Subtleties of taxation of a controlled foreign company that does not carry out activity

Our client is an owner of a company registered in Mauritius. However, the company does not perform any activity and is virtually abandoned. The client needed to know how to legalize the controlled foreign company (CFC) and find out information about risks are connected with such a legalization.


CFC income determined based on its financial statements and under the Chapter 25 of the Tax Code of the Russian Federation (TC RF) is treated as income of individuals recognised as controlling persons of the CFC and such income shall be taken into account when the controlling person determines the tailored personal income tax base.


Hence, controlled foreign company is a foreign organisation that meets two conditions simultaneously (Item 1 Article 25.13 of the TC RF):

1) the organisation is not recognised as a tax resident of the Russian Federation;

2) controlled person of the organisation is an organisation and/or individual recognised as a tax resident of the Russian Federation. In particular, foreign organisations with a place of management located in the Russian Federation are recognised as tax residents of the Russian Federation unless otherwise provided in an international tax treaty of the Russian Federation (Article 246.2 of the TC RF).


Item 2 Article 246.2 of the TC RF provides criteria for determination of a place of management of a foreign organisation; such criteria include, in particular, management of day-to-day activities of the organisation on the territory of the Russian Federation. According to the information provided, the company located in Mauritius does not perform any activity and, therefore, it is not managed. In our opinion, the company may not be recognised as a tax resident of the Russian Federation.


The following legal entities/individuals are recognised as controlling persons (Item 3 Article 25.13 of the TC RF):

1) individual or a legal entity with a membership interest in the organisation exceeding 25%;

2) Individual or a legal entity with a membership interest in the organisation (for individuals: jointly with spouses and minor children) exceeding 10% or, if the membership interest of all persons recognised as tax residents of the Russian Federation (for individuals: jointly with spouses and minor children) exceeds 50%.


In the situation in question, if membership interest in the foreign company exceeds 25%, the company is recognised as a controlled foreign company (CFC).


Controlled person takes into account CFC income determined from the beginning of periods starting in 2015 (Item 2 Article 4 of the Law No.376-FZ). It means that CFC income that was not distributed by 1st January 2015 is not taken into account when determining controlling person’s tax base (Letter of the Ministry of Finance of the Russian Federation dated 25.05.2015 No.03-08-05/29888).


However, if the established threshold level is exceeded, CFC income shall be accounted for. Hence, CFC income for the tax period shall not be taken into account by a taxpayer (controlling person), if CFC income for such tax period is less than:

- 50 million Roubles (for 2015);

- 30 million Roubles (for 2016);

- 10 million Roubles (for periods starting from 2017 (Item 7 Article 25.15 of the TC RF, Part 2 Article 3 of the Law No.376-FZ)).


As the company located in Mauritius does not perform any activity, it has no profits in the form of CFC income subject of the personal income tax.


However, controlling person shall provide the tax authority with two types of notifications (Item 1 Article 25.14 of the TC RF):

1. Notification of membership interest in foreign companies; such a notification shall be provided no later than within three months from the date of occurrence of (change in) membership interest in such foreign company;

2. Notification of controlled foreign companies controlled by the said person; such a notification shall be provided no later than on 20thMarch of a year that follows the tax period when the controlling person recognised profits in the form of CFC income in compliance with the Chapter 23 of the TC RF.


However, in the opinion of the Ministry of Finance of the Russian Federation, notification of CFC shall be provided irrespective of profits of such CFC (Letter of the Ministry of Finance of the Russian Federation dated 21st March 2017 No.03-12-11/2/16199). In the Decision of the Arbitration Court of Moscow dated 21.12.2017 as per the case No.А40-178867/17, the Court also specified that controlling person shall submit the notification of CFC in order to inform tax authorities for enabling them to carry out their controlling functions. Such an obligation does not arise from any financial result of CFC.


Therefore, our client is obliged to provide the relevant notification even if the CFC does not perform any activity and has no profits.


