Identification of tax risks of gambling projects within the CFC

Elena Mashina

When creating gambling projects, the practice of registering a legal entity in a foreign jurisdiction is widespread. The obvious reason for this is the possibility of licensing in specific jurisdictions and the illegality of gambling in other countries. If there is an organization abroad, the question of taxation under Russian law arises. In this situation, the business owner must face the CFC regulation. In this article, you can read about the tax risks arising under the CFC legislation when creating gambling projects.

Contents:

Who is considered the controlling person of a CFC?

The law refers to a CFC as a controlled foreign company. That is, it can be either a legal entity or simply an unregistered structure. The CFC has an owner - a controlling person. According to Russian regulations, he can be a citizen or an organization subject to Russian tax residency.

The owner of a CFC is determined by two criteria. The first condition implies formal membership in a foreign company with a certain share. It must be more than 25% or more than 10% if Russian tax residents own more than 50% of the company. For these purposes, the share is taken into account both direct and indirect. The second mandatory criterion is the actual implementation of management over the company in their own interests or in the interests of close relatives.

What are the responsibilities of CFC owners?

This special status is special in that it imposes additional tax obligations on the owner:

Send a message to the authority about the existence of the CFC;
Submit tax reporting;
Calculate tax on retained earnings.

How to calculate the profit of a CFC?

When calculating, you should pay attention to the fact that you can deduct from the profit:

Dividends paid by the CFC to its members;
Dividends from Russian organizations received by the CFC itself;
Distributed profit of an unregistered foreign entity.

New method of calculating tax for individuals under the CFC

From 2021, individuals are entitled to pay a lump-sum tax. It is expressed in a fixed amount and does not depend on the number of foreign organizations in which the payer owns a share. The tax is 5 million RUB if the minimum profit for the tax period for 2021 is 34 million RUB. In addition to the fact that the amount is always the same, the person is exempted from filing reports to the authorities. Either the owners of CFCs with low profits or the owners of active CFCs will most likely not take advantage of this privilege.

Tax exemption for CFCs

There are also exceptions to the rules on taxation of CFCs. An active foreign company does not pay tax. When passive income is less than 20%, then the company can be considered active. Passive income should include income from the use of intellectual property rights. This point seems interesting, because if gambling is carried out through mobile applications, a licensing agreement will be concluded with the players. Royalties are related to income from the use of rights to intellectual property. Therefore, there is a risk that a gambling company will be recognized as passive. But usually they conclude an agreement with users on the provision of services, therefore, in general, such payments will not be licensed, and the gambling project will be recognized as an active CFC.

Responsibility for violation of the CFC rules

Liability is stipulated for violation of CFC rules, as in other cases of violation of tax legislation. Now the fine for evading filing financial statements with the tax authorities or failing to provide a notification is up to 500 thousand rubles. In case of failure to provide documents that the tax authority has already requested, the liability is 1 million rubles.

Thus, when creating a gambling project in a foreign jurisdiction, it is necessary to take into account Russian tax law, in particular, CFC regulation. The owner of a foreign gambling business can be recognized as a controlling person if there is a certain share or actual control. The owner needs to calculate the income tax of the CFC, whether it is passive or active. For failure to provide documents or lack of notification, liability is provided, which the legislator has recently increased. If you have any questions or you need help with tax support for a gambling project, please contact A4 Law Firm lawyers.