Consolidated taxpayer regime
Since 2018, it is forbidden to create new consolidated groups. Groups formed before 2018 may apply the regime until 2023.
A group can comprise two or more Russian entities in which the direct or indirect equity interest of one member in the charter/share capital of the other members equals at least 90%. In order to establish and apply this regime, all group members should meet the following requirements:
- At least RUB 10 billion in total CIT, VAT, excise tax, and MRET paid during the year preceding the year of tax registration of a new consolidated group.
- At least RUB 100 billion in sales proceeds and other income.
- Total value of assets of at least RUB 300 billion.
The advantages of applying this regime are as follows. First, transactions among group member entities are not controllable under Russian transfer pricing legislation (with one exception: transactions with mineral resources subject to MRET with a percentage rate are still subject to control). Second, for the purposes of calculating CIT, it is possible to consolidate group member entities' profits and losses.
A limitation on recognition of losses incurred by loss-making members of a consolidated group has been introduced. The limit is set as 50% of the given consolidated group’s tax base for the current (tax) period.
Russian transfer pricing legislation is essentially based on Organisation for Economic Co-operation and Development (OECD) principles, with certain important deviations. This legislation establishes criteria for related parties and controlled transactions, transfer pricing methods for determining arm’s-length prices/profitability, a list of permitted information sources, and compliance requirements.
Under the Russian transfer pricing rules, the following parties are recognised as being related:
- Entities where one party (the party and its related parties) has more than a 25% direct or indirect participation in these entities.
- Entities where (i) more than 50% of the directors of these companies are the same individuals, or (ii) not less than 50% of the directors are appointed/chosen by the same individual.
- Entities, where the same individual/entity acts as the sole executive body; and on the basis of some other criteria.
The following transactions are controlled (the rules were amended in 2018):
Generally, the following transactions will be controlled if the income earned exceeds RUB 60 million per year:
- Transactions between related parties*.
- Foreign trade transactions dealing with commodities traded on global exchanges.
- Transactions with parties that are residents of 'blacklist' countries.
* Transactions between Russian tax residents are subject to control only if the annual income on the transactions between such parties exceeds RUB 1 billion and at least one of the following criteria is met:
- The parties to the transaction apply different CIT rates (except for the rates provided for by Articles 284.2, 284.3 and 284.4 of the RTC, which apply to income gained by foreign entities that do not have a PE in Russia, as well as to dividends and to transactions with certain types of debt securities) to income from the activity under which the transaction was made.
- At least one of the parties to the transaction pays the mineral resources extraction tax assessed at the rate of %.
- At least one of the parties to the transaction applies a special tax regime (e.g. single tax on imputed income).
- At least one of the parties to the transaction is eligible for an income tax exemption.
- At least one of the parties to the transaction produces crude hydrocarbons at new offshore hydrocarbon deposits and accounts for income as provided for in Article 275.2 of the RTC.
- At least one of the parties to the transaction is a Skolkovo resident.
- At least one of the parties to the transaction applies a CIT deduction as provided for by Article 286.1 of the RTC.
With that some types of transactions are never controlled (for instance, transactions between members of the same consolidated group of taxpayers).
The revised rules will apply to transactions for which the income and expenses are recognised after 1 January 2019 (irrespective of the contract date).
The Russian tax authorities may request transfer pricing documentation during a transfer pricing audit, but not earlier than by 1 June of the calendar year following the year in which a controlled transaction was performed. Taxpayers will be required to present transfer pricing documentation within 30 working days of receiving a tax authority’s request.
According to the Base Erosion and Profit Shifting (BEPS) Action 13 report Russia has implemented three-tier transfer pricing documentation. The requirement is applicable to financial years starting in 2017. Thus, multinational groups of companies (MNCs) with a total income (revenue) over RUB 50 billion under consolidated financial statements for the previous financial year must submit three-tier documentation to tax authorities, including Master file, Local file, and Country-by-Country (CbC) report, as well as a notification on their membership in an MNC.
Advanced pricing agreements (APAs), including bilateral APAs, are available to Russian companies registered as 'largest' taxpayers.
Transfer pricing audits will be performed by a special unit of the Federal Tax Service. Local authorities are entitled to check notification forms correctness and notify the Federal Tax Service if additional controllable transactions are identified – notify the Federal Tax Service. The penalty rate for additional transfer pricing charges is 40%.
There have been four court cases based on application of new transfer pricing rules in Russia up to date. All four cases have been lost by the taxpayers. The tax authorities mainly focus on testing export of commodities and apply CUP based on prices published by price agencies.
Under the RTC, interests are deductible if the debt does not exceed the amount of equity by three times (12.5 times for banks and leasing companies). If the debt amount exceeds this limit, excess interest will be reclassified for taxation purposes as dividends paid to foreign shareholders. Such dividends are not deductible for CIT purposes and are subject to WHT at the rate of 15% (treaty benefits may apply to reduce the rate).
Three types of Russian borrowers' debt are subject to thin capitalisation rules (with some exceptions provided):
- Debt to a foreign-related party if such a party has a direct or indirect equity interest in the borrower ('Party 1').
- Debt to a party related to Party 1 ('Party 2').
- Debt to another party if either Party 1 or Party 2 guaranteed the debt.
For debt from Party 1, the relationship would be defined based on the transfer pricing rules (in particular, the 25% participation criterion is applied).
