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CFC reporting

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Tax residents of the Russian Federation (both individuals and legal entities) are required to notify the Tax Authorities on their participation in foreign companies or structures without forming a legal entity, and if they are recognised as controlled foreign companies (CFCs) in accordance with the rules of tax legislation, submit the appropriate reporting forms and calculate tax on CFC profits.

In practice, controlling persons face difficulties regarding the determination of the applicability of the CFC reporting requirements to them. The process of filling out the notification forms, determining the possibility of using the financial statements to calculate the taxable base, as well as the process of calculation itself raise several practical questions.

Having significant experience in this field, we are ready to analyse a company’s ownership structure in order to determine the perimeter of CFC, prepare the necessary reporting forms and assist with the collection and translation of documents that should be submitted to the Tax Authorities along with reports, calculate CFC profits, based on financial statements or on the rules of the Tax Code.

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15/06/2022
The former Mo­scow of­fice of CMS to con­tin­ue work­ing as an in­de­pend­ent law...
On 15 June 2022, the former Mo­scow of­fice of the in­ter­na­tion­al law firm CMS an­nounces the start of work as an in­de­pend­ent law firm un­der the new brand name SEAM­LESS Leg­al.Over 80 col­leagues of the Mo­scow of­fice con­tin­ue work­ing as one team, led by Man­aging Part­ner Jean-Fran­cois Mar­quaire and Seni­or Part­ner Le­onid Zubar­ev.We keep ad­vising our cli­ents across all 23 prac­tices and sec­tors: We lean on 30 years of ex­pert­ise and an im­pec­cable repu­ta­tion as part of an in­ter­na­tion­al law firm. We have al­ways abided by strict pro­fes­sion­al stand­ards and will con­tin­ue provid­ing ser­vices of the highest qual­ity. Jean-Fran­cois Mar­quaire, Man­aging Part­ner: “We are proud of hav­ing been able to cre­ate and pre­serve a united team with a friendly cor­por­ate cul­ture and re­spons­ible at­ti­tude to our busi­ness.”Le­onid Zubar­ev, Seni­or Part­ner: “Our new brand SEAM­LESS Leg­al most ac­cur­ately re­flects the ap­proach to work that has de­veloped over the years in our firm – in­teg­rity and co­her­ence, im­pec­cab­il­ity, con­tinu­ity and un­in­ter­rup­ted sup­port to our cli­ents at any time."
20/05/2022
Rus­si­an tax meas­ures to sup­port busi­ness and latest tax trends for for­eign...
The Rus­si­an Tax Code is un­der­go­ing sig­ni­fic­ant changes to help busi­nesses ad­apt and stay afloat.In their turn, for­eign busi­nesses, act­ive in Rus­sia, cur­rently face un­pre­ced­en­ted chal­lenges and are seek­ing...
11/04/2022
Rus­si­an Fed­er­al Tax Ser­vice gives re­com­mend­a­tions on pay­ing VAT on elec­tron­ic...
As we pre­vi­ously re­por­ted, for­eign pro­viders of elec­tron­ic ser­vices may face prac­tic­al dif­fi­culties with pay­ing VAT to the Rus­si­an budget.As a solu­tion to this prob­lem, in its Let­ter No. SD-4-3/[email protected]* dated 30 March 2022 the Fed­er­al Tax Ser­vice of Rus­sia (the “FTS”) gave a num­ber of re­com­mend­a­tions on pay­ing VAT for elec­tron­ic ser­vices provided by for­eign en­tit­ies.The FTS re­com­mends that Rus­si­an cus­tom­ers of elec­tron­ic ser­vices cal­cu­late, with­hold and pay VAT them­selves as tax agents. It is also re­com­men­ded that Rus­si­an cus­tom­ers (i.e. leg­al en­tit­ies and self-em­ployed en­tre­pren­eurs) in­form for­eign ser­vice pro­viders that they act as tax agents and pay VAT to the Rus­si­an budget.It is cla­ri­fied that in such a case, Rus­si­an tax au­thor­it­ies will have no grounds to re­quire that the for­eign en­tity re­peatedly pay VAT to the budget and re­cog­nise the rel­ev­ant trans­ac­tions in its VAT tax re­turns. By vol­un­tar­ily with­hold­ing VAT, Rus­si­an cus­tom­ers re­tain the right to de­duct the in­put VAT. This po­s­i­tion is in line with the stand­ard ap­proach pre­vi­ously set out by the FTS in its Let­ter No. SD-4-3/[email protected]* dated 24 April 2019.   At the same time, this re­com­mend­a­tion of the FTS seems to be more rel­ev­ant for fu­ture pay­ments for elec­tron­ic ser­vices to for­eign ser­vice pro­viders and does not re­solve the prob­lem with pay­ing VAT for the first quarter of 2022, if the cus­tom­er failed to vol­un­tar­ily pay VAT to the budget due from pay­ments made to the for­eign ser­vice pro­vider.Fur­ther­more, this re­com­mend­a­tion will not ap­ply to for­eign ser­vice pro­viders if elec­tron­ic ser­vices are provided to cus­tom­ers who are in­di­vidu­als.Fi­nally, in its new let­ter the FTS does not cla­ri­fy wheth­er pro­vi­sions re­gard­ing the vol­un­tary pay­ment of VAT to the budget and the eli­gib­il­ity of Rus­si­an cus­tom­ers for VAT de­duc­tion ap­ply if the for­eign pro­vider of elec­tron­ic ser­vices is not re­gistered with Rus­si­an tax au­thor­it­ies. Ac­cord­ing to the lit­er­al in­ter­pret­a­tion of Art­icle 171 (2.1) of the Rus­si­an Tax Code, VAT de­duc­tion is pos­sible only sub­ject to sup­port­ing doc­u­ments show­ing the iden­ti­fic­a­tion de­tails of a for­eign e-ser­vices pro­vider as be­ing tax-re­gistered in Rus­sia.Thus, the new cla­ri­fic­a­tions provided by the FTS demon­strate the com­mit­ment of Rus­si­an tax au­thor­it­ies to ad­dress­ing the prob­lems that for­eign busi­nesses cur­rently face. However, they do not solve all chal­lenges in pay­ing VAT to the Rus­si­an budget, in­clud­ing for the first quarter of 2022. Giv­en the above, for­eign pro­viders of elec­tron­ic ser­vices should dis­cuss with their for­eign banks in ad­vance wheth­er it is pos­sible to pay VAT to the Rus­si­an budget, and to con­sider al­tern­at­ive pay­ment op­tions (e.g. via in­ter­me­di­ar­ies).We will con­tin­ue to mon­it­or the situ­ation and keep you in­formed of any fur­ther changes.* In Rus­si­an
