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International governance: Foreign investment

21 July 2015

International governance: Foreign investment

Russia and the UAE revise their foreign investment rules applicable from 2016


Individuals and companies classified as Russian tax residents faced a tight reporting deadline of 15 June 2015 to comply with the first enforcement of the country’s new Deoffshorisation Law – amendments to the Russian Tax Code that came into effect on 1 January 2015.

Large penalties were the risk, but what is considered a Controlled Foreign Company (CFC) and what does Russia’s deoffshorisation actually affect?

A non-Russian company is regarded as a CFC if a Russian tax resident directly or indirectly owns more than 25% of it (together with spouse and minor children). If a company is jointly owned by Russian tax residents by more than 50%, it is regarded as a CFC of each Russian shareholder owning directly or indirectly more than 10% of such a company. In 2015, a provisional threshold of more than 50% applies – this is instead of the 25% and 10% thresholds that will apply starting from 2016. Even if these thresholds are not met, a company can be regarded a CFC if it is de facto controlled by a Russian tax resident.

Unincorporated structures, including trusts, are regarded as CFCs if they are controlled by Russian tax residents who exercise or have the ability to exercise decisive influence on decisions taken by a person that manages assets of a structure (trustee) in relation to distribution of income or profit among beneficiaries.

The tax base of CFCs is determined by foreign financial statements (with certain adjustments), but only if a CFC is located in a treaty jurisdiction and is subject to mandatory audit (this requirement may be changed to voluntary audit by upcoming legislative amendments).

Otherwise Russian taxpayers must perform a full recalculation of tax base using Russian corporate profit tax accounting rules (Russian GAAP) and financial statements or bank account statements and primary documents of a CFC. The relevant accounting documents have to be translated into Russian and provided to Russian tax authorities together with Russian tax returns.

Foreign companies, including but not limited to those regarded as CFCs, can be deemed as Russian tax resident companies subject to 20% Russian corporate income tax if their ‘place of effective management and control’ is in Russia. If a non-Russian company is regarded as a Russian tax resident vehicle, it is not regarded as a CFC.

A beneficial regime is established for companies that are resident in tax treaty jurisdictions with proper local substance (including having its own sufficiently skilled employees). Substance should be properly documented and then provided to Russian tax authorities.

CFCs located in tax treaty jurisdictions with a high effective tax rate (ETR) or with large share of ‘active business’ income are exempt from CFC tax, but not from CFC filings. Moreover, to apply the exemptions, taxpayers need to provide information on ETR and ‘active business’ income to Russian tax authorities. Corporate taxpayers have until 1 January 2017 to liquidate CFCs and receive their assets via liquidation or sale tax-free at the level of Russian tax resident company. No exemption is provided for individuals who wish to liquidate their CFCs, as their ‘onshorisation’ is regulated by the special ‘capital amnesty’ law.

An amnesty in the form of a voluntary disclosure program offers individuals the opportunity to disclose their foreign CFCs, bank accounts, real estate and other holdings until the end of 2015, with no extra charge in return for guarantees of no criminal, administrative or tax liability for tax, customs and foreign exchange crimes in connection with the disclosed assets.

The guarantees only apply to pre-2014 actions and do not cover restructurings made in 2014 and 2015. A possible amendment is likely to extend the guarantees to pre-2015 actions. There is also the ability to transfer overseas assets from nominees to personal ownership without extra tax charges.


The UAE Government’s new Federal Law No. 2 (2015) – Commercial Companies Law, became effective on 1 July 2015. Companies have one year from this date to make any changes as may be required by the new law.

The changes are not dramatic, but reinforce the country’s strategy and commitment to enhancing corporate governance, particularly for listed companies, as well as a focus on making IPO ventures more attractive to companies – mainly family-owned businesses.

For limited liability companies (LLCs) the framework remains largely unchanged and the law is not applicable to Free Zone companies unless the company is dealing onshore.

The new law does not change or address foreign ownership of companies in the UAE and foreign individuals or companies still require a local Emirati or Emirati company to be their agent or sponsor, in order to establish in the onshore market (not applicable in Free Zones).

It is anticipated that the 51% local ownership requirements will be reviewed and amended in the new Foreign Direct Investment Law, which is currently being assessed by the Federal Government – there is no date as to when this will be due for issuance.

Thorold Youngman-Sullivan is Global Head of Corporate Secretarial at TMF Group

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