Increasing the tax appeal of special administrative regions
Federal Law No. 18-FZ of 25 February 2022, Federal Law No. 66-FZ of 26 March 2022
Two federal laws1 entered into force on 26 March 2022 aimed at increasing the tax appeal of special administrative regions in the Primorsky Territory and Kaliningrad Region (SAR) and broadening the range of persons that may benefit from the tax advantages of SARs.
As before, the most significant tax concessions potentially available to companies registered in SARs require the status of an international holding company (IHC). However, now not just foreign companies that have "moved" to the SAR from other jurisdictions (ie, are recorded in the SAR register and have the status of "international company") are eligible to obtain the status of an IHC, but also Russian legal entities from other regions of the Russian Federation that have re-registered in the SAR (such companies are not included in the SAR register).
The scope of the tax benefits available to IHC has also been expanded. More specifically, royalties and interest received from IHC by other taxpayers may now be taxed at a reduced profits tax rate of 10% while the same received by the IHC itself may be taxed at a reduced rate of 5%. In addition to this, there are some positive changes in the taxation of other types of an ICH's income and dividends payable by the IHC.
In this alert you will find an overview of the tax benefits that are available to companies registered in a SAR in light of such legislative changes.
It should be separately noted that in March 2022 changes were also introduced to Federal Law No. 290-FZ of 3 August 2018, entitled On International Companies and International Foundations (Law No. 209-FZ). These changes deal with the conditions for registering foreign companies as well as testamentary and personal foundations in a SAR.2 These changes will not be commented on in this alert but will be covered separately.
Who will be eligible for IHC status?
- A foreign company3 that has made a decision to change the law of the country of its incorporation by re-domiciling from a foreign jurisdiction into a SAR, is included in the SAR register and has obtained the status of an "international company" as set out in Chapter 2 of Law No. 290-FZ (International Company) is eligible for IHC status upon satisfying the following conditions:
- the company was established before 1 March 2022 and no less than three years have passed from the date of its establishment to the date of its registration in a SAR;
- the controlling persons4 holding, directly or indirectly, no less than 75% of company shares remain unchanged during the period from 1 March 2022 up to the date of re-registration in the SAR;* an exception is a change in the controlling persons by succession; and
- the company has, no later than within 15 days of re-registration in the SAR, filed financial statements for the past year (including the auditor's report thereto) and information on its controlling persons to the tax office at the place of its tax registration. For companies re-domiciling during the period from 1 March to 31 December 2022, the filing period for these documents (except for information on controlling persons) has been increased up to a year.
- A Russian company that was set up in the Russian Federation and then re-registered in a SAR from another region of the Russian Federation (Russian Company) may be eligible for IHC status upon satisfying the following conditions:
- the company was established before 1 March 2022 and no less than three years have passed from the date of its establishment to the filing date of the application for IHC status;
- as of the filing date of the application the company is already located in a SAR;
- the controlling persons holding, directly or indirectly, no less than 75% of company shares remain unchanged during the period from 1 March 2022 up to the filing date of the application for IHC status;* an exception is a change in the controlling persons by succession;
- the company has, no later than six months before filing the application for IHC status, notified the region of the Russian Federation where it was based before re-registration in a SAR of its intent to obtain IHC status and as of the filing date this region of the Russian Federation has not raised any objections6; and
- the company has filed the application for IHC status, information on controlling persons and the abovementioned notice for the region of the Russian Federation with the tax office at the place of its tax registration.
(*) The condition on the constancy of controlling persons shall not apply to International Companies and Russian Companies which as of 1 March 2022 are either public companies or are 100% (directly/indirectly) owned by public companies (subject to certain conditions), nor shall it apply to companies where controlling persons in aggregate holding no less than 25% fall under sanctions of foreign states/unions according to the list of the Russian Government.7
TAX concessions for IHC
General conditions for applying tax concessions available to an IHC8
- at least one of the IHC's controlling persons is a Russian tax resident or a Russian national;
- passive income9 accounts for over 90% of the total income of the IHC;
- expenses relating to the purchase of goods, work and services in the Russian Federation10 account for over 70% of the total expenses of the IHC;
- the IHC is governed, and managerial decisions are taken, from the Russian Federation;
- the IHC continuously employs at least 15 employees who are Russian tax residents;11
- the IHC owns or leases office space with an area of at least 50 m2 located within the SAR;12
- in the course of three years beginning from the start of the application of reduced tax rates, the IHC has been investing at least 300 million roubles in the infrastructure of the region of the Russian Federation where the SAR is located; and
- specifically for Russian Companies – the composition of controlling persons holding, directly or indirectly, at least 75% of company shares on the first day of the tax period remains the same as on 1 March 2022 (an exception is a change in the controlling persons by succession).
The IHC must annually (together with an annual tax return in relation to profit tax) submit to the tax office documents confirming compliance with these conditions. If the IHC no longer meets all conditions, the IHC will be obliged to return tax to the budget (in the amount of the tax concession made available to it) and pay penalties.
Profits tax concessions in relation to income received by an IHC
* Where conditions for a 0% rate are not met.
** This concession can be applied even when the abovementioned general conditions for applying tax concessions available to IHC are not satisfied.
*** For tax purposes, IHC's foreign exchange losses and expenses relating to participation in geological surveys, exploration, mining projects and other works will not be taken into account.