The scope of thin capitalisation rules includes loans from foreign-related companies that do not hold a direct or indirect interest in Russian borrower (foreign 'sister' companies). At the same time, interest on loans from independent banks are exempted from the rules (provided the debt [both principal and interest] was not repaid by a foreign shareholder or its affiliates as a result of execution of a guarantee to the bank).
Among other features:
- Loans provided exclusively within Russia are not controlled (provided certain requirements are met).
- All listed liabilities of a taxpayer should be considered in aggregate (so the split of loans will not allow for avoiding the rules).
- A debt arising upon the issue of Eurobonds is not subject to the rules.
Controlled foreign companies (CFCs)
Under the Russian CFC rules, the retained earnings of a CFC that is controlled by a Russian tax resident are taxable in Russia on an annual basis (at the 20% CIT rate if the controlling person is a legal entity Russian tax resident, or at the 13% tax rate if the controlling person is an individual Russian tax resident).
Definition of a CFC
An entity is deemed to be a CFC (or other structure) if it meets the following criteria:
- it is not considered to be a Russian resident for tax purposes, but
- it is controlled by a Russian tax resident (control is determined based on ownership share and other metrics as outlined below).
A controlling person of a foreign company is defined as:
- a person whose direct and/or indirect participating interest in a foreign company (for individuals, jointly with their spouse and minor children) is more than 25%, or
- a person who directly or indirectly owns more than 10% of a foreign company if Russian tax residents (for individuals, jointly with their spouses and minor children) hold a direct or indirect interest(s) in the foreign company in excess of 50%.
The definition of ‘control’ is rather broad and thus could be construed to mean that control exists even when the percentage of a shareholding (interest) is less than the thresholds noted above. For example, the CFC Law stipulates that control may exist based on a management agreement or other means of control. Control may be established directly or indirectly. The existence of control should be determined on a case-by-case basis.
Available CFC exemptions
The CFC Law provides that profits earned by the following types of companies (or other structures) are exempt from CFC taxation in Russia:
- Non-profit organisations that do not distribute profits.
- Companies incorporated in the Eurasian Economic Union.
- Companies resident in jurisdictions that have a tax treaty with Russia and share tax-related information with Russia, and that pay tax at an effective rate equal to at least 75% of the Russian blended CIT rate.
- Companies that qualify as ‘active companies’ as defined by the CFC Law (i.e. companies deriving less than 20% of their total income from passive sources, such as dividends, royalties, interest, rental/lease income, capital gains, consulting fees, and certain other types of income).
- Active foreign holding companies or active foreign sub-holding companies (a share of direct participation of at least 75% during a period of at least 365 calendar days, where passive income [except active dividend income] does not exceed 5% of total income).
- Banks and insurance companies if they operate in a jurisdiction that has a tax treaty with Russia and shares tax-related information with Russia.
- Issuers of certain types of listed bonds or an organisation authorised to earn interest income payable on listed bonds, or an organisation that is the assignee of the rights and obligations related to listed bonds issued by another foreign company, subject to certain conditions (e.g. if the interest income earned should equal at least 90% of the company’s total income for the period and these issuers operate in a jurisdiction that has a tax treaty with Russia and shares tax-related information with Russia).
- Companies participating in a PSA, concession agreement, or similar contract signed with the government of the relevant country, provided that the relevant income amounts to at least 90% of the company’s total income for the period.
- Operators of new subsea fields (or direct shareholders of such operators).
- Companies receiving income from Russian subsidiaries under certain conditions.
In addition, de minimis exemptions from the CFC rules are available for profits RUB 10 million for 2017 onwards.
These exemptions may be applied by Russian controlling parties when calculating their taxable base in Russia. If such an exemption is applicable, then a CFC’s profits should not be included in the taxable base of its controlling party in Russia.
Calculating taxable profits
The taxable profits of a CFC are calculated using one of the following two methods:
- If the CFC is incorporated in a jurisdiction that has a tax treaty with Russia and shares tax-related information with Russia, then its profits are calculated based on its financial statements prepared in accordance with the laws of its home jurisdiction (provided that the financial statements are subject to audit).
- Profits are calculated in accordance with the requirements of the RTC. This method is more burdensome and likely to result in a higher Russian tax bill in most cases, as the RTC imposes a number of strict conditions on the tax deductibility of expenses.
A CFC’s taxable profits may be reduced by the amount of dividends paid out of such profits during the tax year in which they were generated (interim dividends) and the subsequent 12 months.
As of 1 January 2020, if the chain of passive income payments looks like 'Russian legal entity - CFC - Russian controlling party', it is necessary to withhold and pay the tax in Russia only once, when income is paid from Russia, and in such a way as if the income were paid to this controlling party directly. This amendment applies from 2020.
Losses incurred by a CFC may be carried forward without any time limitations (subject to certain restrictions). Losses incurred by a CFC before 1 January 2015 may be carried forward up to the amount of losses for the three financial years preceding 1 January 2015 and may be deducted from the CFC's profit.
Relief from foreign taxes
Foreign taxes paid on the profits of a CFC, either under Russian law or the laws of a foreign jurisdiction, may be offset against the Russian tax liabilities charged on the CFC’s attributed profits.
Implications for affected entities
If none of the available exemptions may be applied, the CFC’s chargeable profits must be apportioned among the relevant Russian controlling persons in proportion to their interest(s) in the CFC, and such persons should be taxed on their portion(s) at the applicable rate. However, the Russian CFC rules have no implications for the CFC itself.