How to Establish a Company Abroad and Comply with Laws
A controlled foreign company (CFC) refers to a business entity established in a foreign jurisdiction but owned and controlled by a resident of Russia (either a company or an individual). The CFC is not itself a tax resident in Russia. CFCs can include not only traditional companies, but also other revenue-generating entities such as investment funds, trusts, and partnerships.
Since 2015, Russian residents have been required to report the profits of their CFCs and pay taxes on these profits. The retained earnings of CFCs are subject to taxation even if the funds have not been transferred to the accounts of the controlling party.
The process of declaring a CFC involves:
- Submission of a CFC registration notice
- Providing financial statements of the CFC, confirming profit or loss, to the tax authority
- Inclusion of the profits from the CFC in the tax return of the individual (in the form of personal income tax) or the company (in the income tax return)
It is important to note that failure to comply with CFC reporting requirements can result in significant penalties and legal consequences. Therefore, it is crucial for Russian residents establishing a CFC to carefully follow the relevant regulations and seek professional advice if needed.
The notification of the Controlled Foreign Company (CFC) is submitted by the relevant person within the following timeframes:
- Upon establishment of a CFC – within three months of obtaining the right to the entity (for example, upon registration or acquisition of shares).
- If the person becomes a tax resident of Russia after establishment of the CFC, within one year.
- In the event of a change in shareholding or dissolution of the company – within three months of the change.
The relevant persons of a CFC include the founders and beneficial owners who are tax residents of Russia and hold a stake in the entity or have significant influence over it:
- An individual is deemed a tax resident if they have been physically present in Russia for a minimum of 183 days in any 12-month period.
- A legal entity is deemed to be a tax resident if it is incorporated in Russia and has tax liability.
Participation in a CFC may be:
- Direct: ownership of 25% or more of the entity
- Indirect: ownership through an entity that holds 10% of the overall ownership, with the combined ownership of all such entities exceeding 50%.
- Indirect ownership through other companies
Control implies influencing the business decisions of the CFC, for example, through nominee shareholders or a general power of attorney.
Deadlines for submitting CFC declarations:
- for individuals – no later than April 30 of the year following the tax period;
- for companies – no later than March 20 of the following year.
Fines may be imposed for failure to submit notifications and reports: 500 thousand rubles per company for failure to submit notifications or reports, and up to 1 million rubles for failure to provide documents upon official request from the tax service.
Controlling persons are required to pay tax in Russia on profits of the CFC:
- Individuals pay personal income tax (up to 5 million rubles – 13%, over – 15%).
- Companies pay income tax (20%)
- The tax base is the income exceeding 10 million rubles.
If the profit is below this amount, no tax is payable. For failure to pay tax, a penalty of 20% of the unpaid amount is imposed, but it must be at least 100 thousand rubles.
Individuals may choose a flat tax: the fixed amount of income is 34 million rubles and the personal income tax rate is 5%.
A company may be exempt from tax in the following circumstances:
- If the company’s profit is less than 10 million rubles
- If it is registered in an EAEU country
- If the majority of its income is active income (not more than 20% is passive income)