Initiatives for the “deoffshorisation” of the Russian economy

Vladimir Gidirim, Svetlana Yakushina and Dmitry Saratovkin EY Moscow, Russia

Vladimir Gidirim is a Partner and Svetlana Yakushina is an Executive Director in the International Tax Group at EY Moscow. Dmitry Sartovkin is a Senior Manager in Business Tax Services at EY Moscow.

The initiative for the deoffshorisation of the Russian economy is threatening to become the most momentous event in the field of Russian taxation in recent years.

I. Introduction

According to currently available draft documents, the deoffshorisation policy is expected to have the following main consequences:

  • an increase in the tax burden on many Russian holding structures organised with the use of foreign holding companies triggering a need for a fundamental review of activities carried on through such holding companies.
  • an increase in the tax burden on many operating structures, including those associated with foreign sales, financing, etc. Many operating structures will become economically unviable unless significant changes are made to them.
  • disclosure of beneficial owners in accounting statements. Enforcement of this requirement will be aided by systematic information exchange with EU countries and many offshore zones and by allowing the Russian tax authorities access to information constituting audit secrets.
II. Background

In February 2014 the Russian Ministry of Finance developed a 21-point plan (later reduced to 17 points) setting out the key areas of future development in the government's fight against the so-called "offshorisation" of the Russian economy. The plan has become unofficially known as the "national plan against offshore companies". The Finance Ministry's plan sets out general guidelines for the development of tax, accounting and criminal legislation, aimed at "deoffshorisation". According to those guidelines, further bills will be drafted in the second quarter of 2014 with a view to making amendments to the Tax Code and other legislation by the end of 2014.

Key measures in the plan include:

  • the introduction in Russian legislation of the concepts of "controlled foreign companies" (CFCs), "tax residence of organisations", "actual recipient (owner) of income" and "offshore company";
  • the establishment of measures aimed at combating abuse of double taxation treaties (tax treaties), including in particular the use of reduced tax rates provided for in such treaties;
  • the introduction of a requirement for Russian companies to disclose information on their "beneficial owners" in accounting statements, and the introduction of liability of executive bodies for failure to provide data or provision of inaccurate data;
  • • legislative framing of procedures for the disclosure and exchange between the Russian tax authorities and the tax authorities of foreign jurisdictions. This involves the conclusion of bilateral international agreements on the exchange of tax information and Russia's accession to the multilateral Council of Europe Convention Mutual Administrative Assistance in Tax Matters;
  • allowing Russian tax authorities access to information constituting audit secrets;
  • improvement of Russian transfer pricing rules, including raising the effectiveness of control over foreign trade transactions and reducing to zero the aggregate criterion for qualifying transactions as controlled where one of the parties to a transaction or its beneficiary is an offshore company;
  • introduction of criminal liability of legal entities for actions associated with money laundering and tax evasion. Preparation of a Framework for the Development of the System for Combating the Legitimisation (Laundering) of Proceeds of Crime and the Financing of Terrorism in the Russian Federation;
  • giving the Investigative Committee of the Russian Federation the right to institute criminal cases without liaising with the tax authorities (abolition of the previously obligatory tax audit report);1
  • other amendments to tax legislation, such as: clarifying the provisions of Russian legislation regarding the tax treatment of income of foreign companies from transactions involving the sale of shares in companies which indirectly own Russian immovable property, and improving procedures for the charging of assets tax and the recovery of tax and levy arrears from foreign companies which own immovable property in the Russian Federation; and
  • the possible introduction of regulatory restrictions on the participation of Russian persons in foreign entities classed as trusts or foundations.

The introduction of the concepts of "controlled foreign companies" and "tax residence" will be addressed in a separate article on the draft bill posted on the website of the Ministry of Finance on 18 March 2014. We will therefore focus here on the Ministry of Finance's other proposals.

III. Allowing access to "audit secrets"

The plan includes measures that would allow Russian tax authorities access to information and documents constituting audit secrets which were received and/or prepared by an audit organisation or an individual auditor in the course of providing services.

It is worth pointing out that this initiative is not something new. A bill2 of amendments to the Law Concerning Auditing Activities was drafted back in 2013, presumably in line with OECD recommendations presented in the context of negotiations on Russia's accession to the OECD.