08/04/2022
UK halts co­oper­a­tion with Rus­sia on tax in­form­a­tion ex­changes
On 17 March 2022, the UK Treas­ury an­nounced the sus­pen­sion of the ex­change of tax in­form­a­tion with Rus­sia.The sus­pen­sion of the ex­change of tax in­form­a­tion means that Rus­sia will not re­ceive in­form­a­tion un­der any of the cur­rent ex­change of in­form­a­tion mech­an­isms with the UK, in­clud­ing the Ex­change of In­form­a­tion on Re­quest (EoIR) and Coun­try-by-Coun­try Re­port­ing (Cb­CR).Fol­low­ing the UK, the Chan­nel Is­lands (Jer­sey and Guern­sey) and the Isle of Man are also sus­pend­ing ex­change of tax in­form­a­tion with Rus­sia.Com­ment­sIt is worth not­ing that the UK sus­pen­ded the ex­change of fin­an­cial in­form­a­tion un­der the Com­mon Re­port­ing Stand­ard (CRS) with Rus­sia in 2019. There­fore, the cur­rent de­cision does not en­tail any sig­ni­fic­ant changes for Rus­si­an tax­pay­ers in terms of is­sues re­lated to the ex­change of in­form­a­tion un­der the CRS.The ter­min­a­tion of the ex­change of in­form­a­tion on re­quest (EoIR) could have a neg­at­ive im­pact on the con­firm­a­tion of eli­gib­il­ity for tax re­lief un­der the cur­rent double tax­a­tion treaty. More gen­er­ally, it lim­its ac­cess to in­form­a­tion on UK coun­ter­parties of Rus­si­an tax­pay­ers, which is in­form­a­tion that can be re­ques­ted as part of audits in Rus­sia.In the ab­sence of the pos­sib­il­ity to re­quest in­form­a­tion from for­eign tax au­thor­it­ies, Rus­si­an tax au­thor­it­ies will have for the pur­pose of audits only those doc­u­ments and in­form­a­tion avail­able to the tax­pay­er, which the tax­pay­er was able to ob­tain from for­eign coun­ter­parties or from pub­lic sources. As prac­tice shows, tax au­thor­it­ies may refer to the fact that such in­form­a­tion is in­suf­fi­cient, and, as a res­ult, tax be­ne­fits will be denied. At the same time, in some cases a lack of ac­cess to for­eign in­form­a­tion may, on the con­trary, pre­vent tax au­thor­it­ies from mak­ing ad­di­tion­al tax as­sess­ments, which has been en­vis­aged as one of the pur­poses of sus­pend­ing the data ex­change.The ces­sa­tion of the ex­change of coun­try-by-coun­try re­ports (Cb­CR) will res­ult in Rus­si­an tax au­thor­it­ies not be­ing able to ob­tain a re­port from the UK side, re­quir­ing the au­thor­it­ies to re­quest it dir­ectly from Rus­si­an tax­pay­ers be­long­ing to UK-led mul­tina­tion­al groups of com­pan­ies (MGCs, a Rus­si­an equi­val­ent of MNE). At the same time, the right not to sub­mit a coun­try re­port at the re­quest of tax au­thor­it­ies with ref­er­ence to Art­icle 105.16-3(6) of the Rus­si­an Tax Code will be lost. In prac­tice, this could lead to an in­crease in the ad­min­is­trat­ive bur­den on Rus­si­an tax­pay­ers and the pos­sible im­pos­i­tion of pen­al­ties in the event of fail­ure to provide the re­ques­ted in­form­a­tion, giv­en the ex­ist­ing prac­tic­al dif­fi­culties with the ex­change of in­form­a­tion in an MGC with Rus­si­an par­ti­cip­a­tion.Rus­sia may an­nounce mir­ror meas­ures in the near fu­ture.For ex­ample, in re­sponse to the UK’s ac­tions, Rus­si­an tax au­thor­it­ies may in­clude the UK in the List of States (Ter­rit­or­ies) that do not ex­change in­form­a­tion for tax pur­poses with the Rus­si­an Fed­er­a­tion, ap­proved by Or­der No. MMV-7-17/[email protected] of the Fed­er­al Tax Ser­vice dated 11 Oc­to­ber 2019 (the “List”).The in­clu­sion of the UK in this List will have im­plic­a­tions for the tax­a­tion of con­trolled for­eign com­pan­ies (CFCs).Thus, on the basis of Art­icle 25.13(4)(2) of the Rus­si­an Tax Code, Brit­ish com­pan­ies whose shares are traded on stock ex­changes will be re­cog­nised as CFCs.In ad­di­tion, with­in the mean­ing of Art­icle 25.13-1(7) of the Rus­si­an Tax Code, the in­clu­sion of a coun­try in the List means that the ex­emp­tion of profits of the CFC will not be avail­able ac­cord­ing to the fol­low­ing cri­ter­ia:   In or­der to de­term­ine the profits of a CFC us­ing fin­an­cial state­ments, the fin­an­cial state­ments must be audited.As a res­ult, the sus­pen­sion of the ex­change of tax in­form­a­tion will af­fect the at­tract­ive­ness of the UK as a jur­is­dic­tion to host hold­ing com­pan­ies and CFCs. If the cur­rent re­stric­tions re­main in place over the longer term, Rus­si­an groups with UK ele­ments may need to re­con­sider their struc­ture, in­clud­ing tak­ing in­to ac­count the pos­sible re­lo­ca­tion of UK com­pan­ies to oth­er jur­is­dic­tions.In prac­tice, how­ever, this trend could also be ex­ten­ded to oth­er European jur­is­dic­tions. Ac­cord­ing to me­dia re­ports, Ger­many* and the US* have also an­nounced the sus­pen­sion of the ex­change of tax in­form­a­tion.We will con­tin­ue to mon­it­or de­vel­op­ments and keep you in­formed of fur­ther changes.* In Rus­si­an
08/04/2022
Bill in­tro­duced in Rus­si­an State Duma al­low­ing sus­pen­sion and ter­min­a­tion...
