The Managing Director of our Moscow office introduces the debate
set to change the way Russian business works Russian business is
certainly facing a challenging time. The Russian Government has
sights set on the offshore business of Russian entities and
individuals, and when they get their way it may have wide-reaching
implications not only for Russian business, but for anyone doing
business with Russian partners across the globe.
It's not a new concept, and is something most major
economies are facing today: big business uses offshore economies to
benefit from tax-efficient strategies and maximise profit. But
this, of course, means that major governments are missing out on
tax revenue, and they are trying to rectify this.
First of all, it should be noted that the definition of
"offshore" under draft law will be different to the
traditional. The government is currently working on a list of
countries with favourable tax regimes they will consider to be in
the "offshore zone"; the bad news for Russian business is
that this is likely to include favoured economies such as the
Netherlands and Luxembourg. We await the release of this list with
much interest; it should come in the next few weeks.
Russia is also extending its reach to include not just
companies, but any sort of offshore entity; this means trust
companies and private wealth will not escape the long arm of
Russian tax law.
Foreign investors may so far be thinking they've escaped;
unfortunately, you won't. Any joint venture established with
Russian partners will also be looked at – and the threshold
for ownership is low. Entities or Russian individuals which are
recognised as Russian tax residents with more than 10% of interest
in controlled foreign corporations will be affected by
de-offshorization. Ten per cent is not a lot – in
international practice a company is recognized as controlled if a
resident owns 50% or more - especially when you consider trusts,
portfolios and other non-business entities come under fire as
There is some good news: if controlled foreign corporations
distribute profits back to Russia through dividends, the dividends
are taxed – at the rate of 9% or if funds are distributed
from the non-offshore countries, then zero tax applies - and so
won't be affected by this law. On the other hand, if you
don't distribute profits by dividends, the rates being
discussed under de-offshorization are a 20% flat rate for Russian
corporates and 15% for individuals. It's all designed to
encourage entities to set up in Russia itself.
We expect to see the list of "offshore zones" to which
draft law will apply sometime in May, but it is possible the
Russian parliament will not see the list before being required to
vote on the law. Intention is to adopt the law by July, and for it
to take effect in the new financial year. However, there are a lot
of questions – and not many answers. At first sight, it looks
like de-offshorization will create additional burdens (like
reporting) for Russian businesses, but full details of the intended
law are still not available.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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