23 Feb 2015

Stephenson Harwood event discusses impact of new Russian CFC rules

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Last night, international law firm Stephenson Harwood LLP hosted a roundtable event focusing on how Russia is introducing fundamental changes to its tax legislation by adopting new rules on controlled foreign companies (CFCs).

The new rules are aimed at bringing capital back to Russia by imposing reporting requirements and tax liabilities on Russian residents who have established or who control or influence offshore companies, trusts and other holding vehicles.

The speakers at the event were James Quarmby, head of private wealth at Stephenson Harwood; Rustem Ahmetshin, senior partner and Tatiana Pavlyukova, senior associate, at Pepeliaev Group, a leading Russian law firm. They discussed the implications of the Russian CFC rules and discussed future tax planning in light of these new rules.

It was clear that the new rules will pose significant challenges to clients and their advisors as they are completely new and will be interpreted by Russian officials and judges who have "virtually zero experience" in international tax matters. For instance, the Russian Federation is not a member of the OECD and until last year the OECD Model Convention and Commentaries was not even available in the Russian language. This will make it very difficult for Russian judges to even understand much of the tax planning involved, let alone make apply the rules fairly and consistently. Given that there is no system of precedent in the Russian law it will be very difficult for taxpayers to get any comfort that the planning they are undertaking is effective or not.

As a consequence, James Quarmby reported, a lot of the planning will simply involve reducing the participation levels below the relevant thresholds of 50/25/10% as at least this can be understood by the courts. Another simple solution is to leave the country as the rules will not affect non-Russian residents. We are already seeing an increase in Russians taking up second citizenships or shifting their residency to the UK, Malta, Cyprus and Luxembourg, for instance. For clients wishing to remain Russian resident but stay outside the CFC rules, Mr Quarmby reported that they are currently looking at insurance or pension related products, where the dominant purpose is non-tax related. He felt that this approach would be more likely to be acceptable. This was re-enforced by Mr Ahmetshin's warning that artificial arrangements designed to simply disguise ownership were likely to fail as the Russian Courts would take a conservative, substance over form approach.

In his summary, Mr Quarmby said that the CFC rules were not just about raising tax revenues – they were primarily about collecting information about taxpayers as part of the "global transparency juggernaut". The Russian Federation has also signed up to the Common Reporting Standards, due to be implemented in 2017, meaning double jeopardy for Russian residents.

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