Questions and Answers: CFC

A CFC is a foreign entity or a foreign structure without legal personality that is not recognized as a tax resident of the Russian Federation and is controlled by organizations and/or individuals who are considered tax residents of the Russian Federation.

A controlling person of a foreign entity is an individual or legal entity whose ownership interest in the organization exceeds 25%, or more than 10% if the combined ownership share of all Russian tax residents in the charter capital exceeds 50%.  

When determining ownership interest, it is important to consider interdependence, as the shares of related persons are aggregated to determine the final percentage (Article 25.13 of the Russian Tax Code). According to the law, related persons include a spouse and minor children.

• It is considered when determining the tax base if its amount exceeds 10,000,000 RUB.
• It is reduced by the amount of dividends paid.
• If the profit of the CFC is used to increase the charter capital, such profit is not included in the tax base of the taxpayer – the controlling person.
• A tax credit is available for the tax calculated on the same profit in a foreign country.

An active foreign company is one in which no more than 20% of its total income consists of so-called "passive" income. This includes dividends, interest income from any type of debt obligations, income from the use of intellectual property rights, and similar sources.

It is difficult to imagine a company that does not receive any income from the "passive income" list, especially considering the last category – "Other similar income."

A company is recognized as an active foreign holding company if the following conditions are met:

• It is a foreign entity in which the share of direct participation by a Russian organization or a controlling person is at least 75% for a period of no less than 365 consecutive calendar days.
• It either has no income or its share of passive income (excluding "active" dividends) does not exceed 5%.
• It has direct participation in active companies of at least 50% for a period of no less than 365 consecutive calendar days.
• It is not included in the Ministry of Finance's "blacklist" (Order No. 108n dated November 13, 2007).

For example, if a client’s foreign company is used solely for technical purposes rather than tax optimization—such as transactions with counterparties, delayed repatriation of revenue, or simplifying document flow—then recognizing it as a tax resident of Russia might be advantageous.

Some companies generate little to no profit but play a crucial role within a corporate group. In such cases, it may be reasonable to establish the company as a tax resident of Russia.

• Analysis of existing foreign legal entities (holding companies, trading companies, etc.) to identify entities classified as Controlled Foreign Companies (CFCs);
• Review of the corporate structure for potential restructuring (considering aspects related to asset sales or liquidation of legal entities) and cost reduction in administration, including complex holding structures with Shareholders' Agreements;
• Assessment of tax risks associated with the application of double taxation treaties, considering the new "beneficial owner of income" rule;
• Explanations and comments on changes in tax and currency legislation;
• Consultations on the new disclosure requirements for owners of foreign companies holding real estate in Russia.