On 22 March 2022, Pavel Krashe­n­in­nikov, Head of the State-build­ing and Le­gis­la­tion Com­mit­tee of the Rus­si­an State Duma, sub­mit­ted a bill*, which makes it pos­sible to ter­min­ate and sus­pend ob­lig­a­tions due to sanc­tions im­posed on Rus­sia. The bill also es­tab­lishes the pos­sib­il­ity for parties to be re­leased from li­ab­il­ity for breach of con­tract.The fol­low­ing de­scribes this le­gis­lat­ive ini­ti­at­ive in more de­tail:Ter­min­a­tion of ob­lig­a­tion­sAc­cord­ing to the bill, an ob­lig­a­tion is ter­min­ated in full or in part if its per­form­ance “ob­ject­ively be­comes defin­it­ively im­possible” “in the con­text of ‘un­friendly’ ac­tions of for­eign states and in­ter­na­tion­al or­gan­isa­tions as­so­ci­ated with the im­pos­i­tion of re­strict­ive meas­ures” against Rus­si­an in­di­vidu­als and com­pan­ies (i.e. for­eign sanc­tions).Ex­emp­tion of li­ab­il­ity for breach of ob­lig­a­tion­sThe bill provides an ex­emp­tion from li­ab­il­ity for a breach of ob­lig­a­tion for a per­son who proves that prop­er per­form­ance has “ob­ject­ively proved to be tem­por­ar­ily im­possible” in the con­text of for­eign sanc­tions. In this case, the ob­lig­a­tions se­cur­ing the de­faul­ted trans­ac­tion are also un­en­force­able un­less the parties agree oth­er­wise after the bill comes in­to force.Ter­min­a­tion of con­tractThe bill in­tro­duces the right to uni­lat­er­ally ter­min­ate a con­tract if the oth­er party to the con­tract has not per­formed, or per­formed im­prop­erly, its ob­lig­a­tion be­cause such per­form­ance is tem­por­ar­ily im­possible in the con­text of sanc­tions. The party au­thor­ised to do so must give a ter­min­a­tion no­tice to the oth­er party with­in a reas­on­able time. The col­lat­er­al se­cur­ing the ob­lig­a­tions of the parties, which shall sur­vive the uni­lat­er­al ter­min­a­tion of the con­tract or are con­nec­ted with the ter­min­a­tion, shall con­tin­ue to ex­ist, un­less oth­er­wise provided for by law or the con­tract.Se­cur­ity de­positThe bill sub­stan­tially mod­i­fies the treat­ment of se­cur­ity pay­ments.  Un­der this draft law, after 23 Feb­ru­ary 2022, the parties may enter in­to an agree­ment for a se­cur­ity pay­ment to se­cure oth­er ob­lig­a­tions. The pay­ment could con­sist of the de­pos­it of shares, bonds, oth­er se­cur­it­ies or gen­er­ic items.Re­pay­ment by Rus­si­an joint-stock com­pan­ies of loans is­sued by their for­eign con­trolling per­son­sThe bill en­titles Rus­si­an joint-stock com­pan­ies, in­stead of re­pay­ing a loan to lenders who are for­eign con­trolling per­sons of such com­pan­ies, to place ad­di­tion­al shares of a cer­tain cat­egory or type in fa­vour of such lenders. At the same time, joint-stock com­pan­ies are al­lowed to is­sue pref­er­en­tial shares whose nom­in­al value may ex­ceed 25% of the share cap­it­al.The bill does not re­quire proof of a caus­al link between the im­pos­i­tion of sanc­tions and the de­cision to place ad­di­tion­al shares in fa­vour of a lender in­stead of re­pay­ing the loan and pay­ing in­terest on it.Pro­tec­tion not for al­lAc­cord­ing to the bill, the above sup­port meas­ures do not ap­ply to per­sons who “con­trib­uted to the ‘un­friendly’ ac­tions of for­eign states and in­ter­na­tion­al or­gan­isa­tions re­lated to the im­pos­i­tion of re­strict­ive meas­ures” against Rus­si­an in­di­vidu­als and or­gan­isa­tions. The bill does not cla­ri­fy ex­actly what is meant by “con­trib­ut­ing”.Let­ter from the Cham­ber of Com­merce and In­dustry of the Rus­si­an Fed­er­a­tion­In con­nec­tion with the bill, the Cham­ber of Com­merce and In­dustry of the Rus­si­an Fed­er­a­tion has sus­pen­ded its re­view of ap­plic­a­tions for the is­su­ance of find­ings of force ma­jeure un­der con­tracts that were con­cluded with­in the frame­work of do­mest­ic eco­nom­ic activ­ity in con­nec­tion with sanc­tions on for­eign com­pon­ents and equip­ment (Let­ter No. PR/0181* of the Cham­ber of Com­merce and In­dustry of the Rus­si­an Fed­er­a­tion dated 22 March 2022).* In Rus­si­an
06/04/2022
Rus­si­an Fed­er­al Tax Ser­vice sets morator­i­um on tax audits of IT com­pan­ies
On 24 March 2022, the Rus­si­an Fed­er­al Tax Ser­vice is­sued Let­ter No. CD-4-2/[email protected]*, which (the “Let­ter”) es­tab­lishes a vir­tu­al morator­i­um for on-site tax audits, in­clud­ing re­peat audits, of ac­cred­ited IT com­pan­ies un­til 3 March 2025 in­clus­ively.The only ex­cep­tion is where an audit is sched­uled with the con­sent of the head or deputy head of a high­er tax au­thor­ity or the Rus­si­an Fed­er­al Tax Ser­vice. The lower tax au­thor­ity must sub­mit a reasoned re­quest in or­der to sched­ule an on-site audit.At the same time, any on-site audits launched be­fore the Let­ter was is­sued are sub­ject to com­ple­tion in the pre­scribed man­ner. No ex­ten­sion or sus­pen­sion of these audits ac­cord­ing to Art­icle 89 of the Rus­si­an Tax Code should oc­cur.   