Profits tax concessions on income payable by an IHC
|
Type of income |
Rate |
Period |
Additional conditions |
|
Dividends
|
5% |
until 01.01.2029 |
As at 1 January 2018 and the date of a decision on the payment of dividends, the IHC is a public company. The recipient is a foreign person that directly holds > 5% in the IHC. |
|
10%* |
from 01.01.2023 to 01.01.2036 |
The recipient is the beneficial owner of income and is not registered in an offshore zone. |
|
|
Interest |
10% |
from 01.01.2023 to 01.01.2036 |
The recipient is the beneficial owner of income and is not registered in an offshore zone. |
|
Royalties |
10% |
from 01.01.2023 to 01.01.2036 |
The recipient is the beneficial owner of income and is not registered in an offshore zone. |
* If conditions for applying the 5% rate to foreign companies and the 0% rate to Russian entities under para. 1 of cl. 3 of art. 284 of the Russian Tax Code are not met.
When paying income to foreign persons, the IHC may apply the concessions established by the applicable Double Tax Treaty (subject to the relevant conditions).14
Beginning from 1 January 2023, an IHC and taxpayers receiving income from the IHC, paying income to the IHC or paying income sourced from the IHC will be jointly and severally liable for paying profits tax.
Non-deterioration clause
The Russian Tax Code contains a non-deterioration clause aimed at preserving and not deteriorating the conditions of taxation of an IHC in relation to profits tax, property tax and transport tax that may apply on the day of obtaining the IHC status. Changes enter into force from 2023.
When can ihc status be revoked?
International Company
- reorganisation in the form of a merger or consolidation (except for a merger or consolidation with another IHC);
- a new person is added to controlling persons within a year of registration in the SAR (exceptions are made for public IHC, a change by succession, reorganisations in the form of spin-offs, split-offs and corporate conversions of current controlling persons as well as if the new controlling person is a Russian tax resident or a Russian national);
- termination of the status of an International Company under Law No. 209-FZ (in particular, in connection with its merger with a person not being a participant of the SAR or relocation of the company outside the SAR); and
- failure to submit to the managing company of the SAR, within two years of re-registration in the relevant SAR, a document confirming removal from the foreign company register in the country of its incorporation.
Russian Company
- reorganisation in the form of a merger or consolidation (except for a merger or consolidation with another IHC);
- a new person is added to controlling persons during a year after submission of the application for obtaining the IHC status (exceptions are the same as for an International Company); and
- relocation of the company outside the SAR.
Other tax benefits for companies in a SAR
Irrespective of IHC status, International Companies are also eligible for the following tax benefits:
- upon re-domiciliation in a SAR, the International Company ceases to be a controlled foreign company (CFC) for its Russian shareholders;15
- there is a ban on field tax audits in International Companies in relation to the periods preceding re-registration in the SAR;
- International Companies registered in the SAR from 1 January 2020 to 31 December 2024 form the tax value of the shares and participatory interest in the authorised capital of Russian and foreign subsidiaries with reference to their market value; and
- exemption from property and transport tax in relation to certain types of property of an International Company.
1 Federal Law No. 18-FZ of 25 February 2022, entitled On Amendments to the First and Second Part of the Civil Code of the Russian Federation and Certain Legislative Acts of the Russian Federation; Federal Law No. 66-FZ of 26 March 2022, entitled On Amendments to the First and Second Part of the Civil Code of the Russian Federation and Certain Legislative Acts of the Russian Federation.
2 Federal Law No. 72-FZ of 26 March 2022, entitled On Amendments to Certain Legislative Acts of the Russian Federation.
3 A legal entity being a commercial corporate body, except for lending institutions, non-lending financial organisations, credit bureaus, credit rating agencies, actuaries, and operators of payment services and payment services infrastructure.
4 The controlling person of an International Company is an individual or a legal entity with a shareholding of over 15% as well as an individual exercising control over such organisation on his/her own behalf or on behalf of his/her spouse or underage children. For individuals their shareholding is determined as an aggregate shareholding held jointly with their spouses and underage children.
5 The controlling person of a Russian Company is an individual, a sovereign wealth fund, a public company (that meets certain conditions) or a state-owned enterprise (that meets certain conditions) with a shareholding of more than 50%. For individuals, their shareholding is determined as an aggregate shareholding held jointly with their spouses and underage children.
6 The region of the Russian Federation may send its objections to IHC status to the relevant company and to the tax office if profits tax receipts from such company exceed 1% of the total sum of revenues from profits tax receipts to the budget of such region in at least one of the three calendar years preceding the calendar year in which relocation to the SAR is proposed.
7 Resolution of the Russian Government No. 1348 of 10 November 2017.
8 Companies that obtained IHC status before 25 February 2022 may be given a deferral until 31 December 2025 to comply with these conditions, ie until the end of 2025 such IHC can apply a profit tax concession even if these conditions are not met.
9 Income under cl. 4 of art. 309.1 of the Russian Tax Code, except for foreign exchange gains and income relating to participation in geological surveys, exploration, mining projects and other works.
10 Except for foreign exchange losses and expenses relating to participation in geological surveys, exploration, mining projects and other works.
11 Employees must be employed on a full-time basis and must perform functions associated with at least one of the IHC's activities aimed at obtaining passive income.
12 During the period up to 31 December 2025 this condition is deemed fulfilled if office space is available in Vladivostok or Kaliningrad.
13 Order of the Ministry of Finance of Russia No. 108n of 13 November 2007.
14 Letter of the Federal Tax Service of Russia No. SD-4-3/26412 of 23 December 2019.
15 Letter of the Ministry of Finance of Russia No. 03-12-11/2/32780 of 28 April 2021.
