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.
To subscribe to GMS Flash Alert, fill out the subscription form.
© 2021 KPMG refers JSC “KPMG”, “KPMG Tax and Advisory” LLC, companies incorporated under the Laws of the Russian Federation, and KPMG Limited, a company incorporated under The Companies (Guernsey) Law, as amended in 2008, member firms of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.
Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.