The Tax Code of the Russian Federation has been amended to allow individuals who are controlling persons of foreign companies (CFCs) to pay personal income tax (PIT) on an imputed “fixed” amount of profit for all CFCs. The amount of PIT on this fixed profit will be approximately RUB 5 million and the new regime can be applied as early as on the 2020 tax return.
The Tax Code of the Russian Federation has been amended1 to allow individuals who are controlling persons of foreign companies (CFCs) to pay personal income tax (PIT) not on the actual profit of each CFC, but on an imputed “fixed” amount of profit for all CFCs. The amount of PIT on this fixed profit will be approximately RUB 5 million. The new CFC profit tax regime can be applied as early as on the 2020 tax return.
The new tax regime does not apply to controlling persons that are legal entities.
The new regime may be attractive for some controlling persons, for example, if PIT payment under the new regime and expenses for services necessary for correctly declaring CFC profit by the controlling person are expected to result in tangible savings on an annual basis, or if the controlling person has many CFCs and the risks of fines for late submission of a CFC’s financial statements or audit opinions are high.
In order to apply the new regime to the 2020 tax return, a controlling person must submit a notice to the tax authorities notifying them of the transition to paying PIT on fixed profits by 1 February 2021. The controlling person must then apply the new regime for at least three years, i.e., when declaring income for 2020, 2021 and 2022.
If the decision to transition to the new regime is taken later, the controlling person must submit a notice of transition to pay PIT on fixed profit by 31 December of the year from which that taxpayer decided to apply the regime. For example, to apply the new regime in the tax return for 2021, the notice of transition must be submitted by 31 December 2021. When a notice of transition is submitted by 31 December 2021, the controlling person must apply it for at least three years. If a notice of transition to the new regime is submitted in 2022 or in a subsequent year, the minimum period for applying this regime will be five years.
The CFC fixed amount of profit is RUB 38,460,000 for the 2020 tax period and RUB 34,000,000 for 2021 and subsequent tax periods. Given the progressive PIT rate from 1 January 2021, the amount of PIT paid on CFC fixed profit will be approximately RUB 5 million per year.
Other conditions for applying the new regime include:
1. The amount of tax on the fixed profit increases during the period of its application as a result of changes to the Tax Code (for example, the amount of CFC fixed profit increases, or the threshold for applying the 15-percent rate is reduced), or
2. the minimum period in which the new regime is applied has expired (three or five years as explained above).
In order to discontinue applying the fixed profit regime, the controlling person must provide the tax authorities with a notice by 31 December of the year: from which the amount of tax on the fixed profit increased (in the case of condition 1), or the minimum period expired (condition 2).
Note that transition to the PIT payment regime for the fixed profit of CFCs does not release the controlling person from the obligation to submit CFC notifications.
Advantages of the new regime for the controlling person include:
Potential disadvantages of the new regime include:
If you have any questions about applying the new regime in your circumstances, you are advised to contact your qualified tax professional; alternatively, you may contact one of the professionals with the KPMG International member firm in Russia noted in the Contact Us section.
1 Federal Law No. 368-FZ On Amendments to Parts One and Two of the Tax Code of the Russian Federation dated 09.11.2020.
2 According to the draft law on amendments to the Tax Code submitted to the Federation Council on 12.11.2020 (which stipulates, inter alia, amendments to the taxation of dividends), in certain cases a controlling person may have the right to offset Russian withholding tax withheld when a Russian entity pays dividends to a CFC.
RUB 1 = USD 0.0132
RUB 1 = GBP 0.0099
RUB 1 = EUR 0.011
The information contained in this newsletter was submitted by the KPMG International member firm in Russia.
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