Offshore reload

A sufficient amount of time has already elapsed in order to preliminary sum up the results of deoffshorization announced by the Russian government. The main changes in the legislation were prescribed in the new law on taxation of the profits of the CFC (controlled foreign companies), which officially came into force in early 2015 and immediately led to changes in the Russian business environment. The novelties had an impact both on foreign entrepreneurs that conduct their business in Russia and on Russian entrepreneurs that have financial assets abroad.

It is true to note that deoffshorization has affected the Russian and foreign businessmen in different ways. If the first ones were affected by the process to a lesser extent, where the main point of reform was the definition of the beneficial owner of income, the Russian business abroad was subjected to much more total and tough reforms.

If we look at the intermediate results of deoffshorization, then immediately noticeable changes are about the amount of tax burden and reporting, which in turn led to the optimization of business entities, and more specifically to reducing the number of foreign enterprises. Some experts note an increasing emphasis on the conduct of business by businessmen from the territory of Russia, but this can hardly be counted as the main goal of deoffshorization, although some of the businesses actually returned to Russia. This can be called the result of the introduction of the institution of a tax resident for enterprises, which are managed from the territory of the Russian Federation. As a result, in order to reduce the likelihood of adverse consequences, Russian enterprises mainly move their personnel to the region where the enterprise operates. It means that the legislator made a gross mistake, since now many workers find themselves on the territory of Panama, Austria, Germany and other countries. The shortcomings of this reform should include the change of the tax residence by individuals. Now those who have close relatives living or studying abroad in most cases, in the context of deoffshorization of the tax norms, decide to change the tax residence. In addition, they often have the sphere of life interests and principles outside the territory of the Russian Federation. This can be attributed to the consequences of not even a thirteen percent tax rate, but to reforming taxation processes and the taxation regime, and other relevant threats to doing business.

All this can certainly be attributed to the negative consequences of past changes, but there are also positive impacts. Now the enterprises have improved and optimized their management structure and brought comparisons of quantity to the quality of legal entities.

Last year was also marked by the adoption of the law on amnesty of capital by the State Duma of the RF. Of course, the development and approval of this law was influenced by the opinion of large private sector entities. The purpose of this lobbying was to prevent liability for information in the declaration on amnesty of property, as bank accounts and organizations that needed to be disclosed in a notification to the tax authorities about participation in foreign enterprises and other structures without the formation of a legal entity were indicated therein. This led to the fact that after the adoption of deoffshorization laws, the liability of individuals for these companies is completely eliminated before taxation. So, there is no tax, administrative, and, most importantly, criminal responsibility, which was the main goal of this law. But this law is rather controversial. The disadvantage is that, referring to the current rules, only those who are specified in the law 115-FZ are considered to be the beneficial owners, and this law does not affect foreign banking institutions, and therefore these accounts can not be declared or reported.

You can also note other provisions of the law that raise questions, for example, to property that falls under the declaration, namely, that is located in the states that are indicated in the "black list". If it is there, it should immediately be moved to the territory of the Russian Federation. But how can we carry out the process of reparation of assets of a foreign enterprise? There is no answer to this question. The very same blacklist is still not compiled, and the structure that should be engaged in this has not yet been formed. The Federal Tax Service of Russia is already publicly discussing the members of a possible list, and among them there are even countries with a favorable reputation, like Switzerland, Great Britain, Germany.

Questions can still be asked on the fact of tax amnesty, and more specifically on its distribution to property and bank accounts, which are valid on the date of declaration. After all, you can make a profit on the account, then transfer money to another account, which is formed at the time of declaring, and close the first one. And then the amnesty does not extend the operation itself with the help of which the person received income. After all, this means that amnesty for many people is useless, since it does not cover the risks of the past years. There is a different opinion on this issue, in fact, besides, the risks of declaring remain, which stops individuals from declaring their firms, bank accounts, and property.Many actually carry out preliminary analysis and consultations before filing a declaration with the tax authorities about the amnesty of their assets. And when calculating risks, a significant part of the individuals do not want to declare their assets.

Thus, analyzing, for example, October of last year, one can be sure that even a half thousand people have not submitted a declaration of amnesty, which is extremely small number. By the end of the year, this figure has reached two thousand, but this is still catastrophically small number compared with the expected tens of thousands. Perhaps the consequence of this can be considered that even by the head of state has noted the failed amnesty in his address to the Federal Assembly. He also drew attention to the small number of guarantees that are provided to the business. We will soon see the consequences of his words.

Experts often ask what exactly can entail a real, massive deoffshorization, what kind of regulatory amendments. In fact, no one conceals the impending changes in the deoffshorization legislation, and they are public, so everyone can join the discussion. But the amendments introduced are of a dualistic nature.

Pay attention to the changes regarding the controlled foreign companies, or rather the process of calculating their income. At the moment, it is normatively established that only enterprises that are registered in countries where there is an obligatory audit are eligible for pro-audited financial statements. Companies the states’ legislation of which does not provide for compulsory audit pay a tax on profits in the same way as firms registered in the territory of the Russian Federation. A good example would be a foreign enterprise that does not have any activity, but only has a foreign currency deposit. In this case, it must pay the income tax simply from a currency revaluation despite the fact that it carries out its operations in a different monetary equivalent. As a result, this enterprise wants to use financial reporting for the purpose of its basis for calculating taxes. Changes consist in fact that they give the chance to count on this reporting, and it is made and submitted to audit in a voluntary manner. Enterprises that are located in those states that have concluded an agreement with the Russian Federation on avoidance of double taxation do not require audit of accounts. The same enterprises that are in the countries that make the exchange of this information do not fall under this standard. It should also be noted that controlled foreign companies pay taxes according to the provisions that are provided for Russian enterprises, and the currency difference in the calculation of income between the currency where the company is registered and the Russian ruble is calculated by the rate that is set by the Bank of Russia. This novelty certainly has an exceptionally positive status.