Fur­ther­more, the audit sus­pen­sion is tem­por­ary in or­der to re­duce the ad­min­is­trat­ive bur­den on IT com­pan­ies in the peri­od between 2022 and 2024, and does not mean that this peri­od will not be audited in prin­ciple. In prac­tice, by schedul­ing an audit in March 2025 after the morator­i­um ex­pires, the tax au­thor­it­ies will have the right to audit the 2022-2024 peri­od as well.The Let­ter con­tains no ad­di­tion­al cri­ter­ia for the morator­i­um, apart from re­quir­ing an IT com­pany to have a state ac­cred­it­a­tion cer­ti­fic­ate. In oth­er words, the morator­i­um will also form­ally ap­ply to ac­cred­ited IT com­pan­ies that are not eli­gible for cor­por­ate profits tax or in­sur­ance con­tri­bu­tion in­cent­ives un­der Rus­si­an law.The chosen leg­al form of the doc­u­ment in­tro­du­cing the morator­i­um is also note­worthy: the Let­ter is of an in­tern­al nature and ad­dressed to lower tax au­thor­it­ies. To date, we are not aware of any fur­ther le­gis­lat­ive ini­ti­at­ives in this area.The Let­ter im­ple­ments one more tax sup­port meas­ure for the IT in­dustry an­nounced in Rus­si­an Pres­id­ent De­cree No. 83 dated 2 March 2022, on which we pre­vi­ously re­por­ted. Also, in pur­su­ance of that De­cree, Law No. 67-FZ dated 26 March 2022 has set the cor­por­ate profits tax rate at 0% for the peri­od between 2022 and 2024. The Min­istry of Fin­ance and the Min­istry of Di­git­al De­vel­op­ment are cur­rently ne­go­ti­at­ing the de­tails of an­oth­er meas­ure an­nounced in the De­cree: ex­tend­ing the list of IT activ­it­ies sub­ject to pref­er­en­tial treat­ment where fur­ther de­vel­op­ments can also be ex­pec­ted.Our ex­perts con­tin­ue to closely mon­it­or this is­sue and will keep you in­formed of any fur­ther changes.* In Rus­si­an
05/04/2022
New tax in­cent­ives: anti-crisis tax pack­age for in­di­vidu­als
On 26 March 2022, Rus­sia’s Pres­id­ent signed Fed­er­al Law 67-FZ* in­tro­du­cing an anti-crisis pack­age of tax sup­port meas­ures for busi­nesses and in­di­vidu­als.Be­low is our over­view of the main changes rel­ev­ant to in­di­vidu­als. Earli­er, we have cir­cu­lated our over­view of cor­por­ate tax changes.Per­son­al in­come tax­Tax­a­tion of in­terest on bank de­pos­it­sThe new Law ex­empts in­di­vidu­als from tax­a­tion on in­come re­ceived in 2021 and 2022 in the form of in­terest on de­pos­its (i.e. ac­count bal­ances) with banks loc­ated in Rus­sia.The Law also ad­justs the pro­ced­ure for cal­cu­lat­ing the amount of in­terest sub­ject to per­son­al in­come tax in fu­ture peri­ods. For in­stance, the highest of the key rates of the Cent­ral Bank of the Rus­si­an Fed­er­a­tion (CBR) set on the first day of each month in a tax peri­od will be used to cal­cu­late the non-tax­able threshold for each tax peri­od, rather than the CBR key rate set on the first day of such a tax peri­od as ap­plic­able be­fore ad­op­tion of the Law.These meas­ures are aimed at re­du­cing the tax bur­den on in­di­vidu­als due to a sig­ni­fic­ant in­crease in the CBR key rate in 2022 and are also de­signed to en­cour­age the pub­lic to hold their mon­ies on bank de­pos­its with Rus­si­an banks. Ma­ter­i­al gain­In­come in the form of ma­ter­i­al gain re­ceived in 2021-2023 is now ex­empt from per­son­al in­come tax.Note that this refers to any ma­ter­i­al gain, al­though in its ori­gin­al ver­sion the bill ex­emp­ted only ma­ter­i­al gain from sav­ings on in­terest for us­ing funds bor­rowed from em­ploy­ers. Re­ceiv­ing as­sets from con­trolled for­eign com­pan­ies (CFCs)Per­son­al in­come tax will not ap­ply to in­come in the form of as­sets (ex­clud­ing cash) and/or prop­erty rights re­ceived in 2022 from a for­eign com­pany or un­in­cor­por­ated en­tity in re­la­tion to which the tax­pay­er is a con­trolling per­son and/or par­ti­cipant as of 31 Decem­ber 2021. The ex­emp­tion will ap­ply to the as­sets or prop­erty rights that were owned by a for­eign com­pany (en­tity) as of 1 March 2022.In­di­vidu­als are there­fore giv­en the op­por­tun­ity for a tax-free trans­fer of as­sets from CFCs. When trans­act­ing in the re­ceived as­sets at a later stage, an in­di­vidu­al will be able to re­cog­nise the ex­penses for re­ceiv­ing such as­sets ac­cord­ing to their CFC’s ac­count­ing data, but up to the mar­ket value of the as­sets re­ceived.Oth­er taxesThe fol­low­ing meas­ures re­lated to prop­erty tax, land tax, trans­port tax and tax ad­min­is­tra­tion are identic­al to those ap­plied to com­pan­ies:Prop­erty tax and land tax­Ca­das­tral value as of 1 Janu­ary 2022 will be used to cal­cu­late per­son­al prop­erty tax and land tax for the 2023 tax peri­od.However, this rule will not ap­ply if the ca­das­tral value de­creases in 2023, or if the in­crease in the ca­das­tral value is due to a change in the char­ac­ter­ist­ics of a prop­erty. There­fore, the ef­fect of in­fla­tion on the tax base is elim­in­ated.Trans­port taxThe Law has ab­ol­ished the mul­ti­pli­ers 1.1 and 2 where trans­port tax is cal­cu­lated for 2022 for vehicles worth between RUB 3m (EUR 32,472**) and RUB 10m (EUR 