If the notification of membership interest in a foreign company is not provided in due time, fine is imposed in the amount of 50 thousand Roubles; if notification of CFC is not provided, fine will amount to 100 thousand Roubles.


However, the client may avoid the fine, if such notifications are submitted together with a special declaration under the Law No.140-FZ.


In addition, there is a three-year Statute of Limitation on liability for tax offences.

Legalization of accounts at foreign banks

Our client asked us to examine possible consequences of declaration of data on his account at a Swiss bank. Money debited from the account is intended for investments in securities as well as transferred free of charge to close relatives and as “friendly” loans to accounts in various countries. Sources of money: own funds and credit given by the Swiss bank. 


Having analysed the information provided, we detected some violations of the foreign exchange law, such as:

  • Failure to provide tax authorities with a notification of opening the account at a foreign bank (of changing the account details). Such a notification shall be submitted no later than within the 1st month from the date when such actions were performed. Failure to submit the relevant notification results in an administrative fine amounting from 4 000 to 5 000 RUB.

  • Failure to submit bank statements on accounts opened at foreign banks. Such statements shall be submitted on an annual basis no later than on 1st June of a year that follows the reporting year. Failure to provide such statements results in an administrative fine amounting from 2 500 to 3 000 RUB.

  • A number of foreign exchange transactions on the account at the Swiss bank were made in violation of the foreign currency law (accounts at authorised banks were bypassed). In particular, such transactions include the following: credit funds provided by the Swiss bank were credited to the account (if credit period is less than 2 years); “friendly” loans were credited to accounts at foreign banks (loan and interest repayment). In addition, before 01.01.2018, if money received from alienation of foreign securities were credited to accounts at a foreign bank without using accounts at Russian banks, such a transaction was recognised as a forbidden operation.


Under the general rule, transactions on accounts at foreign banks are authorised without using accounts at Russian banks, if currency valuables are provided to closed relatives as gifts. In addition, since 01.01.2015, transactions on crediting the coupon yield from foreign securities have also been authorised.


In addition, in the opinion of the Federal Tax Service of the Russian Federation (FTS RF), if notifications of opening (closing) of accounts at foreign banks and cash flow reports on such accounts are not provided, transactions on such accounts shall be recognised as made in violation of the foreign exchange law.


According to the opinion of the FTS RF, as neither notifications nor reports on the account at the Swiss bank were submitted, all foreign exchange transactions on the account shall be recognised as made in violation of the foreign exchange law, which results in an administrative fine imposed on citizens, officers and legal entities at the rate from 75% to 100% of the amount of the illegal foreign exchange transaction.

Which tax information may the Federal Tax Service receive about individuals and legal entities that carry out activities abroad?  

Our client decided to develop his business in Cyprus. Apart from other matters related to incorporation of a legal entity abroad and local taxation system, the client wished to get some clarifications concerning the automatic exchange of information between tax authorities of the two countries.


Under the international agreement signed by the FTS RF (Multilateral Competent Authority Agreement dated 29th October 2014) and the Common Reporting Standard (CRS), the following information is subject to the automatic exchange:

  • information on a bank the account is opened at; receipts to the account and account balance; reporting period;

  • information on personal accounts: full name; date of birth; residential address; Taxpayer’s ID; country code;

  • information on corporate accounts: company name; Taxpayer’s ID; registered office; country code; controlling person’s personal details (beneficiary).


As regards individuals, maximum account balance threshold that falls within the automatic exchange of information is not established; as regards corporate accounts, maximum account balance threshold amounts to $250 000.


However, if corporate account balance as of 31st December of the reporting year is less than $250 000 (applicable only for accounts opened by 01.01.2016), banks may not transmit information on the controlling person of the company via automatic exchange of information. Person that owns, directly or indirectly, over 25% of shares (stakes) in a company or any other person that actually controls the company is recognised as a controlling person.


