On orders from the president, the Finance Ministry has proposed changes that would increase oversight of Russian companies' foreign beneficiaries and significantly limit the use of offshore companies to minimize tax payments.
President Dmitry Medvedev has requested legislation that would prevent Russian businesses from reducing their taxes through companies registered in countries with which Russia has double-taxation agreements. Specifically, he wanted to prevent the ultimate beneficiaries from being nonresidents in the country with the double-tax agreement.
Vedomosti has obtained a copy of the Finance Ministry's proposed changes to Article 7 of the Tax Code, which have been sent to the Justice Ministry for approval.
If it is determined that an individual or organization is the actual beneficiary of a Russian company and is not a tax resident of the country with which Russia has a double taxation agreement, the individual or organization and the earnings received would be subject to the Tax Code rather than the bilateral agreement.
The Economic Development Ministry did not respond to the changes within a month, meaning that it is considered agreed, the Finance Ministry said.
Sergei Belyakov, an Economic Development Ministry official, said the ministry supported the bill's concept, which addresses a request made by the president. "Strengthening the law regarding one's own citizens who are reducing taxes through foreign companies is an international trend," he said, adding that the Russian initiative did not look particularly aggressive.
The bill's main targets are dividends, royalties and interest payments from loans, said Alexander Zakharov, a partner at the Tsentr USB collection agency. He said those types of payments were typically the ones that businesses are able to decrease offshore.
Rustam Vakhitov, a senior manager at Pepeliaev, Goltsblat & Partners, said using the double-taxation agreement with Cyprus, a business can pay 5 percent on dividends, instead of Russia's 15 percent, and nothing for royalties and interest, compared with 20 percent in Russia.
Typically, a shell company with a nominal owner, such as a lawyer or accountant, is set up in a country where Russia has a double-tax agreement, while the actual beneficiary lives in Russia, Zakharov said. In some cases, the owner does not hide and registers in a true offshore, such as the British Virgin Islands, with which Russia does not have a double-tax agreement, he said.
Cyprus is by far the favorite jurisdiction for Russian business. According to State Statistics Service data, Russia received $56.9 billion in foreign investment from companies registered there last year, or 22 percent of the total. For the first nine months of this year, the figure is $5.2 billion, or 10 percent of the total.
Russia has agreements to avoid double taxation with 75 countries, Vakhitov said, but only Cyprus and a few others — the Netherlands, Switzerland and Belgium — are frequently used to reduce tax payments.
If tax officials start aggressively using the proposed changes, businesses will have it tough, Zakharov said.
Given how the proposal is framed, there is a risk that the authorities will start "nightmaring" Russian companies that pay dividends or interest to companies abroad, an executive at a major holding company said. Big business is already transparent in terms of which foreign companies belong to whom, he said, while the higher taxes would come in the middle of a crisis year.
Additionally, the executive said, it is often difficult to determine who will be the ultimate beneficiary in a deal. Dividends paid in Cyprus could be spent on the island, paid to another company or returned to Russia as new investments.
A tax official told Vedomosti that determining the ultimate beneficiary would be difficult, except in cases where the company has disclosed the information to the Federal Anti-Monopoly Service or the state's commission on foreign investments. It will be easier, however, after changes to the double-tax agreement with Cyprus are approved by the Russian government, he said. Russian tax officials will be able to request information from their Cypriot colleagues without any additional approval.
Severstal's Alexei Mordashov, MMK's Viktor Rashnikov and NLMK's Vladimir Lisin control their companies through firms registered in Cyprus, and Mikhail Prokhorov's main Onexim holding is registered there.
The main holding companies for Viktor Vekselberg and Oleg Deripaska are registered in the Bahamas and Jersey, respectively. Neither of the islands has a double-tax agreement with Russia.
Spokespeople for Severstal, NLMK, En+ and Onexim Group declined comment.