108,240).There­fore, the mul­ti­pli­ers will only ap­ply to vehicles worth over RUB 10m (EUR 108,240).Tax ad­min­is­tra­tion­Ac­cord­ing to the Law, there will be no fines for fail­ure to provide doc­u­ments con­firm­ing the amount of CFC profits, or for provid­ing doc­u­ments con­tain­ing false in­form­a­tion for the 2020 and 2021 fin­an­cial years (i.e. the 2021 and 2022 tax peri­ods).Note that fines for fail­ure to provide such doc­u­ments un­der the gen­er­al pro­ced­ure or at the tax au­thor­it­ies’ re­quest amount to RUB 500,000 (EUR 5,412) and RUB 1m (EUR 10,824), re­spect­ively. It is likely that the can­cel­la­tion of fines for the 2021-2022 tax peri­ods is at­trib­ut­able to the po­ten­tial dif­fi­culties that con­trolling per­sons may face in ob­tain­ing fin­an­cial state­ments due to the re­stric­tions im­posed.* In Rus­si­an** As of 5 April 2022
01/04/2022
New tax in­cent­ives: anti-crisis tax pack­age for busi­nesses
On 26 March 2022, Rus­sia’s Pres­id­ent signed Fed­er­al Law 67-FZ* (the “Law”) in­tro­du­cing an anti-crisis pack­age of tax sup­port meas­ures for busi­nesses.Be­low is our over­view of the main changes for cor­por­ate tax­pay­ers. The tax changes that are rel­ev­ant for in­di­vidu­als will be over­viewed in a sep­ar­ate pub­lic­a­tion.Cor­por­ate profits taxAp­plic­a­tion of trans­fer pri­cing rulesAc­cord­ing to the new Law, the rev­en­ue threshold for re­cog­nising cross-bor­der trans­ac­tions between re­lated parties as con­trolled trans­ac­tions for trans­fer pri­cing (the “TP”) pur­poses has been in­creased from RUB 60m to RUB 120m (EUR 649,529 to EUR 1.3m)** per cal­en­dar year.For the busi­ness com­munity, this has been a long-an­ti­cip­ated meas­ure to re­duce the ad­min­is­trat­ive bur­den of doc­u­ment­ing small in­tra-group trans­ac­tions. However, in the cur­rent mar­ket situ­ation it is most likely meant to neut­ral­ise to some ex­tent the de­pre­ci­ation of the rouble ex­change rate in cross-bor­der flows.Moreover, do­mest­ic trans­ac­tions will not be sub­ject to TP con­trol dur­ing the peri­od of 2022-2024, where at least one party to a do­mest­ic trans­ac­tion en­joys in­vest­ment tax re­lief un­der Art­icle 286.1 of the Rus­si­an Tax Code.Fi­nally, the Law ex­tends the ap­plic­a­tion peri­od un­til 31 Decem­ber 2023 for ex­ten­ded “safe har­bour” ranges for arm’s length in­terest rates on inter-group loans es­tab­lished dur­ing the COV­ID-19 pan­dem­ic.In ad­di­tion, the lower range for rouble cross-bor­der loans has also been set at 0%. Pre­vi­ously, this meas­ure ap­plied only to do­mest­ic rouble debt ob­lig­a­tions.By click­ing here you will find the com­par­ab­il­ity ana­lys­is of the arm’s length ranges un­der the gen­er­al rules and un­der the Law.Cla­ri­fied rules for cal­cu­lat­ing thin cap­it­al­isa­tionThe Law provides for a tem­por­ary freeze of for­eign ex­change rates when cal­cu­lat­ing ex­cess­ive in­terest for con­trolled debts de­term­ined in ac­cord­ance with Art­icle 269(2) of the Rus­si­an Tax Code for the peri­od from 1 Janu­ary 2022 to 31 Decem­ber 2023.Ac­cord­ing to the Law, the amount of con­trolled debt de­nom­in­ated in for­eign cur­rency is de­term­ined at the of­fi­cial rate set by the Cent­ral Bank of the Rus­si­an Fed­er­a­tion (the “CBR”) as of the last re­port­ing date of the rel­ev­ant re­port­ing tax peri­od, but not ex­ceed­ing the of­fi­cial rate set by the CBR as of 1 Feb­ru­ary 2022.At the same time, the amount of equity as of the last day of each re­port­ing tax peri­od will be de­term­ined without re­gard to the FOREX dif­fer­ences that arose dur­ing the peri­od from 1 Feb­ru­ary 2022 to the last day of the re­port­ing tax peri­od, on which the cap­it­al­isa­tion ra­tio is de­term­ined.Sim­il­ar rules were ap­plied in 2020 and 2021 dur­ing the COV­ID-19 pan­dem­ic, when the rate was fixed as of 28 Feb­ru­ary 2020.Ex­ten­ded list of non-tax­able for­giv­en debt­sThe tax­able in­come of Rus­si­an tax­pay­ers will tem­por­ar­ily ex­clude in­come from debt for­give­ness un­der the loan agree­ments made be­fore 1 March 2022 with a for­eign en­tity and/or for­eign cit­izen that in 2022 ad­opts the de­cision to for­give the debt.The tax­able in­come will also ex­clude debts for­giv­en by a new for­eign lender (leg­al en­tity or in­di­vidu­al), ac­quired by that lender as a res­ult of a debt as­sign­ment be­fore 1 March 2022.The Law does not set any ad­di­tion­al cri­ter­ia for such an ex­emp­tion (e.g. the min­im­um per­cent­age of dir­ect or in­dir­ect share­hold­ing owned by the for­eign lender in the Rus­si­an debt­or). Thus, the­or­et­ic­ally this rule may ap­ply both to in­tra-group loan ob­lig­a­tions and ob­lig­a­tions to third parties.New in­cent­ives for IT-com­pan­iesUn­der the Law, IT com­pan­ies will en­joy a 0% cor­por­ate profits tax rate dur­ing the peri­od between 2022 and 2024, in­stead of 3%. In­ter­est­ingly, the Law does not in­tro­duce any new eli­gib­il­ity cri­ter­ia for this in­cent­ive, thus the gen­er­al con­di­tions set out in