1 million rubles fine for a Chinese company: what a Russian tax resident should know

In recent years, thousands of Russian entrepreneurs have opened companies abroad. One of the most popular destinations was China. Registering a Chinese company allows you to work with local suppliers, participate in international trade, accept payments in yuan and build a full-fledged business in the world’s largest market.

However, many owners of foreign companies make the same mistake: they believe that if a business is registered outside Russia, the Russian tax authorities will not know about it or it does not fall under the requirements of Russian law. In practice, this is far from the case.

If a Russian citizen remains a tax resident of the Russian Federation and at the same time owns a company in China, he may be subject to the rules on controlled foreign companies (CFC). Ignoring these requirements can result not only in additional taxes, but also in very serious fines, which in some cases reach one million rubles.

Why the Chinese company is not exempt from obligations to the FTS

Many entrepreneurs see business registration in China as a completely autonomous activity, unrelated to the Russian tax system. This logic seems clear: the company is registered in another country, operates under Chinese law and pays taxes in China.

But for the Russian tax legislation, the key is not the place of registration of the company, but the status of its owner.

If a person is recognized as a tax resident of Russia, that is, spends more than 183 days a year on the territory of the Russian Federation, his foreign assets and interests in foreign companies may fall under the requirements of Russian tax control.

That is why the presence of a Chinese company does not automatically create problems, but creates certain obligations to the Russian tax service.

What is CFC and why is it relevant to business owners in China?

CFC is a controlled foreign company. This term refers to a foreign organization that is under the control of a Russian tax resident.

In practice, CFC rules often fall under:

• companies in China;
• companies in Hong Kong;
• firms in the UAE;
• business in Singapore;
• European companies owned by Russian citizens;
• foreign holding structures.

If a Russian resident controls such a company directly or indirectly, he is obliged to notify the tax authorities of his participation and, in certain cases, provide additional reporting.

Many entrepreneurs mistakenly believe that CFC concerns only large corporations and international holdings. In fact, even a small trading company registered in China to work with suppliers or organize export-import operations can fall under the law.

What notifications are required

The main problem of most foreign business owners is not taxes, but the lack of timely reporting.

Russian law provides for the obligation to notify the tax authorities about the presence of a stake in a foreign company. In addition, if a company is recognized as a CFC, there may be additional obligations to provide financial statements and other documents.

It is especially important to understand that tax liability can occur even if the company does not actually operate, does not make a profit or is at the start-up stage.

For the FTS, the key fact is the control of the foreign organization itself.

How to find out about a Chinese company

Until a few years ago, entrepreneurs often relied on banking secrecy and limited exchange of information between states. Today, the situation has changed dramatically.

The global financial system is becoming increasingly transparent. International tax information exchange mechanisms allow public authorities to obtain information about foreign assets, accounts and corporate structures.

Additional sources of information for tax authorities can be:

• banking operations;
• currency control;
• international exchange of financial data;
• information of counterparties;
• data of foreign registers;
• documents submitted by the taxpayer on other matters.

Therefore, the strategy of “letting no one know about the company and hoping that it is not known” is becoming less effective and more risky.

For what can be fined 1 million rubles

The greatest interest of entrepreneurs is the issue of fines. The headlines about the million-dollar sanctions look frightening, but it is important to understand that this is not about a fine for owning a Chinese company.

Liability arises from violation of the requirements of the law.

Large fines may be associated with failure to provide information about the CFC, lack of mandatory reporting or failure to provide documents at the request of the tax authority.

The size of the sanctions depends on the specific violation, the circumstances of the case and the current legislation at the time of verification. That is why it is important for owners of foreign companies not to focus on rumors on the Internet, but to consult with specialists in international taxation in a timely manner.

Why Businesses Find Out Too Late

There is a common situation: an entrepreneur opens a company in China to work with factories, launches imports or exports, solves logistics and banking issues, but practically does not pay attention to tax issues in Russia.

The first years of activity can take place without any requests from the state authorities. This creates a false sense of security.

Then comes the demand from the tax office to provide information on the foreign company. By this point, the deadline for filing notifications has long passed, the documents have not been prepared, and the size of possible fines begins to grow.

As a result, the problem, which could be solved by several correctly filed notifications, has to be eliminated in the format of a tax dispute.

Chinese business is becoming more popular – and control is also increasing.

The development of economic ties between Russia and China has led to a noticeable increase in the number of Russian entrepreneurs opening companies in China. For many, this is not just a procurement tool, but a full-fledged business model with its own employees, offices and production contracts.

At the same time, state bodies are paying more and more attention to foreign structures of Russian residents. The reason is simple: foreign companies are becoming an important element of international business, which means that the issues of transparency of ownership and tax control are becoming especially relevant.

The presence of a Chinese company is no longer surprising. However, with new opportunities, new responsibilities emerge that can be costly to ignore.

Conclusion

Opening a company in China is not a violation of the law and can be an effective tool for international business development. However, for tax residents of Russia, such a step automatically creates certain obligations to the Federal Tax Service.

The main mistake of most entrepreneurs is not the registration of a foreign company, but the lack of understanding of CFC rules and reporting requirements. This is the reason for large fines, which can amount to hundreds of thousands and even millions of rubles.

Therefore, before starting a business in China, it is important to understand not only the issues of company registration, bank account and logistics, but also the tax consequences in Russia. In international business, timely reporting is often much cheaper than the subsequent solution of problems with tax authorities.