Starting from 2020, individual taxpayers will have the opportunity to switch to a tax regime that will allow them to pay a fixed amount of individual income tax from all controlled foreign companies (CFC) in a single payment. Alongside, CFC owners who do not plan to switch to the new regime will face tightened liability.
I. A full guide to the new CFC ‘fixed income’ regime (the “Regime”)
1. Procedure for transition to the Regime
Transition to the Regime requires submission of a notification to a local tax office before 31 December of the year from which payment of fixed income tax is planned. Those intending to make use of the Regime from the current year will need to notify the tax authorities about this by 1 February 2021.
2. Fixed amount of individual income tax under the Regime
The amount of fixed income is set at thirty-eight million four hundred sixty thousand (38,460,000) rubles for 2020 and thirty-four million (34,000,000) rubles starting from 2021. Therefore, the amount of tax payable for 2020 will be approximately five million (5,000,000) rubles.
3. Regime characteristics
The Regime implies the following specifics related to income declaring and tax payment:
- Information on the actual income of the CFC is not provided to the tax office and is not declared;
- The tax is paid in the prescribed amount from all CFCs, regardless of the number of foreign companies and / or the amount of their profits.
- It is possible to terminate usage of the Regime ahead of schedule in the event of amendments to the Tax Code of the Russian Federation that worsen the position of the taxpayer in terms of increasing the fixed amount of tax payable.
- The Regime can be used for a minimum period of three years (for taxpayers who have declared the employment of the Regime in 2020 to 2021), then the minimum period will be five years.
- Distributed profits of the CFC will not be excluded from the individual income tax base and, accordingly, will be taxed at a rate of 15%.
- The right to offset tax paid in foreign countries against tax on fixed income will be forfeited.
II. Additional obligations of CFC owners both under the new Regime and the old system
1.Filing of financial statements with an auditor’s opinion
Recent amendments to the Tax Code of the Russian Federation have resulted in the tax authorities having the right to request financial statements with an auditor’s opinion (if it is mandatory for the jurisdiction in which the CFC is incorporated, or if the opinion is prepared voluntarily).
Moreover, the request can be made in relation to documents confirming the financial data of the CFC for the three previous tax periods. The request itself can be sent both to taxpayers enjoying the Regime (except for the periods in respect of which tax was paid based on fixed income) and to persons paying individual income tax according to the standard procedure.
Liability for failure to provide information requested by the tax authorities will only apply for periods starting from 2020. This said, taxpayers using the Regime cannot be held liable for failure to provide information at the request of the tax authorities.
2. CFC notifications
A new deadline for filing a CFC notification for individuals has been set – until 30 April of the year following the reporting one (formerly until 20 March). In case of failure to comply with the deadline for submitting the notification, a fine in the amount of five hundred thousand (500,000) rubles must be paid (formerly one hundred thousand (100,000) rubles).
III. New obligations and stricter liability for CFC owners using the old system
For taxpayers who will continue to pay individual income tax on CFC profits under the old system, an obligation to attach documents confirming the amount of CFC profits to the CFC notification has been introduced, regardless of whether the tax is to be paid in the future or not.
For taxpayers who do not use the Regime, the following sanctions have been imposed:
- A fine in the amount of five hundred thousand (500,000) rubles for failure to provide financial information on the results of the CFC’s activity for the reporting period.
- A fine in the amount of one million (1,000,000) rubles for the taxpayer’s failure to provide, based on the results of an additional request from the tax authorities, documents confirming the exemption of the CFC’s profits from taxation / confirming the financial performance.
Article prepared by F+P junior associate Evgeniya Durmanova