JURY IS STILL OUT FOR THE FINAL RUSSIAN ‘DEOFFSHORIZATION’ PLAN

Seven months passed since Russian President, Vladimir Putin, had first announced the plans for ‘deoffshorization’ of the Russian economy and no decision has been reached on the final amendments to the tax legislation.

Putin had originally instructed the Government to ensure that the new tax laws were approved by the Duma until July 1st, but this did not occur. Speculators attribute this delay to an effort to improve the bill from what the Ministry of Finance had initially drafted.

Prime Minister Dmitry Medvedev has reportedly given instructions to improve the bill and while the improved version was due by the end of June, there has been no announcement of the final text of the law.

Meanwhile, the Finance Ministry, the Ministry for Economic Development and the Russian Union of Industrialists and Entrepreneurs are to develop a system to stimulate the transition of companies under Russian jurisdiction and to increase the profit threshold beyond which companies would be subject to the law, following their meeting with the Russian Union of Industrialists and Entrepreneurs on June 18th. The directive includes improving the procedure whereby companies will be recognized as controlled foreign corporation if a Russian resident owns at least 50% of an entity plus 1 vote.

On the previous reading of the bill, as developed by the Finance Ministry, Russian individuals and legal entities that control offshore companies would be required to report and pay taxes on their undistributed profits, if they had a stake of at least 10% in an offshore company. Exempted from this reporting and tax requirement would be companies which are either:

•  Listed on a recognised Stock exchange; or
•  Based in countries of the Eurasian Economic Union; or
•  Non-profit organisations and not entitled to distribute profits to their members; or
•  Tax resident in a country included on the list for exchanging tax information with Russia and pay tax at an effective rate of more than 15%.

Deoffshorization plans are especially important to the Cypriot services industry, given that Cypriot companies were among the most popular investment vehicles into Russia. The impact which these amendments to the Russian tax laws will have on the Cypriot economy is yet unknown. It is certain that the rules of the game have changed and Russian investors have a lot more to look for in their investment vehicles than before.