“Deoffshorisation” Tax free repatriation of assets under liquidation of foreign entities

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“Deoffshorisation” Tax free repatriation of assets under liquidation of foreign entities

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“Deoffshorisation”

Tax free repatriation of assets under liquidation of foreign entities

Importance of initiating liquidation proceedings prior to 1 January 2017

 

FOREWORD 

Under the Russian Tax Code (the “Code”) Russian companies and Russian controlling persons can receive assets under liquidation proceeds from foreign entities tax free and also create a tax basis for future sale of these assets, provided certain provisions are met.

In addition to the above a foreign company which undergoes liquidation will not be considered as a tax resident of the Russian Federation, even if it meets certain criteria which under the Code it would have been considered as a tax resident of the Russian Federation.

Below we provide an analysis of the restructuring opportunities under these provisions of the Code. We also analyse the importance of initiating the liquidation proceedings prior to 1 January 2017.

LSTS members are licensed liquidators under the Cyprus Insolvency Practitioners Law, 64(I) of 2015 and can be appointed as liquidators both in relation to Cyprus company liquidations but also on tax haven company (i.e. BVI) liquidations.

 

LIQUIDATION OF FOREIGN ENTITIES AND TAX FREE REPATRIATION OF ASSETS 

Under the Code, property received by a Russian tax resident company or Russian tax resident individual which arose as proceeds from the liquidation of a foreign company i.) will not be subject to tax in Russia and ii.) the tax base of the asset received will be considered to be the value of the asset at the time of distribution of the liquidation proceeds.

Conditions set for tax free liquidation:

  1. Such property must not include cash
  2. The liquidation must be completed before 1 January 2018
  3. The liquidation is completed after 1 January 2018 but this was due to certain restrictions in the personal law of the foreign country but the decision for the liquidation was taken prior to 1 January 2017 and the liquidation was completed at the end of such restrictions.

The analysis of the provisions of the Code is set in Annex 1 hereto.

 

RESTRUCTURING EXAMPLES

  1. Elimination of tax haven companies (B.V.I./ Belize/ Panama/ Marshal Islands):
    1
  2. Elimination of all foreign holding companies:
    2
  3. Introduction of a Russian Holding company for tax planning:
    3
  4. Elimination of tax haven trading companies:
    4

 

TAX FREE REPATRIATION OF CASH FROM FOREIGN ENTITIES

Under the Code, assets which are transferred to the Russian tax resident individual or Russian company are not subject to any tax in Russia provided that these assets are not cash.

In order to overcome this issue the cash must be converted into non-cash assets prior to the transfer.

Possible steps to achieve the above:

  1. The foreign company opens a brokerage account in a large US broker
  2. The Russian individual also opens a brokerage account in the same US broker
  3. Cash is used to buy highly liquid stock (i.e. google, apple, facebook)
  4. The stock is transferred to the brokerage account of the Russian individual as part of the liquidation proceedings.
  5. Russian individual sells the stock and receives cash

 

FOREIGN ORGANISATION REGOGNISED AS TAX RESIDENT OF THE RUSSIAN FEDERATION 

Under the Code a foreign company is considered as a Russian tax resident company if its effective management is in the Russian Federation.

Such criteria, analysed in detail in Annex 1, relate to whether the management decisions and management meetings take place in the Russian Federation.

The foreign entity will not however be recognized as a Russian tax resident even in the case it had its effective management, as this is defined under the Code, in the Russian Federation provided that the liquidation of the foreign company has been completed prior to 1 January 2018.

