- an exemption of individuals who are tax residents of the Russian Federation from personal income tax when receiving income (property rights and property, except cash) from controlled foreign companies (“CFCs”); and
- a tax deduction for the subsequent sale of property (or property rights) received from a CFC.
Background
In 2022, amendmentsFederal Law No. 67-FZ dated 26 March 2022, articles 60.2 and 217 of the Tax Code of the Russian Federation were made to the Tax Code of the Russian Federation, which for the first time established an exemption from personal income tax on income received in 2022 by an individual tax resident of the Russian Federation in the form of property (other than cash) and property rights from a CFC The following conditions must be met simultaneously:- the assets being transferred were owned by the transferring CFC as at 1 March 2022;
- the individual was the CFC's controlling person as at 31 December 2021;
- the individual has submitted to the tax authority, together with the 3-NDFL tax declaration, an application for exemption from tax on income specifying the characteristics of the transferred assets, accompanied with documents evidencing their value according to the CFC accounting data as at the date of receiving income
- if the assets received from a CFC transferred as payment for securities to the issuer or third parties;
- in the event of the sale of securities and derivative financial instruments received from a CFC;
- when selling an interest in the capital of an entity, if the individual had previously acquired it using assets received from a CFC;
- when selling the property (and property rights) received from a CFC
The lawmakers expected such measure to level off the negative impact of the restrictions imposed against the Russian Federation by foreign persons from unfriendly states.
Subsequently, the provision was extendedFederal Law
Furthermore, 2023 saw the expansion of the list of persons covered by such exemption, namely, in addition to an individual controlling a CFC, such persons now also include his/her close relatives, provided that the established requirementsIf the assets were received by a close relative as a result of restrictive measures imposed by a foreign state against the controlling person at the time of the exit from the CFC, and provided that the close relative was a controlling person of the CFC as at 31 December 2022 are met.
Changes taking effect in 2024
The lawmakers have decided to extend this tax relief to the end of 2024 (with effect from 1 January 2024), and additionally provided a number of separate innovations.Previously, when assets were registered out of a CFC’s name into that of an individual, the assets holding period was interrupted and began to run anew.
This procedure will now change. When transferring assets, an individual will be able to count the period during which the assets were held through a CFC (but no longer than the period during which the individual was the CFC’s controlling person) towards the period such assets were held by the individual directly.
This, in turn, will allow the individual taxpayer to take advantage of the tax exemptions associated with the long-term (i.e., for more than five years) holding of assets and, consequently, not to pay capital gains tax upon the sale of such assets.
These additional measures were adopted to continue the policy of encouraging the redomiciliation of businesses from abroad to the Russian Federation.
Considering that tax residents of the Russian Federation were controlling persons of more than 40,000 CFCs as at the end of 2022, and bearing in mind that many of them still have practical difficulties transferring assets, the extension of the exemption will be most welcome.
Denuo’s tax team has extensive practical experience in applying the exemption in question and will be happy to assist you with receiving assets from a CFC, preparing the necessary documents and demonstrating eligibility for the exemption.
