Russia on the EU blacklist. How does it impact Czech taxpayers?

In February, the European Union added the Russian Federation to the EU list of non-cooperative jurisdictions for tax purposes. From a tax point of view, this move may also have a significant impact on Czech taxpayers, especially with regard to the application of the Controlled Foreign Company (CFC) Rules in relation to direct or indirect shares in Russian companies or the reporting obligation under DAC 6. Do any of the obligations apply to your company?

Let us now take a look at which entities will be affected by Russia’s listing and their newly arising obligations.

1. CFC Rules Application

  • Who is affected by the rules?

All companies that directly or indirectly hold a stake in the share capital of a Russian company must check whether they are affected by Russia’s inclusion on the EU blacklist. These entities have to determine whether they fall within the definition of the controlling participation for the application of the CFC rules.

The CFC rules also apply to all companies that have a permanent establishment in Russia.

  • What are the practical impacts?

The companies concerned will be obliged to follow Section 38fa of the Income Tax Act and to tax all income of the controlled (Russian) companies at the level of the Czech controlling (parent) company (i.e. in the calculation of the corporate income tax of the Czech company for the given period) in proportion to their participation in the share capital. Thus, the activities of the Russian company will be viewed as if they were carried out by the Czech controlling (parent) company itself. The related income and expenses will therefore be subject to taxation in the Czech Republic according to Czech corporate income tax rules.

  • When do these rules start to apply?

The above procedure will have to be applied in relation to all controlled Russian companies that are on the EU blacklist at the end of their tax year. Thus, the current issue is particularly relevant for those entities whose Russian-owned companies have a financial year and whose tax year ended on or after 23 February 2023.

If the Russian companies have a calendar year-based fiscal year, it will be crucial for them whether Russia remains on the list of non-cooperative jurisdictions after the autumn update in October 2023.

  • Decision key

The following questions may indicate to you whether the CFC rules concern you:

1) Does your company record shares in other companies?

– If yes, the following question is relevant to you.

2) Do these shares include (i) direct shares in companies in Russia or (ii) indirect shares in other companies in Russia in the structure below?

– If yes, the following question is relevant to you.

3) Does your company, alone or jointly with affiliates, directly or indirectly hold more than 50% of the share capital or voting rights of this taxpayer or have the right to more than 50% of its profits?

– If yes, you should pay close attention to the CFC rules.

4) Does your company have a permanent establishment in Russia?

– If yes, you should pay close attention to the CFC rules.

2. Reporting obligation under DAC 6

The reporting obligation will apply to arrangements involving a deductible cross-border payment made by a Czech company to a Russian affiliate or any other affiliate of a Russian company from countries on the list of non-cooperative jurisdictions (within the meaning of paragraph 1(b)(2) of Article C of Annex 3 to the Act on International Cooperation in Tax Administration). In practice, this is a situation where a Czech company makes payments to an affiliate in the jurisdictions in question that reduce its tax base in the Czech Republic.

For the sake of completeness, we add that in this case, it is not necessary to examine the main benefit test (i.e. obtaining a tax advantage).

So far, the GFD has issued only a brief statement on the above information.

If you have assessed, based on the above criteria, that the above obligations apply to you, or if you have doubts, please do not hesitate to contact us. We will be happy to discuss your situation with you and suggest an appropriate course of action.

We informed you about the EU blacklist update in our February article. This information was also published in the Financial Bulletin (3/2023) of the Czech Ministry of Finance which provides an updated list of countries effective as of 23 February 2023.

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