Russia has set a fixed amount of RUB5 million ($72,777) per year as tax on revenues from the activities of controlled foreign companies (CFC).
The new rules allow CFC owners to elect to pay tax on a deemed fixed income of RUB38.46 million, instead of being taxed on the CFCs' actual declared profits. The effect is a RUB5 million flat-rate tax charge for the year 2020, regardless of the number of CFCs owned or their real financial performance.
"Now, Russian tax residents - owners of foreign assets pay tax on income from the activities of so-called controlled foreign companies using a rather complicated, cumbersome and, one might say, confusing mechanism. I propose to radically simplify it: provide the right to pay a fixed tax amount of RUB5 million per year without additional reporting," Putin said.
We will give an incentive to the development of a modern, responsible business in the Russian jurisdiction
"This way, we will give an incentive to the development of a modern, responsible business in the Russian jurisdiction," Putin emphasized. "I also would like to draw attention of the government - investment activity and new jobs should be supported in general," the Russian leader added.
Business owners will be able to elect for the lump sum tax by notifying the tax authorities before 31 December of the relevant calendar year. However, an extra month's grace is being granted for the 2020 year, so that the filing deadline for that year is 1 February 2021.
Switching to the new regime will also exempt CFC owners from filing the foreign business's financial statements and calculating its adjusted profits. The Russian tax authorities will not be able to request the CFC's financial statements for the period when the new regime is applied, says law firm Baker McKenzie, although individuals will have to file their own CFC notifications by 30 April, together with their tax returns.
However, Baker McKenzie warns that investors "should also be aware that this new regime could be only temporary, as it may contradict the current OECD initiatives on a "new global minimum tax regime" and top-up taxation in source countries."
"If the new tax regime results in low tax revenues, it may prove to be short-lived," the law firm added.