Tax authorities, based on the information received, may bring such person to tax, administrative and, in some cases, criminal responsibility.


It is worth mentioning, that currently tax authorities of the Russian Federation may, under the automatic exchange of information, receive data from 74 countries. List of signatories of the CRS Multilateral Competent Authority Agreement is available on the official website of OECD (The Organisation for Economic Co-operation and Development).

Is it necessary to notify the FTS of real estate abroad?

This question was asked by an owner of a 4-room flat located in an expensive neighbourhood in Riga. Not long ago, he decided to diversify investments and buy real estate abroad. He chose the capital of Latvia not without reason. The client loves the city and he has always dreamed to have his own dwelling near the historic centre.


As it follows from the current law, the fact of owning real estate abroad does not result in any obligation to notify tax authorities.


In our opinion, it is advisable to declare a flat in Riga in situations, as follows:

  • if the flat is a source of income (rented out, for example), and tax on such income is not paid;

  • if the flat is planned to be sold;

  • if the purchase of the flat was carried out in violation of the foreign exchange law (money was transferred without using authorised banks (taking into account the 2-year Statute of Limitation on liability for administrative offences));

  • if, in the creation of sources for the acquisition of real estate, taxes were not paid (taking into account the 3-year Statute of Limitation on liability for tax offences).


As the client bought the flat for a long-term personal use, and no breach was committed in the course of the purchase process, declaration of the real estate was not required.

Forensic audit upon special request of agricultural holding’s owner

We have successfully completed an analysis of efficiency of internal controls and business processes of a large agricultural holding based in Volgograd region.

​At the end of 2016, internal auditors and safety officers of the holding identified many indicators of financial abuse on the part of management and main departments responsible for the collection, transportation and storage of agricultural products. Having been informed of the above-mentioned indicators, the owner, based on results of a restricted tender, chose our company for carrying out an internal investigation into the reasons of such abuse.


Owner’s representatives and we understood that it was important for us not only to find those who committed particular acts of such misconduct, but also analyse weaknesses of the existing internal control system in respect of property safety and propose measures for increasing the efficiency of the internal control system in the future.


n order to solve the task, we created a joint working group consisting of business analysts and financial and industry experts.


Business analysts were responsible for the expert analysis of basic (Soil Preparation,Planting, Harvesting, Delivery From Fields to the Elevator, Storage in the Elevator,Shipment to Clients (Railway and Car)) and auxiliary (Staff Management, Quality Control, Machinery Control, Planning and Budgeting) business processes of the company to identify their efficiency, and the real onsite check to find out how these processes actually worked.


Financial experts compared the onsite check data obtained from business analysts with financial information disclosed in accounting documents, source documents, warehouse ledgers and management reports in order to check their mutual consistency.


Local experienced agriculturists were engaged as industry experts; theyhelpedourfinancialexpertsandbusinessanalystswith matters of the sowing plan, work of the laboratory at the elevator, distribution of petroleum, oil and lubricants, spare parts expenditure control, rates of natural loss, humidity and impurity, and other specific industry information. Professor, Chair of IT Department of the local Economics and Management University, acted as a project manager.


During the work, we analysed internal regulations of the enterprise, detected areas of inadequate control and found multiple violations of the adopted in-house regulations. For example, we detected the following: clear violations of the automatic control in the course of product acceptance at the weighing station; laboratory employees understated grain grade and impurity; evidence that unrecorded excess of grains was removed from the elevator as dirt; rail cars were unsealed when products were shipped to customers; violations concerning the accounting for petroleum, oil and lubricants, and spare parts; failure to observe tender procedures related to the selection of suppliers (purchases from bad-faith suppliers at overinflated prices) and other violations.

​All our findings and recommendations on each violation detected were described in our report and the presentation submitted to owner’s representatives; as a result, relevant personnel decisions were made, and a plan of the improvement of holding’s internal control system was developed.


