EU-Wide Concerns on the Effect of Russian “deoffshorization”

On November 19^th, the Federation Council, the upper house of Russia’s parliament, approved a new tax law as part of President Vladimir Putin’s “deoffshorization” initiative created to return Russian capital and assets from foreign offshore jurisdictions.

The law introduces amendments to the country’s tax code that will oblige Russian owners of companies registered in offshore tax havens to declare ownership and pay taxes in Russia. The law obliges Russian tax residents to declare undistributed profits of controlled foreign companies. Minimum profits subject to declaration will equal 50 million in 2015, 30 million rublesin 2016 and 10 million rubles after 2017.

In accordance with the said law, a Russian company or individual with ownership of more than 50% of a foreign organization in 2015 and with 25% such ownership from 2016 is categorized as a “controlling entity.” The individual threshold will fall to 10%, if Russian residents’ total shareholding is more than 50% of a controlled foreign company.

Penalties amounting to 20% will apply for failure by controlling persons to fully declare and pay taxes into the Russian budget.

Deputy Chairman of the Federation Council Committee for Economic Policy, Sergey Shatirov states “A large part of the Russian economy is linked to offshore tax shelters in one way or another. The use of offshore havens by Russian business causes large damage to the country’s interests,” adding that anonymous ownership of offshore structures were used for criminal activity, including tax evasion and corruption.

The implementation of this new tax law will yield an additional 150-200 billion rubles in tax revenues for the Russian budget annually.

According to expert estimates, about $2 trillion has fled Russia in recent years through offshore schemes.

In light of Cyprus’ strong strategic partnership with Russia, the new Russian tax law has been stirring concerns among Cypriot businessmen of the effect this will have on the Cypriot services industry. This concern is not confined only to Cyprus; in fact, professionals practicing in all major European financial centres are concerned. It is widely believed that the impact of deoffshorization will be significant and unpredictable.