Heading offshore for a corporate advantage
RT: What are the attractions for Russians of using offshore companies?
AS:“The offshore concept has emerged in the middle 1980-s in the Anglo-Saxon world (to date, the great majority of offshore jurisdictions are still the British dependent territories and members of the Commonwealth). The absence of taxation in the country of incorporation, relatively confidential treatment of the company owner’s info, no requirement to prepare financial statements of the company, – all these make offshore corporations one of the most popular vehicles, employed by the western businesses.
Russian companies, which entered the European and worldwide markets in 1990 – 2000, had to deal with the fact that there were certain “game rules” to follow. Incorporation of companies in foreign jurisdictions made it possible for Russian entrepreneurs to widen the geographical horizons for their businesses, to increase the number of export and import agreements and the volume of the funds received from overseas investors, to achieve positive trade balance, etc. The steep increase in the number of double taxation avoidance agreements, made by Russia in 1990 – 2000, played its vital role, too.
For sure, one cannot deny the fact that the availability of the new market vehicles lead inevitably to their excessive use by some members of business community. Nevertheless, the possibility to work with non-resident companies within the frames defined by the legislation has allowed Russian businesses to operate on external markets with greater convenience and facilitated the flow of overseas investments to Russia.”
RT: What industries and business sectors are more or less forced to open offshore companies and for what transactions?
AS: “The concept of the open market and the principle of business competition have inspired Russian businesses to strive for reducing their expenses to the low limit and to search the world market for the most beneficial offers. It means that Russian businesses have often had to tune their business practices to the requirements of their overseas partners and investors. Sometimes, the only way to meet those requirements is to incorporate a non-resident company. Let us draw some examples:
- in the majority of cases, Russian companies trading with China have to incorporate companies in Hong Kong and to make payments through them, for such is the requirement of their Chinese partners;
- Russian businessmen who enter into supply contracts and services contracts with the EU countries are to have a common European VAT-number and/or a customs number, available for EU-registered companies only;
- Russian companies, which attract major overseas investors and get ready for the IPO, have to organize their assets in a particular way, in order to provide for financial transparency of the business and to be able to prepare consolidated accounts for the audit under the IFRS; and for these purposes overseas holding companies come very handy.”
RT: Companies registered in Cyprus are very popular – why is this?
AS: "In answering this question, it would be worthwhile to mention two facts: firstly, Cyprus is not an offshore in its traditional meaning; secondly, the scope of popularity of Cyprus companies is not limited to Russian business environment, they are widely used by businesses from many other countries, including the EU members. The reasons for the popularity of Cyprus companies are fairly obvious:
- favorable tax treatment of businesses, which in the first instance is manifested through the lowest income tax rate in Europe, the 10%. There are other “bonuses”, for instance: no withholding tax on dividends, interests and royalty paid by a Cyprus company; the possibility to apply a zero capital gains tax rate under certain conditions; no regulations on thin capitalization and controlled foreign companies, a vast network of double taxation avoidance treaties.
- the incorporation procedure is relatively simple, and the requirements to the corporate structure are few. The government of Cyprus, just like in other countries of Anglo-Saxon law family, reduced its involvement in the corporate affairs to the minimum. In reality, it means that there are no legal restrictions regarding the directors or shareholders of a Cyprus company; neither there is a minimum authorized capital required by the laws of Cyprus. All this, combined with a simple “notice filing” procedure of a company incorporation and amendment of corporate documents, makes Cyprus rather a popular jurisdiction with the foreign investors, who appreciate the absence of unnecessary administration obstacles.
- Cyprus enjoys the status of a EU-member country, which means that Cyprus companies trade under the same customs rules, foreign exchange and antimonopoly laws and other EU Directives (e.g., the “VAT” Directive), as the other European countries. Thus, Cyprus companies may obtain common European customs numbers (EORI-number) and undergo VAT registration for obtaining an all-European VAT number.
- The requirement to prepare annual audited accounts enables the prospective investor or buyer to check the financial affairs of the company.
RT: How does the use of offshore companies complicate Russian corporate dealings?
AS: “Any legally-relevant actions of foreign companies in Russia are carried out within rules set by Russian law. Taking into account the general legal principle of non-discrimination this means that non-resident companies are governed by the same rules as Russian legal entities, except the cases specifically determined by law (for example, articles 306 – 312 of the RF Tax Code), which provide for deviation from ordinary business procedures and may result in extra costs and time.
Thus, entrepreneurial activity regularly carried on by a foreign entity in the territory of Russia in the cases determined by law will lead to the creation of a permanent establishment within the meaning of article 306 of the RF Tax Code, which is associated with additional administration costs for the accreditation of a representative office, tax registration and onward preparation and filing of accounts according to the rules set out for non-resident companies.
For Russian partners and counteragents of foreign companies, legal relations with non-resident companies may also create an obligation to act as tax agent in the remittance of certain types of income of a foreign entity and liability for failure to fulfill such obligation.
‘Technical’ difficulties may arise even with the paperwork formalizing the relationship between foreign and Russian companies due to the differences in regulation of internal corporate relations in the country of incorporation of a non-resident company and peculiarities of administration and document flow of foreign companies.”
RT: How does the interest in offshore companies reflect a lack of confidence in Russia’s legal and administrative systems?
AS: One of the obstacles the Russian entrepreneurs face when attracting foreign investments is that foreign banks and credit institutions doubt the efficiency of Russian law-enforcement and judicial system.
As a result, foreign banks investing in Russian economy agree to finance Russian businesses against pledge of inventories which are subject of export and import contracts (pre-financing practice) or against pledge of shares or participations in holding companies that hold Russian assets. However, non-Russian residency of such holding companies may be set by the bank as a mandatory condition for a loan-term credit. Similar conditions relating to transfer of Russian assets to non-resident companies more often than not are imposed by foreign investment firms as well. Thus, the interest of Russian businesses in foreign investors, on the one hand, and conditions set out by investors, on the other hand, constitute essential factors affecting the number of non-resident companies registered by Russians.
RT: How will Russian accession to WTO or increasing number of bilateral taxation arrangements affect the trend?
AS:“Today even major foreign economy experts do not venture to estimate all the consequences of Russia’s admission to WTO, but we dare say that harmonized pricing rules, IFRS, lower customs duties and other measures accompanying the implementation in Russia of common standards applied by WTO countries are more likely to boost the foreign operations of Russian entrepreneurs and demand for non-resident companies, than they are likely to cut this trend down. It is also worth noting that the existing list of WTO members already includes almost all leading economies of the world and some of the most popular offshore jurisdictions – Belize, Panama, St Kitts and Nevis, etc.
The growing number of double tax treaties and obligatory clause on tax information exchange and cooperation between tax authorities have long made fictitious the association with offshores of such concepts as ‘non-transparency’ or ‘confidentiality’ that exists in popular mind. Non-disclosure of identity of the ultimate beneficial owner of a business not only becomes an impossible, but often an undesirable consequence of incorporation in jurisdictions where corporate structure details cannot be requested from a public registry. To prove this point, we may remind that names of ultimate beneficial owners and chains of assets ownership of major Russian companies since long ago can be found in print, and this includes disclosures by beneficial owners themselves.”