 

ANNEX 1 – RUSSIAN TAX CODE PROVISIONS 

  1. Article 217 Clause 60 – Income from liquidation exempt from personal taxation

    Income (excluding cash) received by an individual in the form of property or property rights as a result of the liquidation of a foreign organization is exempt from personal taxation provided that:

    1. The taxpayer has submitted to the tax authorities a statement in his tax declaration indicating that such proceeds have been received as part of the liquidation of a foreign entity.
    2. The procedure of the liquidation of the foreign entity has been completed before 1 January 2018
    3. The liquidation is completed after 1 January 2018 but this was due to certain restrictions in the personal law of the foreign country but the decision for the liquidation was taken prior to 1 January 2017 and the liquidation was completed at the end of such restrictions.
  2. Article 220 Clause 2 – Tax base of assets transferred to the Russian tax resident individual under liquidation of a foreign entity

    The Russian individual tax resident should deduct from the sale proceeds of a property or property rights sold the amount of the property or property rights which was received by the foreign entity as a result of the liquidation of such entity under which the income was exempt under the Article 217 Clause 60.

    The amount to be deducted shall be the value of the property or property rights shown in the books of the liquidated organization but not exceeding the market value of such property.

  3. Article 246.2 Clauses 1 and 2 – Foreign companies with effective management in the Russian Federation.

    Foreign companies for which their effective management is in the Russian Federation are considered to be Russian tax residents.

    Regardless of the conditions set in the section below a foreign organization will not be recognized as a tax resident of the Russian Federation provided that a decision has been taken by the shareholders to liquidate the foreign organization and the liquidation procedure has been completed prior to 1 January 2018.

    Conditions setting a foreign company as having the effective management in the Russian Federation:

    The effective management is considered to be exercised in the Russian Federation if the criteria below are met:

    1. Meetings of the board of directors are predominantly (over 50% of meetings in a year) are held in Russia
    2. High-level executive management is predominantly performed in Russia or the executive officers operate predominantly in Russia with respect to the given foreign organization

    If the criteria are met in relation to a number of countries then additional criteria are set in concluding whether the effective management is in the Russian

    Additional criteria for determining the place of effective management of a foreign company are as follows:

    • The accounting or management records are maintained in Russia
    • The company’s records are managed in Russia
    • The place from which operating and administrative procedures (HR management) relating to the company’s operations (as opposed to any group operations) are issued in Russia
  4. Article 277 Clause 2 – Tax base of assets transferred as part of liquidation proceeds of a foreign entity

    In case of liquidation of an organization and distribution of the assets of the liquidated company the gain to the recipient of such property is calculated as the market price of the property received less any amount actually paid to acquire such property.

    If however the liquidation proceeds arise from the liquidation of a foreign organization then the above profit will be disregarded in the tax base of the property received. The tax base of the property received will be set as the lower of the cost of the property shown in the books of the liquidated organization and the market value of such property.

    The above exemption will apply provided that:

    1. The procedure of the liquidation of the foreign entity has been completed before 1 January 2018
    2. The liquidation is completed after 1 January 2018 but this was due to certain restrictions in the personal law of the foreign country but the decision for the liquidation was taken prior to 1 January 2017 and the liquidation was completed no longer than 365 consecutive calendar days after the end of such restrictions.
  5. Article 309.1 Clause 10 – Tax on gains of Controlled Foreign Companies (“CFC”s)

    Gains derived by the CFCs from the sale of securities or property rights in favor of the controlling person of the CFC as well as the costs incurred on the purchase of these securities or property rights are excluded from the profit and loss of the CFC. The cost is determined based on the cost as set in the books of the CFC however it cannot be higher than the market value at the date of the transfer.

    The above exemption will apply provided that:

    1. The procedure of the liquidation of the foreign entity has been completed before 1 January 2018
    2. The liquidation is completed after 1 January 2018 but this was due to certain restrictions in the personal law of the foreign country but the decision for the liquidation was taken prior to 1 January 2017 and the liquidation was completed no longer than 365 consecutive calendar days after the end of such restrictions.

    The cost basis of the securities and property acquired by the CFC will be accounted for as the cost shown in the books of the CFC but not higher than the market value of these securities at the date of transfer.

 

HOW CAN LSTS ASSIST YOU

LSTS may assist in:

  1. Being appointed and act as the liquidator in the members voluntary liquidation of Cyprus and tax haven companies (i.e. BVI)
  2. Providing you with guidance on the provisions of the Code for the liquidation of the company.

 


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