Structuring Business Through Controlled Foreign Companies: Strategies and Legal Aspects

Introduction to CFC Concept

Controlled Foreign Companies (CFCs) are legal entities or structures without legal personality registered abroad but controlled by Russian tax residents. Such companies have become a popular tool for international tax planning, allowing businesses to optimize taxation, protect assets and build efficient corporate structures.

Since 2015, Russia has had CFC legislation requiring Russian residents to declare their foreign assets and pay taxes on undistributed profits of controlled foreign companies. Despite this, proper business structuring through CFCs remains a sought-after tool, especially under sanctions pressure and the need to work with international counterparties.

Main Business Structuring Models Through CFCs

1. Holding Structures

Many Russian businessmen use CFCs to create international holdings. In such structures:

  • Parent company is registered in a jurisdiction with favorable tax regime (e.g. Cyprus, UAE or Hong Kong)
  • Subsidiaries are established in countries of operational activity
  • Russian assets may be held in a separate legal entity controlled through CFC

“Such structuring allows not only tax optimization but also protects assets from potential risks in Russian jurisdiction,” experts note.

2. Trading Intermediaries

One of the most common schemes involves creating CFCs as trading intermediaries between Russian producers and foreign buyers:

  • CFC purchases goods from Russian company at one price
  • Resells them to end buyer at higher price
  • Profit accumulates in low-tax jurisdiction

It’s important that such schemes comply with the “arm’s length principle” and don’t artificially reduce tax base in Russia.

3. Intellectual Property

CFCs are often used to own and manage intellectual property:

  • Patents, trademarks, copyrights are registered to foreign company
  • Russian users pay royalties for using these assets
  • IP income accumulates in preferential tax jurisdiction

4. Investment Holdings

Special CFCs are often created for international investments:

  • Assets (securities, real estate, business shares) are consolidated in foreign company
  • Investment income (dividends, interest, capital gains) remains in low-tax jurisdiction
  • When needed, funds are reinvested or transferred to Russia considering tax legislation

5. Operating Companies in Friendly Jurisdictions

In new economic realities, Russian business is actively exploring “friendly” jurisdictions:

  • CIS countries (Armenia, Kazakhstan, Belarus)
  • Middle East (UAE, Qatar)
  • Asia (China, Hong Kong, Singapore)
  • Africa (South Africa, Mauritius)

These jurisdictions are often used for real operational activities, working with international counterparties and minimizing sanctions risks.

Key Jurisdictions for CFCs in 2025

Choice of jurisdiction for CFC depends on structuring goals, type of activity and tax consequences for Russian controlling person. Currently popular:

  1. EAEU countries (Armenia, Kazakhstan, Belarus, Kyrgyzstan):
    • Exemption from CFC profit taxation in Russia (if conditions met)
    • Relatively simple business conditions
    • Favorable attitude to Russian capital
  2. UAE (especially free zones):
    • Zero taxation if conditions met
    • High level of trust from international business
    • Developed financial infrastructure
  3. China and Hong Kong:
    • Access to Asian markets
    • Ability to work with international counterparties
    • Relatively stable conditions for Russian business
  4. Turkey:
    • Geographical proximity to Russia
    • Ability to operate in euro and dollars
    • Developed banking system

Legal Aspects and Tax Obligations

Business structuring through CFCs requires strict compliance with Russian legislation which provides for:

1. Notification Obligations

Controlling persons must:

  • Submit notice of participation in foreign organizations (within 3 months from participation arising)
  • Provide CFC notice (by March 20 for legal entities, April 30 for individuals)
  • Report changes in ownership structure (share sale, company liquidation)

2. CFC Profit Taxation

Undistributed CFC profits are taxable in Russia if:

  • Profit exceeds 10 million rubles (since 2017)
  • CFC doesn’t qualify for exceptions (active company, EAEU resident etc.)
  • Effective tax rate in registration country is less than 75% of Russian rate

3. Liability for Violations

Non-compliance with CFC legislation may lead to:

  • 500,000 ruble fine for failure to submit notice
  • 20% fine of unpaid tax amount (minimum 100,000 rubles)
  • Criminal liability for major violations

Current Trends and Recommendations

In 2025, business structuring through CFCs requires considering following factors:

  1. Tightening control: Russian tax authorities actively use automatic information exchange to identify undeclared CFCs
  2. Sanctions risks: Many traditional jurisdictions became unavailable for Russian business
  3. Alternative schemes: Instead of classic offshore, companies in “friendly” countries with real activities are used

Experts recommend:

  • Carefully selecting jurisdiction considering tax consequences and sanctions risks
  • Ensuring real presence and economic justification for CFC creation
  • Timely fulfilling all notification obligations to tax authorities
  • Considering using Russian SARs as alternative to classic CFCs

Business structuring through controlled foreign companies remains an effective tool for international tax planning but requires deep understanding of legislation and professional approach. Under tightening control and sanctions pressure, it’s especially important to maintain balance between tax optimization and compliance with all legal norms. Proper use of CFCs can not only reduce tax burden but also protect assets, provide access to new markets and increase business sustainability in long-term perspective.

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