The law does not currently provide for information about a client to be provided to anybody other than by decision of a court. The bill alters this situation by stipulating that "information and documents constituting audit secrets which were received in the course of providing certain audit-related services shall be transmitted to the tax authorities upon their request without the prior consent of the person to whom the services were provided".

Such audit-related services would include services in the course of which an auditor may receive information and documents which are of direct relevance and significance for the taxation of an economic entity (such as tax advisory services and legal advisory services relating to tax and customs matters).

In addition to the above-mentioned amendment, there is also a plan to prepare guidelines for auditors on checking information on owners of organisations and ultimate beneficiaries when auditing a company's accounting (financial) statements. The relevant bill is expected to be submitted to the government in October 2014.

IV. Beneficial owner of an organisation and beneficial owner of income: a confusion of concepts?

The proposals involve not only introducing a requirement to disclose information on the beneficial owner of a Russian organisation, but also creating a centralised register of beneficial owners which would be accessible by the tax authorities, including for the purpose of exchanging information.

A. Beneficial owner of a company

The concept of a "beneficial owner" of a company was introduced back in July 2013 in Law no. 134-FZ, which amended various legislative acts, including the law on the countering of illegal financial operations.3 For the purposes of that law a "beneficial owner" is understood to mean a physical person who, whether directly or indirectly, owns a company and is able to control it (i.e. a so-called "ultimate beneficial owner"). The law currently affects banks, brokerage companies, insurers, etc. which are required to "take measures that are reasonable and practicable in the circumstances for the identification of beneficial owners". These are the entities that are likely to supply information for the creation of the centralised register. Enforcement of this requirement would be aided by the introduction of criminal liability of managers of banks, insurance companies and other financial organisations for the provision of knowingly false or incomplete information about the real state of affairs.

B. Beneficial owner of income

It is not yet clear how the requirement to disclose the beneficial owner of a company would correlate with the concept of the "actual recipient (owner) of income" which is expected to be introduced to tax legislation. In particular, it is not clear how the term is to be interpreted for the purposes of applying tax treaties. As long ago as 2009, the idea was raised of introducing additions to Article 7 of the Tax Code which would have limited the operation of tax treaties to "beneficial owners" of income, but the amendments in question were not enacted at that time.

It should be borne in mind that the concept of the "beneficial owner" or "actual recipient" of income is actively used in international tax law as an instrument for combating tax treaty abuse. In general terms it essentially means that where a company which receives income (such as dividends, interest and royalties) is not the beneficial owner of that income, the company does not have the right to apply tax treaty provisions exempting the income from withholding tax or prescribing reduced rates. The OECD Tax Committee commented on this concept back in 1986 in a special Report devoted to "conduit companies",4 later in the Commentaries to the OECD Model Tax Convention, and recently in a 2012 Report5 which is specifically devoted to an attempt to define the term "beneficial owner". The OECD's position, as set out in those documents, is that a company which receives income cannot be considered as the beneficial owner of that income if it is an agent or a nominee or has limited powers to dispose of the income which effectively render it a conduit in respect of that income. An important criterion of beneficial ownership is the absence of a legal obligation to transfer income received to a third party.

Quite often in international holding structures the recipient of dividend or interest income from Russia might be a foreign company which is based, for example, in Cyprus, while the ultimate beneficial owner which controls the foreign companies might be located in Russia and control the business through a chain of sub holding companies. It is possible that information obtained as a result of the disclosure of the name of the ultimate beneficial owner could be used by the tax authorities to contest the assumption that the foreign companies which directly receive income (such as dividends and income) are the "actual recipients" of that income. Furthermore, the introduction of this requirement would provide a basis for implementing the CFC rules and the "tax residence" concept.

The adoption of the initiatives described above would probably require Russian groups with a foreign presence to review the level of "actual presence" (substance) of the foreign companies, the structure of their income and expenditure and the management system and operating model of their business. Particular attention would need to be paid to increasing the actual powers that foreign companies within the holding structure have to dispose of the income in question and assessing whether or not they have the attributes of conduit companies.

