20% or less of their total income, and which are located in countries that are not on the Finance Ministry’s “black list” and have a double-taxation agreement with Russia. Furthermore, the holding company must either have no income or at least 95% of its income must be in the form of dividends. If all these criteria are met, the holding company is not recognized as a Russian tax resident, regardless of whether the criterion of place of effective operations is met.
Another de-offshorization measure is the “actual recipient of income” (beneficial owner) rules added by Federal Law No. 376-FZ to arts. 7 and 312 RF TC. The rules are aimed at preventing the abuse of double-taxation agreements through so-called “conduit companies”. These companies, established in a jurisdiction that has a double-taxation agreement with Russia, conduct no activities of their own but receive income from Russian sources under the favorable taxation regime of the double-taxation agreement and transfer it to an offshore jurisdiction.
Under the beneficial owner rules, a foreign company cannot avail itself of the benefits of a double-taxation agreement between Russia and the company’s home jurisdiction in respect of income from Russian sources if the foreign company has limited powers to dispose of the income and performs intermediary functions in respect of that income in the interests of another person, without performing any other functions and without itself assuming any risks, paying such income directly or indirectly (in whole or in part) to such other person, which person would not be entitled, if the income had been received from the sources in Russia directly, to enjoy such benefits (i.e., is located in a different jurisdiction). The beneficial owner is the person who through direct and/or indirect participation in the organization, control over the organization, or by virtue of other circumstances has the right to use and/or dispose of such income independently, or the person in whose interests the other person is authorized to dispose of such income (art. 7 RF TC).
If the beneficial owner is a Russian tax resident, it is taxed under Russian tax laws. If such Russian tax resident is an organization, an income source that is a Russian organization (provided that the tax authority where the organization is registered is informed of this fact) is not required to perform the duties of a tax agent, and the income recipient pays tax independently (art. 7(4) RF TC). In the case of income in the form of dividends, if the beneficial owner is a Russian organization, that organization may, subject to compliance with article 284(3)(1) RF TC and a number of additional conditions set out in article 312(1.1) RF TC (the clause added by the law), apply to those dividends the zero-rate tax applicable to “direct” payments.
As before, the tax base for dividend income is calculated separately, which does not allow such income to be reduced for tax purposes by an organization’s expenses relating to its principal activities (deductions are for individuals) (arts. 210(2) and 274(2) RF TC).
The law establishes new procedures for the initiation of criminal cases in tax-related offenses (arts. 198–199.2 of the RF Criminal Code).
The superior tax authority has 15 days to send a reply to the investigator concerning the information it has on tax offenses—namely, whether a tax audit of the taxpayer/tax agent has been or is being performed at the time the query is received from the investigator. If an audit has been performed and the tax authority has issued a final decision recording the tax offense mentioned in the report received by the investigator, the tax authority sends the finding on the tax violations to the investigator.
Within 30 days of receiving the report of the offense, the investor must decide whether a criminal case should be initiated. However, the tax authority’s reply is not binding on the investigator. A criminal case may be initiated even if a tax audit of the taxpayer/tax agent has not been performed or is not being performed at the time the information is exchanged.
We recall that these innovations to the Tax Code require VAT returns to be submitted solely in electronic format, with the inclusion of information from the taxpayer’s purchase and sales ledgers.
The limits within which RF regions can set tax rates ranges from 0.1% to 2% depending on the category of the immovable property (art. 406 RF TC). For residential premises, for example, the maximum allowable rate is 0.3%; for commercial real estate and other immovable property whose cadastral value exceeds 300 million rubles (the so-called “luxury tax”), the maximum rate is 2%.
Furthermore, article 408 RF TC grants a general 4-year “grace period” during which taxes calculated at the rates approved by RF regions within the range set by article 406 RF TC will be reduced by a fixed reduction factor. The system of these reduction factors is designed such that the tax amount increases in each successive year during the grace period.
Among the rulings that the RF Supreme Arbitration Court (“RF SAC”) managed to adopt in plenary session before its elimination (on August 6, 2014) was a ruling dealing with controversial questions from practice in the application of chapter 21 RF TC, governing the charging of VAT.