Art­icle 284(1.15) of the Rus­si­an Tax Code will con­tin­ue to ap­ply to IT-com­pan­ies.This meas­ure has been in­tro­duced in pur­su­ance of Rus­si­an Pres­id­ent De­cree No. 83 dated 2 March 2022, on which we pre­vi­ously re­por­ted.FOREX dif­fer­encesThe pro­ced­ure for re­cog­nising FOREX dif­fer­ences has been changed: for­eign ex­change dif­fer­ences re­cog­nised in profit (in 2022-2024) or loss (in 2023-2024) shall be re­cog­nised on ter­min­a­tion (i.e. dis­charge) of claims (i.e. ob­lig­a­tions) de­nom­in­ated in for­eign cur­rency.Thus, un­real­ised for­eign ex­change gains and losses are ex­cluded from tax re­port­ing, which sig­ni­fic­antly re­duces the im­pact of es­tim­ated val­ues on the amount of tax. The asym­metry in the time peri­ods is not co­in­cid­ent­al: these changes al­low the re­cog­ni­tion of all for­eign ex­change losses arising in 2022 while lim­it­ing the amount of for­eign ex­change gains start­ing from 2022.Monthly pay­ment­sThe Law en­titles tax­pay­ers to switch to monthly ad­vance pay­ments based on ac­tu­al profits dur­ing 2022, start­ing from a re­port­ing peri­od of three months.Note that the nor­mal pro­ced­ure is to make such a switch from the be­gin­ning of a tax peri­od (i.e. year). A sim­il­ar meas­ure was taken in 2020 due to the pan­dem­ic and is aimed at re­du­cing po­ten­tial tax over­pay­ments.VATA zero rate of VAT has been set on cer­tain tour­ism ser­vicesA 0% VAT rate ap­plies to (i) ser­vices re­lated to the pro­vi­sion of a tour­ism in­dustry fa­cil­ity for lease or use if it is put in­to op­er­a­tion after 1 Janu­ary 2022 and in­cluded in the re­gister of tour­ism in­dustry fa­cil­it­ies for a peri­od of up to five years; and (ii) ser­vices in­volving the pro­vi­sion of tem­por­ary ac­com­mod­a­tion in ho­tels or oth­er ac­com­mod­a­tion fa­cil­it­ies un­til 30 June 2027.The list of tax­pay­ers that may ap­ply for ac­cel­er­ated VAT re­fund has been ex­pan­dedAll tax­pay­ers who are not un­der re­or­gan­isa­tion or li­quid­a­tion or sub­ject to any bank­ruptcy pro­ceed­ings at the time of ap­ply­ing for a VAT re­fund will be eli­gible for an ac­cel­er­ated VAT re­fund up to the amount of taxes they paid for the pre­ced­ing year.VAT may be re­fun­ded in ex­cess of the taxes paid for the pre­ced­ing year sub­ject to the pro­vi­sion of a bank guar­an­tee or surety­ship.The meas­ure is aimed at en­sur­ing that tax­pay­ers can quickly re­plen­ish their work­ing cap­it­al with the amount of the VAT re­fund. The Fed­er­al Tax Ser­vice es­tim­ates that the tax re­fund will take, on av­er­age, eight days from the date when the ap­plic­a­tion is filed.It is im­port­ant to note that un­der the gen­er­al pro­ced­ure taxes will be re­fun­ded only upon com­ple­tion of a desk tax audit and in prac­tice such a re­fund takes at least two to three months, while the ac­cel­er­ated re­fund pro­ced­ure (i.e. re­fund upon ap­plic­a­tion) was pre­vi­ously avail­able only to lim­ited tax­pay­ers who met cer­tain re­quire­ments.Oth­er taxe­sProp­erty tax and land tax­Ca­das­tral value as of 1 Janu­ary 2022 will be used to cal­cu­late cor­por­ate prop­erty tax and land tax for the 2023 tax peri­od.However, this rule will not ap­ply if the ca­das­tral value de­creases in 2023, or if the in­crease in the ca­das­tral value is due to a change in the char­ac­ter­ist­ics of a prop­erty. There­fore, the ef­fect of in­fla­tion on the tax base is elim­in­ated.Trans­port taxThe Law has ab­ol­ished the mul­ti­pli­ers 1.1 and 2 where trans­port tax is cal­cu­lated for 2022 for vehicles worth between RUB 3m (EUR 32,476) and RUB 10m (EUR 108,254).There­fore, the mul­ti­pli­ers will only ap­ply to vehicles worth over RUB 10m (EUR 108,254).Tax ad­min­is­tra­tion­Ac­cord­ing to the Law, there will be no fines for fail­ure to provide doc­u­ments con­firm­ing the amount of CFC profits, or for provid­ing doc­u­ments con­tain­ing false in­form­a­tion for the 2020 and 2021 fin­an­cial years (i.e. the 2021 and 2022 tax peri­ods).Note that the fines for fail­ure to provide such doc­u­ments un­der the gen­er­al pro­ced­ure or at the tax au­thor­it­ies’ re­quest amount to RUB 500,000 (EUR 5,412) and RUB 1m (EUR 10,825), re­spect­ively. It is likely that the can­cel­la­tion of fines for the 2021-2022 tax peri­ods is at­trib­ut­able to the po­ten­tial dif­fi­culties that con­trolling per­sons may face in ob­tain­ing fin­an­cial state­ments due to the re­stric­tions im­posed.Also, there will be no fines for tax un­der­pay­ment as a res­ult of ap­ply­ing prices de­vi­at­ing from the arm’s-length ones in the con­trolled trans­ac­tions where in­come and/or ex­penses are re­cog­nised for the peri­od between 1 Janu­ary 2022 and 31 Decem­ber 2023, re­gard­less of the date of a rel­ev­ant con­tract.Ac­cord­ing to gen­er­al rules, such a fine will amount to 40% of the un­paid tax, but not less than RUB 30,000 (EUR 324).Fi­nally, for the peri­od between 9 March 2022 and 31 Decem­ber 2023, late pay­ment in­terest will not be doubled where com­pan­ies delay pay­ment of tax for over 30 cal­en­dar days. This meas­ure is ob­vi­ously aimed at neut­ral­ising a sig­ni­fic­ant rise in the rate of late pay­ment in­terest in this peri­od pro rata to the in­crease in the CBR key rate in 2022.* In Rus­si­an** As of 1 April 2022
