Russia has got only a few anti-offshore laws which do not scare offshore-loving businesses.
Photo: Larisa Martynova
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Russian Companies Still Long for the Sea
Despite the government’s encouragement for Russian companies to stop using offshore registration, foreign jurisdiction is still growing popular with Russian businesses. But now foreign jurisdictions do not come down only to offshoring.
The Russian Central Bank recommended banks in a statement this fall demanding additional documents from offshore companies which wish to open an account with them. According to the statement, a bank may want to inquire what transactions and with whom a non-resident would like to have and ask for references from other banks for the company and its founders. This move is not binding, so we should not expect a huge impact from this recommendation. Unlike Western countries with detailed anti-offshore law, Russia has got only a few documents which do not scare offshore-loving businesses. “During the liberal reforms Russia had no specific laws until 1999 that could ban the most notorious offshore schemes,” says Dmitry Golubtsev, author of the book, Practice of Tax Evasion and Capital Outflow. “In 1999, Russia adopted Article 40 of the first part of the Tax Code to fight transfer pricing. But introducing the concept of a market price it uses quite a wide corridor of deviation from it (20 percent), which enables many companies to use offshore firms as easily as before without violating Article 40.” Less than a year ago the Finance Ministry published the concept of the draft General Directions of Tax Policy for 2008-2010 promising to do away with all tax evasion schemes within four years, review deals on avoiding double taxation with offshore territories and encourage deals between the Federal Tax Service and major companies on pricing. However, none of these steps have been implemented yet. It is generally believed that the YUKOS trial made Russian business to think twice and cut on its overseas activities voluntarily. However, this is not the case.
Cyprus Trails Britain and the Netherlands
Tax advisors note that Russians are still increasingly interested in low-tax jurisdictions. This is true for such well-known offshore zones as Cyprus, British offshore islands and new destinations. “Cyprus is still growing popular for registering business,” says Mikhail Sobolev, Vice-President for the CIS at Consulco International Group. “The popularity is still because of an agreement on avoiding double taxation between Russia and Cyprus in 1998. Later, Cyprus went through a tax reform which made its tax laws even more attractive for investors. 2,000 new companies were registered in Cyprus in 2006 alone. There was a time when an inflow of clients slowed down after Russian securities market authorities said that Cyprus discloses information on beneficiaries. But when it became clear that it was only information about investment firms, banks and insurance companies, the inflow picked up its usual speed.” Mikhail Gorlov, head of the international department at Tax Consulting UK explains: “Registrating and servicing firms is still four or five times less expensive in Cyprus than in any other jurisdiction with agreements on avoiding double taxation. That’s why Cyprus is still the leader for Russians to set up holdings.” Experts note to changes in the size of companies that are now registered in Cyprus. There is substantial growth in small and medium-size businesses and a decline in major businesses. But it would be too early to say that major business is leaving Cyprus. Last year GidroOGK and RUSAL set up a joint venture in Cyprus to manage the construction of the Boguchany power metal combine.
The same is true for other favorite islands of Russians – the British Virgin Islands (under official statistics, the UK beat Cyprus in investments in Russia in the first half of 2007 sending $15 billion to this country) and the Channel Islands (Guernsey, Jersey and Sark). Unlike the new EU member Cyprus these islands are classic offshore territories that are traditionally looked at with suspicion. However, the world’s largest aluminum company, United Company Rusal, where Russian RUSAL and SUAL hold 88 percent and Glencore owns the rest, was registered in Jersey. Russian major online search engine Rambler Media is also registered in Jersey.