V. Taxation of profit from the "indirect" sale of immovable property in Russia

In accordance with current Russian legislation, income of foreign companies from the sale of shares in Russian organisations more than 50 percent of whose assets consist of immovable property situated in the territory of the Russian Federation is taxable at source in Russia.6 The existing tax rules have resulted in sales being conducted through a foreign company rather than a Russian company as a means of protecting the income received from Russian withholding tax.

Under the amendments proposed by the Ministry of Finance, profit earned from the sale of the above-mentioned shares would be taxed irrespective of the "level of ownership" at which the sale takes place. In other words, "indirect" sales of immovable property (or of companies by which it is owned) would be taxed in Russia under domestic law.

Provisions of this kind are already contained in a number of treaties (such as those with Luxembourg and Switzerland). Since, however, there are no corresponding provisions in the Russian Tax Code, until amendments are made to Russia's domestic tax law those treaty provisions cannot be applied in practice, as international treaties cannot establish the principal elements of a tax obligation, but only contain "distributive" provisions defining the tax competence of a state in respect of a particular item of income.

One of the legislative proposals might, therefore, be to introduce provisions requiring tax obligations to be fulfilled directly by a non-resident seller of such assets, or requiring a non-resident purchaser to withhold tax from resources paid to a seller. In order for the new provisions to be effective amendments would also have to be made to Article 13 of most Russian tax treaties, similar to those made to the Cyprus and Luxembourg treaties. In addition, mechanisms would need to be provided for collecting tax and obtaining information on transactions conclude, since no such mechanisms are prescribed by law or applied in practice at the present time.

VI. Initiatives of the Federation Council, the Investigative Committee and individual deputies of the State Duma

In addition to the proposals being drafted by the Ministry of Finance a number of documents are being prepared by initiative groups of legislative bodies. The Federation Council is considering a number of proposals, including the following:

  • a provision to be introduced to the Tax Code which would make it inadmissible for a taxpayer to receive an unjustified tax benefit. This would provide a legal framework for the receipt of an unjustified tax benefit to be automatically qualified as a direct violation of law. In this respect, the bill does not propose clear criteria for distinguishing an unjustified tax benefit from legitimate methods of planning activities. There is a risk that the introduction of vague and imprecise concepts which are characteristic of the "unjustified tax benefit" doctrine would lead to even greater uncertainty in tax law enforcement.
  • introduction in Article 21 of the Tax Code, which deals with taxpayers' rights, of the concept of "tax policies" as a document in which a taxpayer may reflect "legal methods of obtaining a tax benefit" which it plans to use in the following year, which would have to be approved by the tax authority before the beginning of the ensuing year. The taxpayer would thus be insured against any claims in regard to the legitimacy of those types of tax benefit which have been disclosed in advance in its tax policies. This would imply that any reduction of the tax burden which has not been disclosed in advance in the tax policies and approved by the tax authority would be at risk of being contested as unjustified.
  • an addition is proposed to Article 36 of the Budget Code, concerning the principle of budget transparency, which would establish a requirement to disclose information on intermediate holders and beneficial owners of entities which act as suppliers of goods, work and services which are paid for out of State budget resources. In this respect, the poor structuring of Article 36 itself might result in a reading whereby the disclosure of information is taken to mean publication in the mass media.
  • another proposal is for the inclusion in Article 115.2 of the Budget Code of an additional criterion whereby only persons registered in the Russian Federation would have the right to receive state and municipal guarantees.
  • there is a proposal to restrict access to participation in the system of state procurements for entities which are registered in or are tax residents of countries which have been "blacklisted" by the Ministry of Finance.7
  • additions are proposed to Articles 198 and 199 of the Criminal Code, which prescribe punishment for tax evasion, whereby they would apply to the receipt of an unjustified tax benefit as one of the methods of tax evasion.
  • a proposed addition to Article 104.1 of the Criminal Code, which prescribes confiscation of assets (i.e. the appropriation of assets by the State without compensation) as a sanction, would involve inserting references to Articles 198 and 199 of the Criminal Code, thus allowing confiscation of assets to be used as a sanction for tax evasion crimes (including on the grounds of the receipt of an "unjustified tax benefit").
VII. Initiatives to limit the legal capacity of offshore companies and "offshore-controlled" Russian companies

