The Russian Ministry of Finance explained the rules on controlled foreign companies

Russian tax residents had to report for the first time on controlled foreign companies (“CFCs”) by 20 March 2017, as we reported in a previous Alert, and declare the profits of CFCs by 2 May 2017. In light of inquiries by taxpayers on their participation in CFCs, the taxation of profits and income of controlling persons, the Ministry of Finance of the Russian Federation issued Letters* No. 03-12-11/2/7395 of 10 February 2017 and No. 03-12-11/2/9197 of
17 February 2017.

These letters deal with a wide range of issues that are often encountered by controlling persons in the context of the application of the CFC rules. Please click here to see our outline of the most significant explanations given by the Ministry of Finance.

Despite the fact that these letters bring some certainty with respect to controversial issues arising when applying the CFC rules, uncertainties remain in certain respects:

• The procedure for classifying certain types of income as active or passive remains unclear.
• The procedure for determining the result of transactions with securities and other financial instruments included in the profit of the controlling person remains ambiguous.
• It is not clear whether the CFC rules apply to consolidated groups of taxpayers.

Russian tax residents who are controlling persons and do not wish to be faced with the difficulties arising from the new rules can, until 31 December 2017 inclusive, opt for the voluntary liquidation of their CFCs, to avoid being held liable for failure to pay taxes and fees.

If you have any questions on the matters referred to in this Alert, please do not hesitate to contact CMS Russia experts Hayk Safaryan and Igor Ershov or your regular contact at CMS Russia.

* In Russian