Goltsblat BLP advises that the Federal Tax Service (FTS) has approved BVI's removal from the list of countries (jurisdictions) not exchanging information with the Russian Federation for tax purposes from 1 January 2018 (the relevant order is pending registration with the Ministry of Justice).
A country's removal from the FTS 'black list' will only matter for exempting a controlled foreign company's profits in Russia under specific circumstances (such as the effective tax rate, the bank or insurer status, or the role of negotiable bond issuers). Even so, the second pre-requisite for such an exemption to be granted is that a DTT (Double Taxation Treaty) has to be in place with the country in question, which is certainly not the case with the BVI.
What is of interest in this new development is that, according to the Russian FTS, the BVI will shortly be ready to launch transfer of information about local company beneficiaries in response to a request from the FTS. This will immediately affect those whose operations are still unrestructured, those who continue to adopt approaches that are clearly outdated as well as those using BVI companies as a tool for investing personal funds (for instance, in securities).
This method is a widespread practice as it excludes taxation of 'paper' profits that might be generated even in the case of USD losses resulting from devaluation of the Russian rouble, helps to solve problems with the FX legislation and gives additional comfort in asset protection. At the same time, given that such companies are actually managed (transactions with assets are undertaken) from Russia, there is an unavoidable and significant risk that they may be recognised as Russian tax residents. For many, this might turn into an unexpected addition of 20% profit tax plus fines and penalties on top of 13% personal income tax.
In this context, we would like to reiterate the need for restructuring the approach as soon as possible given that alternative options are available for structuring ownership of foreign securities portfolios, which, while incurring the duly payable 13% tax, do not have such considerable disadvantages.
First published 6th October 2017
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