We express our special gratitude to our lead auditors Elena Nazarenko and Tamara Belenova for their mental flexibility and dedication to that unusual audit assignment.

Our team has completed a large project on 1C:ERP implementation. It was a big challenge, but we have successfully solved this untypical and complex task

In 2015, a large service company (that has 1400 employees, 25 branches, over 200 separate business units throughout Russia and a turnover amounting approximately to 1 billion RUB) contacted us after making a decision, in 2014, to have 1C:ERP implemented.

​Third-party advisors had been engaged in 1C:ERP implementation, but something went wrong, and the implementation process was drawn out causing inconsistencies in accounting; and the accounting process went out of control. As a result, the company incurred substantial financial losses and went bankrupt. By the end of 2016, 1C:ERP had not been implemented because the internal accounting office was closing the first half-year in December. There were conflicts and misunderstanding between branches’ accounting offices and the head office’s accounting department. The state of reporting was far from satisfactory. As a result, management decided to start a business from scratch in a brand-new company.

​We were charged with a task of arranging and maintaining accounting records using 1C:ERP in the new company with the same business processes and organisational structure.

​First thing we faced with – our Client wanted to have, by the commencement of the project, the description of all business processes of the accounting and roles of project participants: on the part of the Client (over 30 employees) and on our part (18 specialists); despite the disagreement about “how it must be”, we met the Client’s wish.

​The second challenge was a huge nomenclature (over 10 000) of items of goods and materials. We had to study and unscramble it and set all reference materials in order. Then, we had to customisetheaccountingsoftware for subdivisions and branches.

​The next issue was connected with a lack of branch accountants’ qualification; they didn’t know how 1C:ERP system worked. Since February, Client company’s accountants had started to record day-to-day activities in the system, but each of 25 accountants had their own opinion as to how to make entries. It turned out that none of them was trained to work with the system. We closed the first quarter and corrected all errors manually. Therefore, we fully understood all working peculiarities of the system and customised it taking into account specific aspects of Client’s business. After that, we could share our knowledge with other participants of the accounting process; we moved to the stage of training Client company’s accountants.

​We organised small teams, and each team took a “bunch” of branches. On our part, a leading specialist with an extensive experience in 1C implementation was appointed to customise 1C:ERP system. Then, through trial and error, the system setup began. However, we clearly understood how source documents had to be transformed in reporting. On our part, 10 specialists and 8 assistants worked on the project.

​In order to increase the efficiency of 1C:ERP implementation, we regularly carried out briefings where all members of the team gathered and shared their experience and achievements in the system setup and the training given to Client’s employees. The rest of project participants used best practice of their colleagues to speed up the process.

As a result, at the end of the second quarter, 23 of 25 branches were trained fairly well, and they significantly reduced the technical error rate! However, work with 2 branches went not really well, and we had to redo all work for them. Nevertheless, financial statements were prepared in automatic mode, without any manual finalisation, and met all standards of fairness!

Big and complex software was set up, and the accounting process became automated at a good level. Since then, the Client has promptly obtained all necessary data in the convenient format. Tax risks were significantly reduced. Automation of many accounting functions resulted in the decrease in number of Client’s accountants. Costs for the accounting office fell from 3.5 million to 2 million per month.

We have completed another major due diligence review

Management company that represents one of the major shareholders of a heat generating company from Siberia engaged UHY Yans-Audit in an external independent review of the state of accounting and the assessment of tax and commercial risks resulted from work of former managers.


​Our professionals carried out all necessary due diligence procedures. Based on results of such procedures, management took initial steps in the improvement of management processes in the company. Our report was considered and approved by Customer’s audit committee.

Audit of compliance with licence agreements

Company that owns rights to registered trademarks on the territory of the RF (well-known cartoon characters) concluded a number of licence agreements for using its trademarks: imprinting logos on promotional items, production of sweets and other confectionery, manufacturing and sales of children’s toys and issue of children’s books based on the cartoons.

