Module IV·Article IV·~1 min read
Controlled Foreign Companies (CFC): Rules and Planning
International Taxation and BEPS
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What is a CFC
A CFC (Controlled Foreign Company) is a foreign company or a structure without legal entity formation (such as a trust or partnership) that is controlled by a Russian tax resident.
Control criterion: An individual/organization is recognized as a controlling person if: share of participation >25%, or >10% provided that the share of Russian residents in the company is >50%.
Taxation of CFC Profits
The controlling person must include the undistributed profit of the CFC in their tax base proportionally to their share. Personal income tax or corporate profit tax at Russian rates.
Threshold: CFC profit <10 million rubles — is not included in the base of the controlling person.
Exemptions: Active companies (>80% active income); companies in countries with a double tax treaty (DTT) and real presence (substance); public companies; banks and insurance companies.
CFC Documentation
The controlling person is obliged to: (1) notify the Federal Tax Service (FTS) of participation in foreign organizations (within 30 days after change of share); (2) notify FTS about CFC (by March 20 of the year following the year of profit recognition of the CFC); (3) attach the CFC’s financial statements to the notification.
Penalties: failure to submit notification — 500 thousand rubles for each CFC; failure to pay tax — 20% or 40% (intentional).
Practical Assignment
A Russian resident (citizen) owns: (1) 100% of a BVI company (passive holding, undistributed profit — $1 million), (2) 30% of a Cypriot operating company (active trading business, profit — €500 thousand). Determine: (1) Is each company a CFC? (2) What profit is included in the Russian resident’s tax base? (3) Are there any exemptions?
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