Risks related to the recognition of Russia as the place of management of a foreign group company
The Russian tax authorities have been using instruments allowed under the “de-offshorisation” laws to assess additional tax liabilities for quite some time already. They have been extensively applying the definition of a person actually entitled to passive income payments to foreign countries. For the second consecutive year, taxpayers have been reporting the profit of their CFCs in the light of automated exchanges of tax information (Common Reporting Standards), under which Russia undertakes to provide important information to foreign tax authorities and also receive reporting information from them to enable its tax authorities to check the accuracy of reported CFC profits and assess appropriate taxes.
Now the tax authorities are looking at companies with a place of management in Russia. A case involving the ONEXIM Group has recently become public (see below), and as part of field tax audits the tax authorities are regularly asking questions regarding the management of foreign companies in the same group. We are aware of several cases where the tax authorities, in conducting field audits, have managed to assess additional taxes on foreign companies by recognising them as resident in Russia by studying their place of management.
So far the tax authorities have had success primarily in cases where foreign companies have had branches in Russia operating as fully-fledged businesses, while having a limited level of presence in the countries in which their head offices were resident. In recognising these companies as Russian tax residents, the tax authorities have been able to assess additional withholding taxes (WHT) on dividends distributed by their head offices to shareholders, rather than just profit tax (already paid by the branch). This additional WHT was assessed at 15%.
ONEXIM Group case
The ONEXIM Group case is not directly linked to the recognition of overseas companies as Russian tax residents, but rather to the assessment of additional VAT on services caused by recognising Russia as the place of management for the foreign companies. However, we believe that the arguments used by tax authorities in that case may also apply to tax residence cases. The key factors are:
— where are source documents for the board of directors of the foreign company prepared?
— does the foreign company have sufficient qualified employees?
— do employees in the company’s Russian group perform due diligence work or take investment decisions?
— are original documents and seals belonging to the foreign companies on the premises of the Russian companies?
— is there a Russian beneficiary shareholder of the foreign company?
— what are the details of the affiliation between the foreign and Russian companies?
— are the IP- and MAC-addresses of the overseas and Russian companies different or the same?
In the case under review, the tax authorities did not recognise the foreign companies as Russian tax residents, probably because of the lack of significant profit at the level of these companies. However, we are not in a position to rule out such risk in other cases.
It is not clear now how the Russian tax authorities will manage to collect taxes from foreign companies that have no registered presence in Russia. However, one should bear in mind that DDTs contain provisions about rendering assistance in collecting taxes, and it is possible that the Russian tax authorities may resort to using these. In addition, the tax authorities may refer to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
What should you do?
Having gained substantial experience in tax residency issues, including positive interactions with foreign tax authorities connected with audits to identify the beneficial owners of income, the tax authorities are gradually proceeding to use more and more the rules regarding the tax residency of companies.
Therefore, it is important to make sure that foreign companies belonging to your group are not managed from Russia (in particular, check the criteria from the ONEXIM Group case). Particular attention should be paid to the presence of foreign companies in their country of tax residence: ensure they comply with recent changes regarding the creation of an appropriate level of economic presence, a rule adopted in many popular offshore jurisdictions (including the BVI and Cayman Islands).
Special care should also be taken regarding structures with operating branches in Russia, as these structures have already ended up in the crosshairs of the tax authorities.
We at KPMG are completely ready and highly experienced at reviewing any risks your firm may have related to the recognition of Russia as the place of management of a foreign group company, providing you with recommendations regarding their mitigation under Russian and international practice. As and where required, we can also happily propose restructuring options, including how to wind up a foreign company or change its tax residency / redomicile it to other jurisdictions.