​Under the licence agreement, payment for using the trademark was based on revenue from sales of products released under the trademark; such revenue was disclosed in Licensee’s quarterly reports.

​Licensee asked us to conduct a sample audit of information contained in those reports.

​Based on results of audits of some licensees, we found violations related to royalty calculation and licensed territory of sales; we also detected cases of product shipment to affiliated entities at an understated price, failure to pay royalties in time and other violations.

​Based on the violations detected, we calculated damage incurred by the Licensee (unpaid royalties) and fines provided by the licence agreement.

Our SOX experience. Internal controls testing

Our firm is registered with thePublic Company Accounting Oversight Board (PCAOB), a U.S. non-profit organisation that oversees the work of audit firms. It entitles us to audit the financial statements of companies whose securities are sold on the American stock market.

​Under an annual audit of a Russian subsidiary of an American public company, our specialists, as part of an international work group, together with their colleagues from UHY LLP(,conducted annual audit procedures in respect of testing the compliance of the audited entity’s internal controls with SOX404. Our SOX experts were trained by an American SOX professional who represented the parent company’s auditor. We started SOX testing procedures in 2008, and since then we have conducted them on an annual basis. Our SOX experts carry out all necessary testing procedures, fill in all reporting forms and deliver results of their work to Houston. 

Tax risk insurance

Continuously opening its own shops, a leading retailer (top 3 in Russia) acquired ownership of suitable A leading retailer (top 3 in Russia) continuously opened its own shops and acquired ownership of suitable retail space throughout Russia.


Deals were often structured as a purchase of 100% shares of (stakes in) the company that owned such real property.

​In situations like this one, owner risks being held liable for tax violations committed during previous tax periods (three calendar years preceding the year of tax audit).

​Our firm was engaged in an external independent expert examination of such risks. We have successfully carried out over twenty similar projects in seven regions of Russia.

We have completed the preparation of a full set of investment documents for obtaining the financing for a project from a foreign fund

Transport (taxi) company asked us to carry out a comprehensive assessment of investment prospects of scaling the current business model to regions, i.e.: an active geographic expansion of the current business into regions in order to attract investments in the project.

Having completed the work, we prepared the following documents necessary for the submission of the project to the investor: investment memorandum, assessment of company’s financial conditions and a financial model of the project.

Staff performance assessment

Transportation & logistics company, which handles daily delivery of food to shops of one of the biggest Russian retailers, asked us to assess man-hour efficiency of its staff.

We used the time and motion study (TMS) as an assessment tool. TMS recorded all operations performed by employees during their working hours. Data received via TMS were recorded in the workday sheet of each employee.

​As a result, we defined actual work time expenditures of each employee, which formed the basis for our opinion concerning staff optimization and performance rates for each category of job titles as well as recommendations on changes in the existing business processes.

We select professionals only in areas of our activities and expertise

Our clients often ask us for assistance to make sure that key staff they plan to employ in financial or legal departments have appropriate qualifications.

​It’s no secret that ordinary recruitment agencies are not highly competent in accountancy, law, taxes and finance.  

​Our HR department successfully solve these tasks engaging subject matter experts from the relevant departments in job interviews; when it is necessary to recruit top managers, interviews are also conducted by our Managing Partners.


​For example, last September, an Australian company specialising in software for mining industry contacted us as they sought a financial controller for their Russian subsidiary. Moreover, the financial controller was to be a direct subordinate to the Manager of the Head Office located in Australia.

​Based on the request from the Australian office, our HR specialists collected an applicant pool and carried out job interviews with the candidates. The second round of interviews was held in English by the Head of the IFRS Department of UHY Yans-Audit. 

After these two stages, we selected top 5 candidates to be considered by the Australian office. The third round of job interviews was conducted in our office by the Client via Skype.

​We believe that such no-nonsense approach of our clients to the selection of key employees is reasonable and helps employers considerably reduce risks of unforeseen problems that may occur in further work.

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