Russia has suspended the tax agreement with Latvia: what does this mean?


On September 26, 2022, the President signed decree on suspension agreements with Latvia on the avoidance of double taxation and on the prevention of tax evasion in respect of taxes on income and capital. The Decree came into force from the date of its signing.

In accordance with the procedure for suspending international treaties, the president must submit to the State Duma a draft federal law on suspension of the agreement. This procedure is established in paragraph 4 of Article 37 of the Federal Law “On International Treaties of the Russian Federation”.

Latvia unilaterally suspended the agreement is valid from May 16, 2022. This move has many implications. Artur Dulkarnaev, financial expert of the Rusprofile service, spoke about the key implications in terms of Russian rules on controlled foreign companies – CFCs.

Russia has suspended the tax agreement with Latvia: what does this mean?

I am a tax resident of the Russian Federation and a CFC owner in Latvia. How will breaking the tax agreement between Russia and Latvia affect me?

Certain grounds for tax exemption of CFC profits will not apply to Latvian companies

The presence of a foreign company controlled by a tax resident of the Russian Federation does not always entail tax consequences in Russia in terms of personal income tax for such a tax resident of the Russian Federation.

The fiscal meaning of the rules on CFCs boils down to the fact that in Russia, at the level of the controlling person of a CFC, retained earnings of a CFC are subject to Russian personal income tax. Russia, as the state with which the controlling person has the closest relationship, claims to tax the distributed profits of a controlled foreign company and tax the undistributed profits of a controlled foreign company as well.

Distributed profits are ordinary dividends. Dividends from participation in a foreign organization are subject to ordinary Russian personal income tax as ordinary income of a tax resident of the Russian Federation. Such income, among other things, is indicated in the personal income tax return in the form 3-personal income tax.

Undestributed profits – this is that part of the profit of a foreign company that remains after the announcement and distribution of dividends. Such retained earnings of a foreign organization are taxed through a special mechanism. The special mechanism is called rules on controlled foreign companies.

Very often there are situations when the Russian personal income tax does not arise in relation to retained earnings of a CFC. This happens because there are many situations where profits are exempt from taxation. The tax code has a list of such exemptions.

For example, the profits of active foreign companies are not subject to personal income tax. The profits of foreign companies registered in the EAEU countries are not yet taxed. There are other grounds for exempting CFC profits from taxation.

In order to take advantage of some of these grounds and not tax CFC profits with Russian personal income tax, some additional conditions must be met.

One of the most common additional conditions is that Russia has a tax agreement with the state where the CFC is located. This additional condition applies to the following grounds:

  1. You will no longer be able to use the effective tax rate as the basis for exempting CFC profits from taxation in Russia. If a CFC abroad pays taxes plus or minus the same as those paid by ordinary Russian companies, then this is recognized as a basis for exempting the profits of such a CFC from taxation in Russia. Russian CFC rules do not have the task of taxing the profits of an ordinary company twice, which is already paying fair taxes by Russian standards somewhere abroad. This is one of the most popular grounds for exempting CFC profits from taxation.
  2. If your CFC is an issuer of transferable bonds; bank or insurance company, then the profit of such a CFC will no longer be exempt from taxation in Russia.

Financial statements of Latvian companies need to be audited

Russian rules about CFC design obligation to submit several documents:

  • Notice of participation in foreign organizations;
  • Notice of Controlled Foreign Companies;
  • Personal income tax return in respect of income in the form of retained earnings of a controlled foreign company.

In order to correctly calculate the amount of Russian personal income tax in relation to retained earnings of a CFC, you need to understand the amount of profit or loss of a CFC. Russian tax rules state that the profit or loss of a CFC is determined two ways.

The first the way to determine the financial result of a CFC is to determine the financial result according to the financial statements of the CFC. Second the way to determine the financial result of a CFC is to create a full-fledged tax accounting system according to Russian rules, as if the CFC were an ordinary Russian company like a simple LLC-shka.

Determining the profit or loss of a CFC based on financial statements — it’s a privilege. Because it is not necessary to do tax accounting according to Russian rules and the financial statements clearly state how much profit and how much loss. Doing a full-fledged tax accounting of a foreign company according to Russian rules is difficult and incomprehensible.


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Since the determination of the financial result according to financial statements is a privilege, the legislator has introduced conditions when this is possible. Either the country where the CFC is located has entered into a tax agreement with Russia, or there is an auditor’s report regarding the financial statements, which says that everything is in order.

In a situation where there will soon be no tax agreement between Russia and Latvia, in order to enjoy such a privilege and use financial reporting data to determine the profit or loss of a CFC it is necessary to additionally hire auditors and audit financial statements.

Sometimes an audit of financial statements is carried out because it is required by the national rules of the country where the CFC is located. In other words, the audit is carried out regularly and without reference to Russian CFC rules. In such a situation, it seems that not much will change.

  • You will simply need to send an additional document for translation and simply attach an additional document in the taxpayer’s personal account when submitting a CFC notification.

Typically, an audit of financial statements costs somewhere between 5-10 thousand euros. This is very conditional. And the translation of the audit report into Russian can cost several tens of thousands of rubles.

If you do not attach an audit report, then the tax office may fine you 500 thousand rubles.

In 2022, I am no longer a tax resident of the Russian Federation and the owner of a CFC in Latvia. How will breaking the tax agreement between Russia and Latvia affect me?

You will most likely not be affected by the termination of the tax treaty.

Russian CFC rules apply only to tax residents of the Russian Federation. If you are not a tax resident of the Russian Federation, then the Russian CFC rules do not apply to you. In other words, you may choose not to file either notices of participation or notices of controlled foreign companies.

The dates on which the tax status is determined in the context of the CFC rules are important.

For the purposes of filing a notice of participation, tax status is determined, for example, on the date of incorporation of the foreign company. If you, for example, created a foreign company on September 28, 2022, then you need to submit a notice of your participation in this organization only if you lived most of the time in Russia during the period from September 28, 2021 to September 28, 2022.

For the purposes of filing a CFC notification, tax status is generally determined as of December 31 of the calendar year following the year in which the CFC’s financial year end date falls. The fact is that the notification of the CFC is submitted by the controlling persons. And controlling persons are, first of all, tax residents of the Russian Federation and only then all the rest.


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Usually because the status of a tax resident of the Russian Federation is determined on the date of the decision on the distribution of profits made in the calendar year following the year in which the end of the financial year falls in accordance with the personal law of the CFC, and if such a decision is not made, then only on December 31st.

If you are not a tax resident of the Russian Federation on December 31, 2022, then you most likely do not need to file a CFC notice in 2023. By April 30, 2023, you must submit a CFC notification for the 2022 tax period in respect of the foreign company’s financial year that ended on December 31, 2021, only if you were a tax resident of the Russian Federation on December 31, 2022.

If you are not a tax resident of the Russian Federation on December 31, 2022, then you do not need to file a CFC notification at all in 2023. This applies not only to CFCs in Latvia, but also to any other CFCs.


Cover photo: Shutterstock / Ingus Kruklitis

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Source: RB.RU by rb.ru.

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