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Offshore, welcome home!
Why offshore on Russky Island has a great future
On August 3, 2018, the President of Russia signed a package of laws providing for the creation of special administrative regions (SAR) with special conditions for conducting business activities for foreign companies and the possibility of creating international funds. According to experts, the experiment, which lasted three years, can be considered successful. How the Far Eastern offshore is developing, why 2021 was a breakthrough year for the SARs, and what problems prevent the deoffshorization of Russian companies - in the material from EastRussia.
Attraction of capital
Now in Russia there are two SARs. These are the islands Russian (Vladivostok) and Oktyabrsky (Kaliningrad). 47 companies are currently registered in both CAPs (there are four on Russky Island). Residents of the CAP attracted over 50 billion rubles of investments in the Russian economy, and tax deductions exceeded 800 million rubles.
Today, the offshore company on Russky Island has four members that were previously under Cypriot jurisdiction. Its first resident in September 2018 was the international company Finvision Holdings of Artur Avetisyan, the main shareholder of Vostochny Bank.
In March 2019, the second resident, Donalink, of the coal magnate Andrey Melnichenko, the main beneficiary of the Siberian Coal Energy Company (SUEK), entered the Primorsky SAR.
A breakthrough year can be considered 2021, when on about. Two residents registered in Russian at once. In January SUEK's subsidiary SUEK LTD moved there. In May, Rosneft transferred to Russian jurisdiction the Cyprus company Colmati Trading Limited ("Kolmati").
An "entrance ticket" to the SAR starts at 50 million rubles. This is the minimum amount that a new participant must invest in the Russian economy in order to register an international company in the re-domiciliation procedure (change of jurisdiction while maintaining its organizational and legal status and corporate structure). These can be investments in their subsidiaries or any other business. In exchange, he receives tax preferences. Among them - the rate of 0% on income received by the company in the form of dividends, provided that on the day of the decision to pay them, it has had at least 15 percent contribution in the authorized capital of the organization paying dividends or depositary receipts giving the right to receiving dividends. A 5% tax is imposed on income received by foreign persons on shares of international holding companies, which are public at the date of dividend payment.
“To date, three residents of the SAR - Finvision Holdings, Donalink and SUEK LTD - have fulfilled their investment obligations in the amount of 166 million rubles. I can note that there are several companies that are planning to enter the SAR on Russky Island by the end of the year, "- said EastRussia Pavel Sheika, Director of the Department for Consideration and Analysis of Projects of the Corporation for the Development of the Far East and the Arctic.
According to the interlocutor, interest in special administrative regions has grown with the adoption of the February amendments. In particular, in February, the State Duma adopted in the third and final reading a law that removes geographical restrictions on the re-domiciliation of companies from low-tax jurisdictions to special administrative regions of the Russian Federation.
“For example, in order to enter the SAR, it used to be required the presence of assets or affiliated companies in Russia. These restrictions have now been lifted. That is, a resident can conduct business in several states, but not necessarily in the Russian Federation. Accordingly, any foreign company that has branches, representative offices, business in at least any two countries of the world can become a member of the CAP, ”explains Pavel Sheika.
Director of the Association of Tax Consultants, cState Civil Service Counselor 1st Class Vladimir Saskov emphasizes that, considering the measures of tax incentives for business projects in the system of the CAPs of the Kaliningrad Region and the Primorsky Territory, it is important to note their systemic and complex nature.
“Tax preferences do not end with a“ zero dividend rate ”. They also include a number of property tax preferences, insurance premiums and, in some cases, even VAT. In this regard, it should be noted that the tax incentives proposed by the state will greatly contribute to the deoffshorization process. After all, most of the traditional international “tax havens” have practically ceased to exist due to the global consolidated position of the fiscal authorities of the world's leading economies, ”the expert says.
Plus, according to him, the consistent and systematic work of the Russian Ministry of Finance on deoffshorization is being carried out, including within the framework of the revision of international tax agreements. Preconditions are being formed for the reorientation of financial flows from traditional offshore companies.
