In recent years, Russia has introduced several economic and political reforms, including a deoffshorization policy that some would say appears to be sound economic policy but others would say is more politically motivated by the centralization of power in the office of the President. In principle, the idea is to make Russian legislation friendly for Western investors, although the context suggests otherwise. Nonetheless, Russia is attempting to westernize its domestic laws and introduce economic concepts that are familiar to Western businessmen.

BACKGROUND

In 2014, the Russian government came out with a plan that would attack capital flight by residents. This was the so-called “deoffshorization” of investments. Among other things, this legislation increases the tax burden of many offshore holding companies by requiring payment of Russian taxes in the absence of any repatriation of profits. It also requires the disclosure of beneficial owners in the accounting statements of these holding companies. Again, these are concepts that are popular among policy makers in Western Europe, albeit in a different context.

Now, the Russian government is contemplating introduction of the “trust” into the Russian legal system. New laws are anticipated that are intended to formalize Russian arrangements where the nominal owner and the beneficial owner are separate individuals.

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Federal law No. 376 of November 24, 2014, On Amendments to Part One and Part Two of the Tax Code of the Russian Federation (concerning the taxation of controlled foreign companies and foreign organizations), and commonly referred to as the “C.F.C. Law,” came into force on January 1, 2015. It marks the beginning of deoffshorization of the Russian economy and introduces entirely new tax rules for Russian businesses having affiliates based outside Russia.

The C.F.C. Law introduces the following three new legal concepts, previously nonexistent in Russian tax legislation:

Controlled foreign company (“C.F.C.”),
Russian tax residence for foreign companies, and
Beneficial owner of income.

The C.F.C. Law establishes the obligation of taxpayers to notify the tax authorities of their participation in foreign entities. It also establishes rules for computing and taxing C.F.C. profit and share transactions of companies that own real estate in Russia. It provides for recognition of foreign non-corporate structures (such as trusts, private foundations, partnerships, etc.) as separate taxpayers.

Following the O.E.C.D. lead in the B.E.P.S. proposals, these amendments have two broad goals: (i) they ensure business transparency and (ii) they combat the use of low-tax jurisdictions to obtain unjustified tax benefits.