Another reform can be considered the reorganization of the process associated with the closure, liquidation of enterprises, and more specifically with the continuation of the term for completion of the liquidation until 2018 and with the fact that the risk of registration of such enterprises as tax residents disappears. Many are in favor of this rule.

In addition, there is a process of clarifying which company can be recognized as a controlled foreign company. At the moment there is an instruction that if a person owns a foreign enterprise through some structure without forming a legal entity, for example - a fund/foundation or trust, then everything that is in its system is recognized as a controlled foreign company. And the new changes make the amendments of the following nature that if the "main" company is not recognized as controlled, then the downstream companies in its structure can not be recognized as those too. The foregoing breaks the illogical and erroneous system when it turns out that being in the role of a limited partner in a fund where there is only a right to part of the income, you nevertheless recognize all the other companies in the structure as controlled ones.

Many professional consultants are interested in what exactly new deoffshorization norms mean for them. They also reply that deoffshorization norms are not only laws that concern controlled foreign companies, but it is something more influential.

These are new changes regarding the transfer of information and reporting on the role of foreign companies and structures. Then, these are notorious controlled foreign companies and their tax residency. The changes also affect:

• beneficiaries;
• profits from the activities of companies;
• sale of shares or parts in organizations with real estate.

The latter is an exceptional innovation. In the past, however, tax payments fell only under the condition of direct ownership, now also under indirect one.

There are a couple of questions that cause bewilderment. Do you need to notify about all my participations, or specific one? On the one hand, the list of conditions that the legislator puts forth is clear and simple, but the practical part of the interpretation of norms causes problems, for example, in the areas of structures without the formation of a legal entity: trusts, funds/foundations, partnerships.

Immediately there is the following question: which of them is exactly recognized as a controlled foreign company? Moreover, this always directly follows with structures without the formation of a legal entity. In addition, it is worth noting that since 2017, when reporting on controlled foreign companies will be filed, it will be necessary to calculate their revenue part. After all, there is a lot of grounds for doubt, which derive from what is included in the tax base. A good example would be firms that calculate their income from information in financial statements, for example, by investing their money in certain financial projects. And if the firm invested (entered) at a high price before the implementation of the law, and now it leaves the project at the same price in foreign currency, which means that the company has no financial result in the financial plan. Analyzing the financial statements, we understand that the peculiarity of these data is that at the beginning of the year the investment should be demontrated at market value. And if we assume that the investment has greatly depreciated, what exactly will happen if one proceeds from information that is ostentatious in the financial statements? Then the income will be received, and the controlling person, which means the Russian tax resident, will have to pay the corresponding tax. And at our discretion, such a taxation regime is not economically fair. So it is necessary to resort to ways of tax planning that fall within the scope of the law.

In addition, these deoffshorization innovations have many unexplained moments. First of all, they concern controlled foreign companies and beneficial owners.

For example, let's consider a foreign enterprise that is the recipient of interest on the loan. According to the rules, it does not act as a beneficiary of this profit, as it does not manage its actions independently, because a certain shareholder, that is, an individual, is a tax resident of the Russian Federation. So an individual declares the income of this firm and pays thirteen percent to the treasury. On the one hand, everything is fair, legal, but we must also take into account that the foreign enterprise acts as the CFC and will enter the relevant tax base, which means that it will pay the tax twice.

The fact that this problem is one of the most prevalent in the light of the deoffshorization process, which is also well demonstrated by the survey of owners of large businesses. Of course, every Russian natural or legal person is not against paying taxes at the available rates. But double taxation is essential, and for some, a critical blow to their business. Even the notifications coming from the Ministry of Finance can not be assessed unambiguously, since out of three incoming letters from them, one contradicts the other.

The result of the foregoing is that due to the new deoffshorization law, it is now more profitable for many entrepreneurs to conduct business through foreign enterprises, rather than Russian ones.

A good example would be an individual that conducts his business through a foreign firm that is in a jurisdiction where the income tax is identical with the income tax in Russia. And if it is the same individual that conducts his business in Russia, then initially the company must pay the tax received from the income, and then when receiving dividends, it must additionally pay another tax on profits after taxation.

Proceeding from the above, it is logical to assume that the entrepreneur will prefer to conduct his business from the territory of another state.    

Of course, there are also unique aspects, for example, state orders, contracts, tax residency. The latter must be duly presented abroad. After all, if an enterprise carries out its activities on the territory of Russia, it pays taxes there, and is accordingly recognized as a tax resident according to deoffshorization legislation. But the world practice shows that the tax resident is the one who carries out the basic management of the enterprise. And these functions are entrusted to the board of directors, which is the main body of the enterprise. Initially the board of directors in the new deoffshorization legislation acted as the starting point for the recognition of an enterprise as a tax resident. But then this criterion when drafting the laws was excluded, in order to block the scheme, when the board of directors could hold a meeting in any jurisdiction convenient for itself.

After that, the remaining criterion is the managing officials and the executive body itself. And these subjects must be exactly where the enterprise acts as a tax resident despite the jurisdiction where the company is located. But if a foreign company is located, for example, in Austria, and there is its board of directors there, and there will be ongoing management carried out in Russia. Does it mean that there will be a dispute between the countries and their tax authorities about recognizing this company as their own one? In this case, the case is submitted to court, and the enterprise will be subject to double taxation.