The new rules continue to shape the way Russians think, plan and comply, since their concerns around succession and asset protection may now be even more relevant.

Tax treatment of Russian tax residents have seen all manner of changes, such as around the succession and estate planning. This article by Ayshat Gaydarova, the head of Russian private client and tax at Withers, the international law firm, drills into some of the details. The editors of this news service are pleased to share these views with readers and invite responses. Email tom.burroughes@wealthbriefing.com

The last couple of years have seen a period of uncertainty around the use of trusts for Russian tax residents, following the introduction of Russian “controlled foreign corporation” rules in 2015. The CFC rules lacked the clarity and guidance to provide assurances for clients and trustees, resulting in some agonising choices and a reluctance to actively plan. 

The new rules continue to shape the way Russians think, plan and comply, since their concerns around succession and asset protection may now be even more relevant. Since the reporting deadlines fell at the start of this year, we are now starting to see some of the practical applications and clarifications from the Russian tax authority on the rules. We highlight some positives here, as well as reasons why a trust may be the right option for them.

There is still no alternative to trusts in Russia, despite several attempts to change succession rules and introduce more flexible succession tools. The good news is that the new tax rules have finally addressed tax inefficiencies on capital succession between family members via trusts, making them tax neutral. Some families are increasingly concerned about the threat to their asset protection in light of global transparency. Trusts may not be a universal solution, but they do help protect and manage assets to the standards required by many families.

The following are some of the most common questions around trust structuring options from a Russian tax and legal perspective:

Are trusts recognised in Russia?
No, but there is no restriction in Russia for residents to enter into legal arrangements under foreign law, as long as it does not contradict the public policy in Russia. The new term “non-corporate structure” introduced in the Russian Tax Code in 2015 defines trusts and similar structures for tax purposes in Russia. 

Can trusts be tax-efficient?
Trusts are tax neutral in Russia, as the settlors are generally taxed on undistributed trust income at the same income tax rate of 13 per cent that they would have paid on income generated from assets they owned directly. At the same time, beneficiaries will not be taxed on trust income which has been taxed in the hands of the settlors or other controlling persons. 

Settlors with no powers and rights in the trust may be exempt from CFC tax and reporting exposure. Where the settlor or other controlling person is resident outside Russia, income tax will be deferred in Russia until such time when Russian resident beneficiaries actually receive income distribution.

Who is reportable in case of corporate settlors?
There is no requirement for the ultimate beneficial owners of such entities to submit notification on the establishment of a trust, but they may be subject to reporting separately in relation to such an entity. CFC reporting may arise if they control the trust, regardless of its legal structure. 

Can 'control' be established via corporate settlors, protectors and appointors?
Yes, the recent official clarifications clearly suggest that a “look through” approach is most likely to apply in these scenarios. Bear in mind, however, that in some cases establishing control is not sufficient for a person to be subject to CFC rules. 

When does the trust become “controlled”?
Recent clarifications stated that the controlling person should be identified either when income distribution is made, or at the end of the calendar year following the end of the trust accounting year for each relevant CFC assessment period, whichever comes first. This means that termination of control before any such date would also mean that no tax and reporting obligations arise for the relevant period (only applicable to financial years starting in 2015). 

Is capital contribution taxable?
No, as long as trust capital contributions are made from funds/assets belonging to the settlor or his close family members. It can therefore get tricky where corporate settlors are used for trust funding, however there is a concession for controlled companies funding trusts which are controlled by a close family member. 

Are beneficiaries taxed on capital distributions in Russia? 
No, as long as the settlor is a close family member. This is the most important change, which finally made trusts tax neutral in comparison with the position under the old rules. Under the old rules, any distributions made out of trusts were taxed as income. As there is no inheritance tax in Russia, succession planning via trusts was never particularly tax efficient. Under the new rules, where trusts are used for succession, it can be done without an additional tax burden.

It is important to remember, however, to check whether a capital distribution of a certain kind would be treated as capital (“asset”) in Russia for this rule to apply. 

If the settlor is not a controlling person, should they report the trust when it is set up?
Yes, the rules are clearly devised to put the requirement on any settlors to make relevant notifications. 

Benefits in kind
This is another positive development which allows the tax free use of assets held in trusts by beneficiaries - close family members of the settlor - unless there is undistributed income which can be 'matched' with the benefit in kind distributions. 

What about loans?
Interest free and low interest loans issued to the settlors and beneficiaries are most likely to be taxed under the general tax rules where material gains released on the amount of saved interest is taxed at the 35 per cent income tax rate in the hands of the recipient. 

Is voluntary audit of accounts helpful?
Yes, voluntary audit will allow use of trust accounts (unless the trust is located in a treaty country) without reference to the Russian tax code for tax calculations. It will also help minimise dealings with tax officials in Russia. 

Losses
Losses for 2012-14 are allowed, subject to a number of conditions and prorated according to the special rules. It is therefore important to extract and keep records of accounts from 2012 for all existing trusts as of 1 January 2015. 

What if a trust generates no income?
If a trust generates no income or has losses in the relevant period, the controlling person is still subject to CFC reporting, but has no obligation to submit a self-assessment tax return.  

What is “income”?
Broadly, income will include income (cash and in kind) and capital gains released on the disposal of assets. 

Trustee's liability
There are several cases in Russia where subsidiary liability is assessed on third parties connected with the taxpayers, therefore we cannot rule out that trustees may be involved in tax disputes over the outstanding Russian tax liabilities of settlors and beneficiaries of the trusts in the future. Whether any such claims will be successful or assisted by the foreign courts remains to be seen.

Reporting of trustees
Under current Russian tax rules, foreign trustees will only be required to submit annual reporting and pay property tax in relation to the Russian real estate property held directly by the trust. 

Are trusts subject to Russian currency control restrictions on investments? 
No, investments held on a trust's bank account are not subject to these restrictions and can be traded freely. 

Interaction with the common reporting standard
There is nothing more costly than a mistake that must be fixed with Russian tax officials. Mistakes in reporting leading to discrepancies in CFC and CRS reporting must be avoided. It is essential to cross check and prepare full documentary evidence where discrepancies may arise from differences in legal requirements, which cannot be unified.