What is a flat CFC tax?
- What is a controlled foreign company;
- The mechanism of action of a flat tax on a CFC;
- Pros and cons of switching to a fixed CFC tax regime;
- Sanctions for violation of the CFC flat tax regime;
- Transition to a fixed tax regime for CFCs.
General Provisions
A controlled foreign company is any foreign organization or any other structure without a legal entity.
It is important that such a company does not have to be a valid tax resident of the Russian Federation, but it must be controlled by a tax resident of Russia.
In addition to the above conditions, it is necessary to comply with the requirements of the Tax Code of the Russian Federation for the controlling person. Such a person is recognized:
- Natural or legal person;
- The share of participation in a CFC is more than 25 percent, or 10 percent if the share of participation of all tax residents of the Russian Federation is more than 50 percent.
Mechanism of action of the flat tax on CFCs
The Tax Code contains the main innovation of the legislation, namely the ability to purchase a certain payment for all CFCs, which provide the right to switch to a new taxation system, namely, to pay personal income tax from a fixed CFC profit. Fixed income does not depend on the number or type of CFC activity. The size of this profit is also established - 34 million rubles. Hence, through simple mathematical calculations, the amount of personal income tax will be about 5 million rubles a year.
An important feature is that this regime applies only to individuals who control CFCs.
The presence of 2 or more controlling individuals will not be an obstacle, namely, the transition of all controlling individuals to a fixed tax regime is not required. In other words, if a CFC has two or more controlling individuals, each person can independently decide on the transition to a fixed tax regime. Thus, the person who switched to such a regime begins to pay tax in accordance with the new regime, and the rest of the persons controlling the CFC can remain on the previous taxation system.
Pros and Cons of Switching to a Fixed CFC Tax Regime
As with any other tax regime, a flat CFC tax has a number of advantages and disadvantages.
The first advantage is the fixed nature of taxation. Having paid the tax once a year, you get rid of further taxes, regardless of any conditions.
An important advantage of the flat tax for CFCs is the elimination of the need to submit reports to the Federal Tax Service. But, at the same time, the obligation to submit notifications of participation in foreign companies or the establishment of foreign structures, as well as notification of all CFCs, remains.
Along with the aforementioned advantages, the new taxation regime is not without its drawbacks.
One of these disadvantages is that the transition to a fixed tax entails the deprivation of the right to switch to another tax system for three years in 2021 and for 5 years upon transition thereafter.
Also, upon receipt of dividends, personal income tax is payable in full without reducing the amount of dividends by the amount of the CFC's fixed profit, despite the previously paid tax in the amount of 5,000,000 rubles.
Sanctions for violation of the CFC flat tax regime
The legislator establishes sanctions for violation of legislation in the field of flat tax for CFCs. For example, failure to provide documents confirming profit or loss is punishable by a fine of 500 thousand rubles. Or, in case of failure to submit documents confirming the conditions for exemption of profits from taxation, the FTS is authorized to issue a fine in the amount of 1 million rubles.
Also, the lack of notification of the CFC to the FTS entails a fine of 500 thousand rubles.
In addition to the above sanctions, an individual may also incur criminal liability for violating tax laws. According to article 198 of the Criminal Code, tax evasion by a natural person committed on a large scale, namely 2,700,000 rubles, is punishable by a fine of 100,000 to 300,000 thousand rubles, or as a maximum sanction - imprisonment up to one year. A similar act committed on a large scale - 13.5 million rubles, may be punishable by a fine of 200,000 to 500,000 rubles, or imprisonment for up to one year.
Transition to the CFC flat tax regime
The above mode is designed for individuals only. When switching to a fixed tax regime for a CFC, it is necessary to notify the FTS by December 31 of the year that is the tax period with the previous tax regime (for the transition to a new tax regime in the new tax period).
If you still have questions or need help with the transition to the flat tax regime for CFCs, the highly qualified lawyers of A4 Law Firm are ready to help you with this.
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