a disposal of property as a result of events beyond a taxpayer’s control (loss of property due to spoilage, breakage, theft, natural disaster, or similar events) does not constitute a taxable event. However, a taxpayer is required to record the disposal and the fact that the property was disposed of for the stated reasons, and was not transferred to third parties (art. 54(1) RF TC). In that connection, when a dispute arises concerning the truthfulness of the reasons cited by a taxpayer for a property disposal, including during assessment of the accuracy and completeness of documents submitted by the taxpayer to corroborate the fact and circumstances of the disposal, courts should consider the nature of the taxpayer’s activities and the conditions of the taxpayer’s economic management, take into account whether the volumes and frequency of the property disposal correspond to the usual level for such activities and other similar circumstances, and also evaluate the tax authority’s objections as to the likelihood of the property disposal for the reasons stated by the taxpayer, in particular arguments as to excessive losses (s. 10 of the Ruling);
However, when advertising materials are distributed as part of a taxpayer’s activities to promote in the market, with the aim of increasing sales, the goods/works/services it produces or sells, such distribution cannot be regarded as a separately taxable item unless the advertising materials qualify as goods, i.e., property intended for sale in its own right (s. 12 of the Ruling);
on the basis of article 171(6) RF TC, a taxpaying investor’s right to a tax deduction depends neither on the settlement procedure for contract works nor, accordingly, on who claims payment of the relevant amounts: the contractor itself or the developer/technical client. For purposes of implementing the provisions of chapter 21 RF TC in relations with an investor, a developer/technical client should, if it is not acting simultaneously as a contractor, be classified as an intermediary and be subject to the provisions of article 156(1) RF TC (s. 22 of the Ruling).
In 2014 and previously, it should be noted, the court practice that had developed on this issue was virtually uniformly negative for taxpayers (see, for example, Moscow Okrug FAC Rulings of April 7, 2014, in case No. A40-56610/13; of March 26, 2014, in case No. A40-171364/12; and of December 23, 2014, in case No. A40-77167/14 and the Volgo-Vyatka District Arbitration Court Decision of October 27, 2014, in case No. A29-9206/2013). The courts, as a rule, with reference to RF SAC Presidium Ruling No. 13018/10 of March 1, 2011, reached the conclusion that there was no “business need” for such payments and that they were therefore not economically justified (art. 252 RF TC).
The new article 217.1 also contains the rule that if a taxpayer’s income from the sale of an immovable property is less than 0.7 multiplied by the property’s cadastral value as at January 1 of the year in which the state registration of the transfer of title to the property was performed, then that calculated value is taken to be the taxpayer’s taxable income from the sale. In other words, the taxable income from the sale of an immovable property cannot be less than 70% of its cadastral value.
As of the January 1, 2015, the list of local taxes has been expanded to include a trade levy (chapter 33 RF TC “The Trade Levy”). This is a compulsory charge payable quarterly by organizations and individual entrepreneurs on the facilities they use for trading activities. Individual entrepreneurs who have purchased a patent (license) are exempt from the levy.
Payment of the trade levy is not expected to increase the tax burden on taxpayers, given that it is deductible from their tax liabilities (profit tax, unified tax, or the personal income tax payable by taxpayers in connection with their business). A greater tax burden may result only for “mala fide” taxpayers who minimize the tax base of the profit tax or unified tax, or for loss-making organizations.
A Moscow law on the trade levy has already been adopted by the Moscow City Duma (Moscow Law No. 62 of December 17, 2014) and envisages the introduction of a trade levy in Moscow as of July 1, 2015. The rates set by that law will be in effect in 2015–2016.
Tax monitoring means the tax authority’s ongoing oversight of the monitored organization’s compliance with tax laws instead of desk and field tax audits of that organization. To enable such control, the monitored organization is required to provide the tax authority with necessary documents upon request on an ongoing basis.
If the taxpayer agrees with a reasoned opinion, it complies with the opinion by filing or adjusting the relevant tax reports. If the taxpayer disagrees with a reasoned opinion, it initiates a mutual agreement procedure involving the central office of the RF Federal Tax Service. Based on the outcome of the mutual agreement procedure, the tax authority’s reasoned opinion may be revised or left unchanged.
First court case on the “joint promotion” agreement
The effective of advertising campaigns carried out by product manufacturers and distributors vitally depends on their close cooperation with retail stores to jointly promote the products and increase sales. Both the manufacture and the retailer have an interest in improving the effectiveness of marketing and advertising and in steady sales growth, and their cooperation in this area is standard market practice. The problem is that Russian legislation lacks a specific “contractual structure” to formalize such relations between a producer/distributor and a retailer, in which the parties do not reciprocally provide services to each other but there is a common goal and concerted actions to achieve it.
A “product co-promotion agreement”, whose use we have recommended in these situations for many years, is not provided for in the RF Civil Code and is little known to the tax authorities; for that reason, business representatives have been anticipating claims from the tax authorities about this “contractual structure” and attempts to recharacterize it as a more “customary” agreement, with the aim of assessing the parties with additional taxes. It was not until 2014 that such an agreement became the subject of a judicial dispute: in the “Job.ru” case (MO FAC Ruling No. A40-82571/13 of July 16, 2014) the court considered a tax authority’s claims against a taxpayer that had concluded a mutual cooperation agreement with its partner. The tax authority made claims against the taxpayer for providing services free of charge to the partner.
The court supported the taxpayer’s arguments and held the inspectorate’s decision to be unlawful, stating that the parties could enter into any contract regardless of whether it was contemplated by the Civil Code. Mutual cooperation does not have as its purpose the provision of services by the parties to each other; rather, it involves contributions by each party to a common activity, and such contributions cannot be regarded as a sale that is subject to VAT.