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OECD Toughens CFC Oversight Guidelines

07.04.2015 12:00 / Vedomosti

A draft of new, tougher OECD controlled foreign companies (CFC) oversight guidelines has been published online last week (http://www.oecd.org/daf/inv/investment-policy/PFI-update-draft-2015.pdf). Public debate is set for May 12, with the final report due in September.

OECD advises tougher CFC rules (passive income generated abroad is eligible for taxation). OECD recommends to apply the law to trusts and funds. While the Russian law (enacted in 2015) debates were underway, the business fought to exclude trusts from CFCs. Minfin was ready to exempt from taxation irrevocable trusts only (beneficiaries receive income and cannot influence management), with amendments on standby for last Autumn, but the Duma turned them down. In late March, Putin backed the softer approach to irrevocable trusts, and the amendments were reintroduced to the Duma.

The Russian law considers a foreign company controlled from Russia if the share of all Russian tax residents exceeds 50%. In 2015, the bar for the transitional period is set higher – 50%.

Speaking at a meeting with the President, First Deputy Prime Minister Igor Shuvalov proposed making other trust types tax exempt as well, says a source. The President was adamant, the source adds. Shuvalov’s representative neither confirms or denies this: the meeting was held behind closed doors.

Some statutes of the Russian law are less strict than OECD recommendations. For instance, CFC profit may be quoted according to the financial reporting standards in the CFC’s country of origin, says Partner at KPMG Anna Voronkova, while OECD suggests the use of beneficiary’s country rules.

Russian rules are considerably well-balanced, thinks E&Y Partner Marina Belyakova. For instance, profit is tax exempt for active companies as well as ones in a higher tax bracket. These rules can hardly be labeled the most liberal, she adds: OECD, for instance, allows only taxation of profits received from sources in the controlling entity’s country of origin; Russian rules do not contain this provision. The Russian law has stricter definitions of ownership shares that qualify the company as controlled from Russia, OECD recommends 50%, Voronkova points out.

The key difference from OECD guidelines is the absence of a double taxation prevention mechanism in the draft: first, CFC profit is taxed, then dividends are deducted from it, paid to Russia and taxed again, says PwC’s Natalia Kuznetsova.

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