29/03/2022
Po­ten­tial chal­lenges in pay­ing VAT on elec­tron­ic ser­vices
In the cur­rent eco­nom­ic and polit­ic­al en­vir­on­ment, and tak­ing in­to ac­count the lim­it­a­tions now im­posed by many for­eign banks with re­spect to the trans­fer of funds to Rus­sia, we ex­pect that for­eign pro­viders of elec­tron­ic ser­vices may face prac­tic­al dif­fi­culties with pay­ing VAT to the Rus­si­an budget for the first quarter of 2022. Ac­cord­ing to the ap­plic­able le­gis­la­tion, the tax is due to be paid on or be­fore 25 April 2022.Ac­cord­ing to the in­form­a­tion at our dis­pos­al, In­ter­re­gion­al tax in­spec­tion No. 7 in charge of the elec­tron­ic ser­vices’ agenda is col­lect­ing in­form­a­tion from tax­pay­ers on ex­pec­ted prob­lems with pay­ments with a view to provid­ing tech­nic­al solu­tions.That be­ing said, for­eign pro­viders of elec­tron­ic ser­vices in Rus­sia should con­firm with their for­eign banks in ad­vance wheth­er it is pos­sible to pay VAT to the Rus­si­an budget in due time. Any prob­lems iden­ti­fied may be re­por­ted to the In­ter­re­gion­al tax in­spec­tion No.7 via the feed­back form in the tax­pay­er’s on­line ac­count.For­eign pro­viders of elec­tron­ic ser­vices may also dis­cuss with their Rus­si­an cus­tom­ers the VAT pay­ment mech­an­ism for the flows. For ex­ample, the Rus­si­an cus­tom­er may choose to vol­un­tar­ily with­hold the VAT due from the pay­ment made to the for­eign pro­vider, us­ing the mech­an­ism provided in the let­ter* of the Fed­er­al Tax ser­vice dated 24.04.2019 No. СД-4-3/[email protected] However, this ap­proach may be ap­plied only in re­spect of fu­ture pay­ments to the for­eign pro­viders.* In Rus­si­an
28/03/2022
Rus­si­an Fed­er­al Tax Ser­vice com­ments on ap­plic­ab­il­ity of IT in­cent­ives...
The Rus­si­an Fed­er­al Tax Ser­vice com­men­ted on the pos­sib­il­ity for com­pan­ies spe­cific­ally cre­ated as a res­ult of a busi­ness split to ap­ply IT in­cent­ives in its let­ter* No. SD-4-2/[email protected] dated 17 March 2022. Ac­cord­ing to this let­ter, IT in­cent­ives in the Rus­si­an tax le­gis­la­tion we pre­vi­ously re­por­ted on should be ap­plic­able both to ex­ist­ing com­pan­ies and those cre­ated after the in­tro­duc­tion of IT in­cent­ives in Rus­sia.In ad­di­tion, Rus­si­an tax au­thor­it­ies should not re­gard a busi­ness re­or­gan­isa­tion res­ult­ing in the es­tab­lish­ment of a new IT com­pany (sub­ject to the ap­plic­a­tion of IT in­cent­ives) as a bad-faith split of a busi­ness per­formed to ob­tain an un­jus­ti­fied tax be­ne­fit in Rus­sia with­in the mean­ing of Art­icle 54.1 of the Rus­si­an Tax Code. Pro­vi­sions of let­ter* No. BV-4-7/[email protected] is­sued by the Fed­er­al Tax Ser­vice on 10 March 2021 on the as­sess­ment of the key aim of busi­ness re­or­gan­isa­tions are thus not ap­plic­able to such newly cre­ated IT com­pan­ies.IT in­cent­ives should be ap­plic­able ir­re­spect­ive of whom the eli­gible IT activ­ity be­ne­fits (e.g. re­lated or un­re­lated com­pan­ies, oth­er per­sons be­long­ing to the group of com­pan­ies, etc.).Provided that a newly cre­ated IT com­pany does not overtly mis­in­ter­pret its busi­ness op­er­a­tions, Rus­si­an tax au­thor­it­ies should not doubt the eco­nom­ic jus­ti­fic­a­tion of the tax be­ne­fit re­ceived by such an IT com­pany, since the in­tro­duc­tion of IT in­cent­ives for eli­gible IT com­pan­ies was ini­tially in­ten­ded to sup­port IT busi­nesses by re­du­cing the ap­plic­able tax bur­den.In­ter­est­ingly, this po­s­i­tion of the Fed­er­al Tax Ser­vice con­tra­dicts its pre­vi­ous ex­plan­a­tions on the mat­ter (e.g. let­ters No. SD-19-3/[email protected] dated 9 April 2021 or No. SD-4-3/[email protected] dated 20 Feb­ru­ary 2021), where the tax au­thor­it­ies in­sisted that each case of re­or­gan­isa­tion of a busi­ness activ­ity res­ult­ing in the es­tab­lish­ment of a new IT com­pany should be re­viewed to en­sure that such a split of a busi­ness was not per­formed ar­ti­fi­cially with the sole aim of be­ne­fit­ting from the IT in­cent­ives’ ap­plic­a­tion.This switch in the per­cep­tion of the tax au­thor­it­ies is aimed at in­creas­ing the busi­nesses that may en­joy the ap­plic­a­tion of IT tax in­cent­ives and should thus en­cour­age tax­pay­ers to in­vest in the de­vel­op­ment of the IT lines of their activ­it­ies in Rus­sia. This new ap­proach, to­geth­er with the pre­vi­ously an­nounced new pack­age of tax sup­port meas­ures for IT com­pan­ies in Rus­sia, is gen­er­ally in­ten­ded to sup­port IT busi­nesses in the cur­rent tur­bu­lent eco­nom­ic en­vir­on­ment and to re­tain the IT work­force in Rus­sia.* In Rus­si­an
18/03/2022
Rus­si­an Fed­er­al Tax ser­vice com­ments on the arm’s-length level of loss-mak­ing...
