5 August 2014
Tax Analysts publishes commentary by Mark Rovinskiy on a draft law that would allow the taxation of CFCs controlled by Russian tax residents

Russia Considering Tax Amnesty for Offshore Companies

Russia is considering a tax amnesty for Russian-owned offshore companies as part of a wider effort to encourage the repatriation of capital and discourage the use of offshore companies for tax avoidance, a government spokeswoman told Tax Analysts.

The spokeswoman for Russia's Ministry of Economic Development confirmed July 3 that the government may include a tax amnesty provision in a draft controlled foreign corporation bill "as a vehicle to drive the repatriation of the capital of Russian origin from low-tax jurisdictions."

The spokeswoman declined to provide any specific details, saying it is premature to do so at this stage.

Russia's Ministry of Finance on March 19 published a draft law that would allow the taxation of CFCs controlled by Russian tax residents. The Ministry of Economic Development helped draft the bill, which also addresses corporate tax residence and treaty relief. Two amended versions of the bill have been published, with the most recent revision being posted on the MOF's website on May 27. If the bill is adopted and published in 2014, it may enter into force on January 1, 2015.

According to the spokeswoman, the adoption of CFC rules has become standard international practice, and other countries' experience with those rules has shown that the taxation of CFCs does not lead to a weaker investment climate. However, CFC rules have curbed the corporate use of low-tax jurisdictions to facilitate tax avoidance, she said.

"The common goal is to work together to create new tax rules, which should be transparent and easy to understand," the spokeswoman said. "It is imperative to protect investors, reduce risks, and guarantee property rights, which subsequently increases budget revenues and spurs the country's advancement."

Mark Rovinskiy of Egorov Puginsky Afanasiev & Partners in Moscow said Russia has intended to introduce CFC rules for several years. The draft bill was written after President Vladimir Putin called for measures to repatriate capital from Russian-owned offshore companies during his annual message to the Federal Assembly in December 2013. Putin's speech marked the official start of the country's first "de-offshorization" program, Rovinskiy said.

"This program became a quite significant event for businesses and raised a lot of concerns among the business community and tax practitioners," he said, adding that the rules "should be perfectly balanced in order not to override the initial purpose of their application -- tackling tax avoidance and evasion."

Rovinskiy said it is too early to comment specifically on the possible effect of CFC rules because that would depend on their flexibility. The MOF is redrafting the text following further consultations with the Russian business community, and the bill has not yet been sent to the State Duma (lower house of the parliament).

Stepan Guzey of the Moscow office of Lidings said Russia's focus on the use of offshore companies for tax avoidance was apparent as far back as 2010, when the government ordered state-owned companies to restructure so that their foreign subsidiaries would be tax resident in Russia.

He said the original version of the CFC legislation contained some severe restrictions and measures, such as the requirement that Russian tax residents regularly notify tax authorities of their participation in CFCs and in foreign companies registered in jurisdictions on Russia's blacklist, if ownership in the share capital exceeded 1 percent.

Stakeholders also had several other concerns about the original draft law, including the low (10 percent) interest threshold to qualify as a controlling person in a CFC; lack of a clear definition of the term "control"; lack of provisions on the avoidance of double taxation; and excessive sanctions, Rovinskiy said. He said he is optimistic that the government will make further improvements to the draft law, such as raising the interest threshold to 50 percent.

The amnesty provision is expected to "motivate business to bring capital back from offshore without significant adverse effect," Rovinskiy said.

However, while it's clear that the government is serious about cracking down on the use of offshore companies for tax avoidance and evasion, CFC rules -- both in Russia and around the world -- may force only a small number of companies engaging in abusive behavior to emerge from the shadows, Guzey said. "There will be a lot of companies that will use more complicated schemes for the structuring of financial flows or will invent their own," he added.

by Stephanie Soong Johnston