Apart from the UK Cyprus has to compete with Luxembourg and the Netherlands. The latter has recently become a mighty rival for Cyprus. Under the Russian-Dutch agreement, if a Dutch company owns more than 25 percent in a Russian firm and has invested more than ˆ75,000 in it, it can receive dividends from the firm with a 5-percent tax. What is more, these dividends on the account of a Dutch firm will not be viewed by Dutch tax authorities as revenue which is to be taxed for profits. “Money on the account of a Dutch firm can then be used for different international investment projects as the Netherlands has numerous agreements on avoiding double taxation with developed countries,” Dmitry Golubtsov explains. “But if the owner of the money wants to send it to any classical offshore, it can then use a company from the Netherlands Antilles.” The Netherlands also beat Cyprus in the first half of 2007 investing $11.8 billion in Russia while Cyprus invested $8 billion, more than Luxembourg with $6.7 billion. “Dutch firms often act as a sort of sluice between corporate firms in offshore countries and corporate firms in other countries such as Russia or the United State,” says international consultant Niels Rovers. “The main advantage of the Netherlands is that other countries including OECD nations and Russia (a candidate to enter the OECD) does not look at it askance as they do at Jersey or Isle of Man.” Mikhail Gorlov from Tax Consulting U.K. agrees: “The Netherlands and Luxemborg are more expensive than Cyprus but they work hard to make their taxation systems attractive for non-residents. The same goes for other EU members. They tighten anti-offshore laws and make their own more attractive.
Tax advisors also point to an increasing interest to countries with tax laws even harsher than in Russia, such as Denmark, Switzerland and Austria. “Under Austrian laws, a firm is taxed 34 percent without profit distribution, and in case of distributing profits among founders the tax goes up to 50.5 percent due to calculating capital profit taxes,” say Ton Kemp from Kemp, Hoogstad & Partners. “However, these countries have advantageous geographic positions and high international status, and the Russian holdings that make active international expansion prefer them and estimate these benefits higher than tax evasion in other jurisdiction.
Among exotic places to avoid taxes analysts mention Estonia which has no taxation on retained earnings. Those who trade with South East Asia find Hong Kong increasingly attractive.
Observing the Proprieties
Apart from geographic discoveries Russian business learnt something more in this subject. Offshoring is necessary not only to avoid taxes. “I can’t think of an example recently when clients would be interested in creating an international holding only with the aim of tax optimization,” says Natalya Luchkova from Kemp, Hoogstag & Partners. “Normally, there are several goals – protection of ownership, creation of a vehicle to attract international investors and prospects of holding an IPO on Western stock exchanges.”
It is proved by the fact that such notorious schemes as transfer pricing on exports, fictitious import of services, tolling etc are not widely used now. As a result, more taxes are being collected. In the first half of 2007, tax authorities collected 37 percent more of the VAT (598.7 billion rubles) than last year. And it is not because of legislation as the law on transfer pricing has not yet been adopted but it is about the menacing power of the YUKOS case. The trial scared business though not till death. A blunder was discovered last years after President Putin’s visit to the Netherlands. Mr. Putin came to congratulate the Dutch on importing the record-high volume of Russian goods but according to the Dutch statistics agency, 2.5 times fewer goods were imported compared to official Russian statistics. It turned out that the Netherlands calculated the actual goods imported while Russia did not go into such detail. The only explanation for the phenomenon is that Dutch firms are used in agent schemes by offshore traders as importers to evade taxes.
However, the trend in using foreign jurisdiction for tax optimization only is quite clear. “Tax evasion is not the key thing for most companies now while considering international registration,” says Alexander Ermolenko, head of corporate policies at the FBK company. “If we range reasons for foreign registration, protection of ownership will be number one. The next one will be building relations among shareholders. Third, it is the balance of interests between managers and employers.”
The YUKOS trial where its lawyers won the case in a Dutch court also acts as a good reason to protect your ownership with the help of offshoring. This victory makes the shareholders still hope for a success in the European Court of Human Rights in Strasbourg. Image considerations also play a big role in going for a foreign registration. Cyprus and British offshore zones are blacklisted in a number of EU states, and companies registered there are under particular scrutiny. Therefore, many companies decide to set up additional firms in countries with a good reputation. Evrazholding, for example, in 2005 sent its assets from Cyprus-based Mastercroft to Luxembourg’s Evraz Group S.A.
A tax advisor who preferred to the unidentified explains: “90 percent of Russian major business is built in this way. Beneficiaries own classic offshore companies on some islands. These companies own a holding registered in a decent European country which in its turn holds assets in Russia.”
Elena Razina
All the Article in Russian as of Nov. 19, 2007
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