Key changes
The Russian Ministry of Finance will limit tax benefits by adding 51 countries/territories from the list of "unfriendly states", including the United States, European Union countries, the United Kingdom, Switzerland, and others, to Russia’s so-called "blacklist" of offshores* (the “List”). The List includes offshores and countries not exchanging tax information with Russia; the extended version will apply as of July 1, 2023.Confirming the suspension of tax information exchange with "unfriendly" countries may be a step towards the temporary suspension or termination of tax treaties. We covered this topic in more detail in our Alert as of March 21, 2023.
Implications
The main negative implications of a country's inclusion on the List are:
• Sales of shares and participatory interests in companies in countries from the List by Russian taxpayers will be subject to corporate profits tax in Russia, with no 5-year holding period exemption. This may significantly increase the cost of such sales and restructurings.
• Russian companies will be subject to the 13% corporate profits tax on dividends from foreign subsidiaries in countries on the List, in contrast to the current tax exemption.
• No tax exemption for undistributed profits of controlled foreign companies (CFCs) qualified as active holding/sub-holding companies from blacklisted jurisdictions.
• The volume of transfer pricing reporting will significantly increase, as transactions over the 120 mln. ruble threshold with companies from blacklisted states will be considered controlled transactions. They must be reported to the tax authorities and you may be requested to provide transfer pricing documentation to support arm’s-length prices.
• There will be fewer opportunities for foreign companies from blacklisted jurisdictions to make tax-free contributions to the assets of Russian companies (e.g., to finalize financial settlements); such contributions have been available to majority participants.
How we can help
Given the possible prompt adoption of the draft laws, we recommend considering the following actions now:• assess the applicability of the windfall tax and the possibility of making a “security payment” in autumn 2023;
• determine the types and amount of income to be excluded from the tax base;
• calculate the tax base and the amount of windfall tax potentially payable;
• monitor the adoption of the draft laws in order to be aware of the relevant tax implications in good time.
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* Order No. 86n “On Approval of the List of States and Territories Providing a Preferential Tax Regime and (or) Providing No Disclosure and Provision of Information When Conducting Financial Transactions (Offshore Zones)”, dated June 5, 2023
Sergey Zhestkov, Partner, Moscow
Arseny Seidov, Partner, Moscow
Kirill Vikulov, Partner, Moscow
Maxim Kalinin, Partner, St. Petersburg
