The Impact of Russian Deoffshorisation Measures

Considering the cause and magnitude of offshorisation in Russia, and the reasons and main directions of the current fight for deoffshorisation, is no easy feat.

Still, speaking at the 6th Cyprus Professional Services to International Business Conference, Dmitry A. Pentsov, Senior Associate, FRORIEP, Switzerland tackles this very issue, analysing, furthermore, the recent decisions of the Supreme Arbitration Court of the Russian Federation dealing with quasi-trust structures and off-shore entities (aggressive tax planning, hiding the beneficial owner's identity in real estate transactions etc.). 

Pentsov notes that, contrary to perhaps prevailing conceptions, ‘offshorisation’ is not a Russian national phenomenon: it is used among many developed economies, and denotes the process when nationals of a certain state organise and conduct their domestic economic activities through the use of foreign law and entities.

Russia, for example, prefers the offshore jurisdictions of Cyprus, Luxembourg, the Netherlands, and Switzerland.

Turning to causes of offshorisation in Russia, Pentsov explains that the view that offshorisation is equatable with tax avoidance is disputable, considering the relatively low levels of personal and corporate taxation in Russia.

Alternative explanations could be a general mistrust among businessmen towards the Russian state, or the lack of confidence in the Russian judicial system.

According to President Putin, Pentsov explains, the offshore nature of the Russian economy has become a byword, with experts calling this phenomenon a ‘run from jurisdiction’.

In fact, it is imagined that 9 out of 10 significant transactions, concluded by large Russian entities were not governed by domestic law.

The fight for deoffshorisation, Pentsov explains, reflects an existing global trend, though notes a few reasons lending to the Russian fight.

In essence, the Russian government does not want to relinquish control over crucial economic assets to entities outside of Russia, as doing so is considered as affecting economic growth crucial to solving social problems and achieving development goals.

Giving a general overview of measures currently in place aimed at deoffshorisation, Pentsov lists such cases as strengthening information exchange with foreign jurisdictions, measures aimed at politically exposed persons, and disadvantaging offshore entities, via, for example, tax means.

Delving deeper into measures aimed at strengthening information exchange with foreign jurisdictions and Russia, Pentsov examples Cyprus’ case, noting that many amendments have been made since October 2010, to further intensify information exchange.

Following several case studies, Pentsov concludes that the proposal for ‘controlled foreign companies’ would not necessarily result in the change of jurisdictions used to structure Russian-related activities, though could result in the increased use of common law trusts by Russian nationals and companies. Moreover, the concept of the ‘tax resident of Russia’ would indeed result in the decline in the use of domicillary companies, and existing case law involving ‘offshore entities’ demonstrates the need to properly structure and document commercial transactions, which should have a real economic goal.


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