Legal Highlights: Deoffshorization in action. Andrey Goltsblat and Alla Zverkova for The Moscow Times
CFC (controlled foreign companies) rules came into force in Russia on January 1, 2015. However, the first tax declarations (personal income tax and corporate profits tax) that will include the profits of CFCs will be filed by Russian tax residents (“controlling persons”) only in 2017.
Of course, back in 2015 the owners of foreign companies and settlors of foreign unincorporated structures were required to file notifications of participation in foreign companies (establishment of foreign unincorporated structures). However, in view of insignificant amount of fine (50,000 rubles) for large businesses, many owners of offshore companies and structures ignored this requirement in order to buy time to determine the fates of their foreign assets.
Therefore, today it is difficult to draw a firm conclusion on the success of the deoffshorization plan of the Russian government. For example, the voluntary disclosure campaign under Federal Law No. 140-FZ (so-called “amnesty of capital”) did not yield the desired result. The Federal Tax Service received approximately 2500 special declarations, which is next to none for such a large country as Russia. It will be recalled that the amnesty of capital released persons who submitted special declarations from administrative and criminal liability for commitment of tax and currency control offenses on condition of disclosing information on foreign assets, such as real estate, vehicles, securities, participation in foreign companies and unincorporated structures, and foreign bank accounts. A corresponding provision in the Tax Code guaranteed tax free receipt of the disclosed assets from the nominal owner.
It should be noted that, literally, the deoffshorization initiatives (the law on the amnesty of capital, CFC rules) do not require repatriation of assets into Russia or liquidation of foreign companies and unincorporated structures (e.g. trusts, funds). These initiatives are aimed at the disclosure of offshore assets and structures and the development of such a taxation regime that the holding of Russian business through offshore companies and structures will not provide tax savings. On the contrary, taking into account only taxation, now it may be more interesting to build a holding structure under a Russian holding company or a foreign holding company that declares itself a Russian tax resident. This status is available for foreign companies whose place of effective management is situated in Russia and allows such foreign companies to benefit from the Russian participation exemption regime (exemption for incoming dividends on condition of a minimum 365-day holding period of at least 50 percent shareholding in the company paying the dividends; exemption for capital gains from the sale of shares on condition of five-year holding period). In addition, CFC rules introduced provisions on the tax free receipt of assets from foreign companies and unincorporated structures by Russian tax residents upon their liquidation within the established period — generally January 1, 2018, with certain exceptions.
Despite these seemingly beneficial terms, the disclosure of foreign assets and liquidation of foreign structures is not going on as speedily as expected. Nevertheless, Russian beneficial owners soon will have to decide the future of their offshore structures.
The Russian government currently undertakes active work on the mechanisms of information exchange with foreign jurisdictions. On July 1, 2015, the Convention on Mutual Administrative Assistance in Tax Matters came into force for Russia. This Convention has been signed by 107 countries, including classic offshore jurisdictions that have been used by Russian business for decades like BVI, Belize, Bermuda, Cayman Islands, Cyprus, Jersey/Guernsey, Gibraltar, Liechtenstein, Panama, Seychelles. It should be noted that not all jurisdictions that signed the Convention have ratified it yet, e.g., the United States has postponed it since 2010.
The above-mentioned Convention allows Russia to exchange information with participating jurisdictions upon request beginning from 2016 reporting year. The mechanism of information exchange is also usually included in double taxation treaties concluded by Russia and is in fact already underway, which can be illustrated by many recent court cases where the Russian tax authorities have successfully obtained information from such countries as Cyprus, the Netherlands, Switzerland and others. However, so far the information exchange has been limited to countries that concluded a double taxation treaty with Russia (which does not include such jurisdictions as BVI, Panama, Belize, Liechtenstein) and has not been carried out on a large scale. This situation may change with the beginning of automatic exchange.
On May 12, 2016, Russia acceded to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (an implementation document to the above Convention), which already has 87 signatories (including such classic offshore jurisdictions as BVI, Belize, Bermuda, Cayman Islands, Cyprus, Gibraltar, Jersey, Guernsey, Liechtenstein, Malta and others). Herewith, Russia undertook to start automatic exchange in September 2018 (i.e. information for the 2017 reporting year).
According to the above Multilateral Competent Authority Agreement, in order to start the automatic exchange, each participating country should (among other things) have in place the necessary laws to implement the Common Reporting Standard (CRS) and provide notification to the OECD Coordinating Body Secretariat with a list of jurisdictions with respect to which it intends to exchange information. The respective bill has been drafted by the Ministry of Finance and is expected to be passed during the spring session of the State Duma.
When the automatic exchange starts, Russian tax authorities will be receiving information on foreign bank accounts of Russian tax residents and foreign bank accounts of foreign legal entities controlled by Russian tax residents, including account details, account balance and amounts paid or credited during a calendar year.
In this regard, a compelling need is developing for the Russian beneficial owners to decide on the existence and disclosure of their offshore structures, participation in which is not liquidated by the end of 2016. Many business owners have already preferred to surrender Russian tax residency status or to transfer shares in their foreign companies into an irrevocable discretionary trust (which is not a CFC). Others are reconsidering their foreign structures in view of the forthcoming transparency. However, complete abandonment of the use of offshore structures is rare. Obviously, tax reasons alone are not sufficient for the success of the deoffshorization plan. In this context, the prospect of a progressive personal income tax rate does not add to the incentives to deoffshorization and maintaining Russian tax residency status.
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