“The creation of domestic, Russian islands of tax attractiveness will undoubtedly act as a zone of attraction for capital. As a result, we all expect an investment inflow and, accordingly, economic development not only of the designated zones, but also of the Russian economy as a whole. The task of the state at this stage is to a greater extent to develop non-burdensome but effective mechanisms to control residents of these zones, in order to prevent abuse of the right to broad tax preferences, ”comments Vladimir Saskov.
“The main aspect that may be of interest to potential residents is, of course, a reduction in the income tax rate, as well as exemption from income tax of exchange rate differences and exclusion from the tax base of income and expenses of companies within the framework of production sharing agreements for foreign mining projects. The issues of company registration are not so important for international holding companies with a large number of legal entities in the holding structure. The most interesting to get a residence will be Russian exporters who want to lower the tax rate after the revision of the tax agreements of the Russian Federation with Cyprus and Malta. It makes no sense to expect an influx of residents not related to the Russian economy, given the sanctions risks and toxicity of Russian capital, "says Yaroslav Kabakov, Director of Strategy at FINAM Investment Company
The decline of the Cyprus offshore companies
The deoffshorization process has been launched against the backdrop of a revision of the global tax policy in the part of the so-called transit jurisdictions, experts emphasize.
Galina Tkachenko, director of the Center for Independent Tax Expertise LLC, notes that the situation began to change back in 2018, when the Russian government prepared a resolution "On the conclusion of agreements on the exchange of information on tax matters." A list of 75 states with which automatic exchange of financial information is carried out was attached to the document.
In 2020, the Ministry of Finance of Russia began a "crusade" - earlier, President Vladimir Putin ordered to increase the tax rates on income from dividends and interest that flow to offshores. Protracted negotiations began with transit countries. Malta, Cyprus and Luxembourg agreed to revise the rates. It turned out to be more difficult with the Netherlands.
It was not possible to come to an agreement with the Dutch colleagues. On May 26, 2021, Vladimir Putin signed a law on denunciation of the double taxation treaty (DTT) with the Netherlands
As for Cyprus, the protocol to the agreement on the avoidance of double taxation with the "main offshore zone" became a real blow for Russian companies. It came into force in January 2021. According to the document, the tax rate on dividends received by offshores has increased to the standard Russian 15%. According to experts, this marked the end of the era of the Cypriot offshore companies.
The question "what to do next?" stood in front of hundreds of Russian companies, including in the Far East. Experts advised, for example, using a Russian sub-holding to distribute dividends at a zero rate in its favor for further reinvestment.
Alexander Tokarev, partner of the international auditing company KPMG in Russia and the CIS, singles out the possibility of moving to a “Russian offshore” as an alternative. He emphasizes that, subject to certain conditions in the CAP, dividend income received from subsidiaries will be subject to a zero rate. Moreover, the Russian government is seeking to improve conditions in domestic "offshore" areas. The plans are to reduce the rates of income tax and income tax in relation to the distributed dividends.
New interested parties
As noted in the Corporation for the Development of the Far East and the Arctic, while the SAR is of interest, first of all, among companies whose activities are related to the Far Eastern region.
“Either they have assets in the Far East or conduct business through companies in the Far East and Siberia. Geography and time zones play a significant role in the speed of business processes and the cost of doing business. At the same time, there are interested persons from central Russia, ”says Pavel Sheika.
But the legislation on Russian "offshore" is constantly being improved. And experts have no doubt that soon there will be much more residents of the SAR, the geography of companies will expand, as well as their industry diversity.
On April 22, 2021, an updated version of the draft law on additional tax benefits for international holding companies (MHC) was posted on the federal portal of regulatory legal acts.
The new edition allows the use of income tax benefits until 2035. The rate is reduced to 5% on all passive income.
KPMG says this may be relevant for holding companies in relation to dividends. Now, if they do not fulfill the conditions for a zero rate, they apply a 13% rate. Also, concessions apply to income from the sale of shares or shares of the company.
Moreover, players in the financial sector will be able to take advantage of the reduced interest rate on loans (now it is 20%). BUT IT-companies - in relation to income from intellectual property (now it is 20%).
