Organization of activities in low-tax jurisdictions in Russian practice: controlled foreign companies and residence in special administrative regions

Criteria

Controlled foreign companies

Special administrative regions

Application and notification procedure

CFC notification shall be submitted by the company to the tax authority not later than March 20 of the year following the tax period in which the controlling entity recognizes income in the form of CFC profit in accordance with Chapter 25 of the Tax Code of the Russian Federation or which follows the year for which the loss of CFC is determined.

In order to obtain the status of SAR resident and an International Company a foreign legal entity submits an application to conclude an agreement for the implementation of activities, indicating its data, attaching the documents required for registration in the Unified State Register of Legal Entities and the issue of shares.

Restrictions on status

There are no restrictions.

A foreign company with formation or without formation of a legal entity, which is not recognized as a tax resident of the Russian Federation and whose controlling company is a tax resident of the Russian Federation becomes a CFC.

A company that has obtained international status in a Russian jurisdiction and is registered under the procedure of redomiciliation of a foreign organization, which was established before March 1, 2022, which has committed to invest 300 million rubles in the Russian economy within 3 years can become a resident of SAR. Exceptions: credit institutions; non-credit financial institutions; payment system operators; operators of payment infrastructure services.

Control criteria

The share of direct or indirect participation in the organization is more than 25% or;

The share of direct or indirect participation in the organization is more than 10%, if the share of participation of all parties, recognized as tax residents of the Russian Federation, in this organization is more than 50%;

The ability to have a decisive influence on the decisions made by this organization in relation to the distribution of profits received by the organization.

A controlling entity of SAR resident is an entity that has a controlling interest of at least 75% in a redomiciled foreign company as of January 1, 2020 (not applicable to public companies and sanctioned companies).

Profit included in the controlling party's profit

Counted in determining the tax base for taxpayers recognized as controlling parties in the share corresponding to the share of participation of this party in the CFC.

SAR resident`s profit is not included in the profit of a controlling party;

Profit of a CFC is not included in the income of SAR resident (until 2029).

Tax exemption

Tax exemption:

• -    A CFC is a non-profit organization that does not distribute profits;

• -    CFC is an active company (share of passive income is less than 20%);

• -    The effective tax rate is not less than 75% of the weighted average tax rate for corporate income tax;

• -    CFC is recognized as an international holding company;

• -    CFC is a bank or insurance company, issuer of tradable bonds.

Since the legal organizational forms of SAR residents, its location and territory of its activities are clearly defined, there are no criteria for the exemption of SAR residents from taxation.

Tax benefits and interest rates

The profit of a CFC shall be deducted by:

• -    distributed profits of the CFC, if it has the status of a foreign structure without formation of a legal entity;

• -    dividends paid by the CFC during the financial year;

• -    dividends whose source of payment is Russian organizations if the controlling party of this CFC has the actual right to such income. The right to pay tax on the CFC's fixed profit: 34 million rubles.

The tax paid by the CFC in the territory of its residence is deducted from the beneficiary's income tax.

The average tax rate on CFC's retained earnings at the controlling party is 13-15% depending on the territory of the CFC's residence.

Tax benefits:

• -    Income from sale of shares/stakes in companies -0%;

• -    Dividends to foreign entities - 5%;

• -    Income of Russian beneficiaries is not taxed;

• -    Income from subsidiaries - nontaxable

• -    Transport tax, property tax for aircraft and ships,

VAT on importation of ships - 0%