The Rus­si­an Fed­er­al Tax Ser­vice has, for the first time, ac­know­ledged that a loss-mak­ing trans­ac­tion may still be con­sidered arm’s-length for trans­fer pri­cing pur­poses in Rus­sia in its let­ter No. ShYu-4-13/[email protected]* dated 5 March 2022 (the “Let­ter”).Ac­cord­ing to the Let­ter, in the cur­rent eco­nom­ic en­vir­on­ment, where the ap­plic­able sanc­tions in­tro­duced at the US and EU level may in­flu­ence the eco­nom­ic con­di­tions of com­mer­cial trans­ac­tions, Rus­si­an tax­pay­ers may be forced to sell their goods pro­duced for ex­port­a­tion abroad with a dis­count, which may in cer­tain cases lead to a loss res­ult­ing from such trans­ac­tions.This be­ing said, the Fed­er­al Tax Ser­vice should con­sider that these cir­cum­stances may in­flu­ence the pri­cing ap­plied in, and the res­ults of such trans­ac­tions, when con­duct­ing the trans­fer-pri­cing con­trol over such trans­ac­tions and when con­sid­er­ing ap­plic­a­tions for ad­vance price agree­ments filed by tax­pay­ers.Com­ment­sAl­though Rus­si­an tax au­thor­it­ies have his­tor­ic­ally pro­nounced their in­ten­tion to con­sider the eco­nom­ic cir­cum­stances of the trans­ac­tions per­formed when con­duct­ing trans­fer-pri­cing audits, they have nev­er be­fore in prac­tice con­firmed the pos­sib­il­ity of re­cog­nising loss-mak­ing trans­ac­tions as per­formed in com­pli­ance with trans­fer-pri­cing re­quire­ments.This was not even the case dur­ing the COV­ID-19 pan­dem­ic, when tax au­thor­it­ies sug­ges­ted that tax­pay­ers ap­ply the ad­just­ments aimed at en­sur­ing the com­par­ab­il­ity of the com­mer­cial terms of tested trans­ac­tions, which was for­mu­lated rather vaguely in Rus­si­an tax le­gis­la­tion.However, this new ini­ti­at­ive, al­though rep­res­ent­ing a pos­it­ive shift in the per­cep­tion of Rus­si­an tax au­thor­it­ies, still leaves a vast num­ber of open ques­tions to be cla­ri­fied.For ex­ample, it is not clear what eco­nom­ic cir­cum­stances Rus­si­an tax au­thor­it­ies will ac­tu­ally con­sider when as­sess­ing the com­pli­ance of the trans­ac­tion with the arm’s-length prin­ciples. In prac­tice, ac­com­pa­ny­ing eco­nom­ic con­sequences of the sanc­tions, such as ex­change-rate volat­il­ity or tem­por­ary sus­pen­sion of cer­tain busi­nesses in Rus­sia, may have even stronger in­flu­ence on the res­ults of the com­mer­cial trans­ac­tions than the im­me­di­ate re­stric­tions in­tro­duced as part of the sanc­tions pack­ages.Moreover, the Let­ter ex­pli­citly ad­dresses the tax­pay­ers en­gaged in ex­port­a­tion of the goods pro­duced, while cur­rent eco­nom­ic con­di­tions will likely in­flu­ence the prices charged in and the res­ults of vari­ous types of trans­ac­tions per­formed in Rus­sia, in­clud­ing im­port­a­tion of goods to Rus­sia, pro­vi­sion of works and ser­vices, trans­ac­tions with in­tel­lec­tu­al prop­erty, etc. It is un­clear wheth­er sim­il­ar ap­proaches would ul­ti­mately be ap­plic­able to a wider range of cross-bor­der trans­ac­tions, fall­ing un­der trans­fer-pri­cing con­trol.Fi­nally, the Let­ter does not ad­dress the pos­sib­il­ity of per­form­ing cross-bor­der ad­just­ments aimed at re­duc­tion of tax pay­able to the Rus­si­an budget, cur­rently pro­hib­ited un­der the le­gis­la­tion in force. However, such ad­just­ments may in fact be re­quired in the cur­rent con­di­tions, es­pe­cially in cases when the Rus­si­an parties to the con­trolled trans­ac­tions hold en­tre­pren­eur­i­al status, and are thus gen­er­ally bound by the ob­lig­a­tion to en­sure arm’s-length prof­it­ab­il­ity to their routine coun­ter­parties.Our tax team will be closely mon­it­or­ing fur­ther anti-crisis de­vel­op­ments in the trans­fer pri­cing do­main and will re­port on any such changes.* In Rus­si­an
16/03/2022
Ac­count­ing & Re­port­ing
We in­vite you to join our we­bin­ar on Ac­count­ing and Re­port­ing, or­gan­ised by the Ja­pan­ese Desk at CMS Rus­sia.Please join our ex­perts Georgy Daneliya, Olga Odint­sova and Eka­ter­ina Usova to learn about es­sen­tial...