The rate for dividend payments is reduced from 15 to 10%. From 20 to 10% - upon payment of interest and royalties (unless other rates are provided for by the agreement on the avoidance of double taxation).
At the same time, companies will have to fork out to take advantage of these benefits. MHC will have to take on investment obligations no longer for 50 million, but not less than 350 million rubles. Moreover, they are obliged to organize an office in the SAR with an area of at least 100 sq. meters and hire a staff of at least 15 people permanently or temporarily residing in the territory of the subject where the "offshore" is located.
Also, the Ministry of Economic Development plans to allow international personal funds to move to the Russian special administrative regions. The main condition is the value of the founder's assets from 5 billion rubles. Real estate abroad, shares in foreign companies, deposits in foreign banks, etc. are considered as assets.
Interestingly, the bills also stipulate the development of the offshore infrastructure.
For example, residents will be able to invest in social, cultural and housing and communal infrastructure facilities, and the term of such capital investments has been increased from two to three years.
Companies are changing their "registration"
KPMG identifies the main factors that make the change of jurisdiction relevant.
This, of course, is the presence in the structure of the group of companies that receive passive income from sources in the Russian Federation and are tax residents of jurisdictions that have concluded an agreement with Russia on the avoidance of double taxation.
It is also worth considering relocation if the Russian company distributes dividends in favor of foreign companies that are tax residents of the Russian Federation directly or using a “pass-through” approach. Considering that the right to apply a 0% tax rate in respect of such dividends is canceled from 1 January 2024.
Of course, you should first carefully check the compliance with all the criteria for obtaining the MHC status, since there are peculiarities and problems here.
"The cost of doing business, the general conditions within the CAP are now at least no worse than within the offshore", - emphasizes Pavel Sheika.
To make the re-domiciliation process convenient for big business, the package of laws on the CAP needs to be adjusted, he said. Alexander Abramov, expert of the Far Eastern Federal University, professor:
Experiment to create special administrative regions, which lasted three years, can be considered successful. "The process has begun."
The largest domestic companies are interested in the CAP mechanism (Gazprom, Gazprom Neft, Sberbank, VTB, Sibur, Rosneft, Severstal, Alrosa) and are considering the possibility of redomiciliation.
Among the factors influencing the decision about this: the threat of imposing sanctions, tax incentives, facilitated currency control.
However, from the point of view of the largest business, in order for the re-domiciliation process to be convenient for it, an adjustment of the package of laws on the ATS is required. The Russian government plans to make such an adjustment, it is supposed to include:
- Expansion of the types of companies that can register in the CAP.
- Exclusion from the tax base for income tax of organizations of income and expenses of international holding companies from participation in the implementation of exploration and mining projects (which is especially important for the Far East (FEF), where the structure of the economy is such that the mining industry, together with related industries, produces more than 50% of GRP). It is assumed that joint ventures of such companies can be registered in the SARs without creating separate divisions.
- The re-registration of the parent company requires the consent of the shareholders, which makes re-domiciliation impossible. The possibility of joining the SAR of subsidiaries of public companies solves this problem, but only in part, since this amendment can only be used by those foreign companies whose shares are listed on stock exchanges located in the countries of the Organization for Economic Cooperation and Development (OECD). Therefore, in the CAPs, for example, subsidiaries of Cypriot companies cannot be registered (Russia is also not a member of the OECD). Consequently, the proposal of the Russian government to expand the approach to include the possibility of circulation of shares of shareholders of international companies not only on the exchanges of the OECD countries, but also on the Hong Kong, Shanghai and Singapore exchanges is reasonable.
- It is also planned to mitigate the requirement for the immutability of the composition of shareholders of foreign organizations; reduction to 10% of the tax rate on profit from dividends for non-public companies and exemption from taxation in Russia of income of foreign branches of international companies, which may become an additional incentive for the re-domiciliation of companies in the SAR.
- Participants registered in the CAP before January 31, 2024 will be able to account for the value of investments in subsidiaries at market value. Thus, in the SAR, only “value gains” are taxed from the moment of re-domiciliation - this, in particular, may be of interest to development companies, as well as to business centers.