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CFC — alternative tax in the amount of 5 million rubles

Ministry of Finance of Russia website reports that the Russian Government submitted a bill amending provisions of the Tax Code on controlled foreign companies (CFC). The draft bill is intended to establish an alternative opportunity for individuals — Russian tax residents — to pay tax in a fixed amount of 5 million rubles annually on income in the form of CFC profits without the need to declare and confirm such income.

Finance Minister Anton Siluanov noted that presumably the annual fixed payment will be paid for all CFC, which is controlled by an individual, and not for each company separately. At the same time, the administrative burden of calculating and declaring taxes will be minimized.

In case of switching to paying a fixed amount of tax, tax residents will have to apply this regime for at least 5 years. An exception will be made for those who switch to this payment procedure in 2020 or 2021. For them, the mandatory minimum term will be reduced to 3 years.

There is also information about restrictions on setting off other taxes against the annual fixed payment. There are no such restrictions if the general CFC tax regime is applied, and if the new regime is applied, they can potentially create double taxation risks for the same income. For example, the amount of tax calculated in relation to the CFC's profit under the legislation of a foreign country cannot be set off against the annual fixed payment. Or, if the controlling person is subsequently paid dividends from the CFC's profit, these dividends will be subject to personal income tax in the normal mode, without taking into account the previously paid fixed payment in respect of the corresponding amount of the CFC's profit.

In addition, it is planned that in case of concealment of income in the form of profit, the CFC will have to pay a fine of 5 million rubles.

The new alternative regime may be of interest to high-income individuals who want to reduce the administrative burden associated with declaring and confirming income in the form of CFC profits.

It is likely that some of the proposed amendments will be changed or removed at the stage of consideration of the bill. Follow the news on our website.