Taxpayers who missed the 2022-2023 deadline for processing transfers of assets from controlled foreign companies ("CFCs") have been in the waiting for many months for an extension of the benefits of tax-free transfer of assets from CFCs. And now, this week, the bill to extend and expand the exemption was approved by the Federation Council, which means that it will soon take effect and the process of voluntary deoffshorization will continue.

In addition to extending the exemption, the draft law contains a number of important new points that make this option more attractive. In particular, it is now possible for a holding period of a CFC in respect to an asset to be credited to the controlling person (or their Russian company), which would in sum increase the timeframe the controlling person (or company) is deemed to hold the asset for Russian tax purposes.

Conditions for applying the benefit when transferring assets from a CFC remain the same (Clause 60.2 Article 217 of the Russian Tax Code):

• Transfer of property (other than cash) or property rights is made from a CFC to an individual who, as of December 31, 2021, was its controlling person or founder (or a close relative of such a person);
• The transferred property (or property rights) belonged to the CFC as of March 1, 2022;
• The individual receiving assets has provided the tax authority with the set of documents necessary to enjoy the benefit.

At the same time, the transfer of property may be made either for a consideration or gratuitously – the way in which the asset was acquired has no impact on the opportunity to enjoy the benefit.

Receiving assets from a CFC while applying the exemption under Clause 60.2 Article 217 of the Russian Tax Code allows you to enjoy the following benefits:

• Exemption from tax on income of the controlling person when receiving an asset from a CFC;
• Where a controlling person subsequently disposes of assets which were received from a CFC, that person will be able to claim a tax deduction:
  • The person controlling a CFC will be able to take into account the period during which the CFC owned property when calculating its own period of possession (applicable only to Russian assets); previously, this benefit was not available. This will allow certain taxpayers to enjoy a tax exemption under Article 217 of the Russian Tax Code when selling their assets. In addition, if a controlling person of a CFC receives shares in Russian companies from the CFC and further invests these assets in the authorized capital of a Russian company in which this person is the sole shareholder, such Russian company will also be able to count that holding period in a preferential manner when selling these assets.
  • If the controlling person of a CFC is unable to apply the income tax exemption when selling the received asset, such person will be able to reduce their tax burden by deducting the "expenses" in form of the value of the property received from the CFC according to the CFC's accounting records at the time of transfer, but no higher than the market value.

The proposed amendments to the Tax Code to extend and expand the exemption are favorable for taxpayers due to the continued political and sanctions restrictions for Russians and the ongoing difficulties involved in disposing of foreign assets.

If you encounter difficulties or inconsistencies in the application of this benefit, we recommend you seek professional advice. Our team constantly monitors changes in the tax laws related to the possibility of tax-free deoffshorization of assets, and provides professional assistance in transferring assets while enjoying this benefit.