A number of State Duma deputies have prepared bills for discussion which set out deoffshorisation measures through amendments to Federal Law no. 115-FZ of 7 August 2001 "Concerning the Countering of the Legitimisation (Laundering) of Proceeds of Crime and the Financing of Terrorism" and a number of other laws:

  • the bill provides for the introduction of such concepts as "offshore zone" and "offshore-controlled company". In this respect, a list of offshore zones would be approved by a federal executive body authorised by the government.
  • the proposed definitions of an offshore company and an offshore-controlled company are very broad. Specifically, an "offshore company" is to be a legal entity registered in an offshore zone with a Russian legal entity or physical person as its beneficiary and (or) ultimate (beneficial) owner. An "offshore-controlled company" is to be a Russian legal entity which is directly or indirectly controlled by one or more offshore companies. In this respect, the control threshold is set at 10 percent for an open joint stock company and 30 percent for companies established in other forms. This wording could result in many companies (including some with state participation) being placed in the category of offshore-controlled companies.
  • the bill proposes the inclusion in the Law of a requirement of mandatory inspection of operations involving monetary resources or other assets where either of the parties involved is an offshore company or an offshore-controlled company and there is information on their involvement in money laundering or tax evasion or their refusal to disclose information on beneficial owners who are public officials. In this respect, the procedure for defining and disseminating such information is to be clarified by the government.
  • the bill proposes a number of limitations on the legal capacity of the above-mentioned categories of companies, including limitations on the performance of certain export operations, participation in privatisation and participation in the capital of companies (the list of which is to be established by the President of the Russian Federation) which produce strategically significant goods, work and services, the receipt of funds from the federal budget and guarantees from the state and certain banks, the supply of goods, work and services for state and municipal requirements and participation in the capital of a specialised depositary, non-state pension funds and (or) management companies thereof. Such transactions and actions may be invalidated by a court.
  • the bill imposes a prohibition on the participation of a number of companies with state participation in the charter capital of offshore companies and offshore-controlled companies. Given the broad nature of the proposed wording, many Russian business structures might fall under the scope of this prohibition.
  • according to the bill, within six months of the amendments being introduced offshore companies and offshore-controlled companies must alienate shares in companies which produce strategically significant goods, work and services. Otherwise they will not be able to exercise certain rights, such as voting rights and the right to receive dividends. Given the broad nature of the proposed wording, many Russian business structures might fall under the scope of this prohibition.
  • if Russia were to conclude an agreement on the exchange of information requiring a foreign state to disclose, inter alia, the beneficiaries of offshore companies, the above-mentioned restrictions on offshore companies and offshore-controlled companies would cease to have effect.
VIII. International exchange of tax information

The CFC rules can only be applied effectively in the context of a proper mechanism for the international exchange of tax information which would enable Russian tax authorities to obtain information on ownership of Russian companies in offshore and low-tax states and territories. It is now known that there are plans to conclude a bilateral agreement on the exchange of tax information with the British Virgin Islands. Russia is also expected to ratify this year the Council of Europe and OECD Convention on Mutual Administrative Assistance in Tax Matters (Strasbourg, 1988), which would also provide enhanced scope for international tax co-operation not only in the area of information exchange but also on a broader range of issues.

IX. Implications for business

The measures outlined in the "anti-offshore plan" of the Ministry of Finance and in the bills described above reflect the main elements of Russia's deoffshorisation policy. The initiatives mentioned above are aimed on the one hand at limiting capital outflow from Russia into offshore jurisdictions, and on the other hand represent an attempt to apply Russian taxation to structures which use offshore companies administered from Russia. Would it be fair to infer a desire on the part of the state to prohibit, or maximise restrictions on, the use of foreign jurisdictions by Russian businesses?

Deputy Finance Minister S.D. Shatalov said in an interview on January 30, 20148 that "the Ministry of Finance is by no means demanding that foreign subsidiaries be wound up and all business transferred to Russia. The message on taxes is this: […] make use of convenient jurisdictions if the nature of your business demands it, but do so openly."

Nevertheless, some of the proposals that have emerged since then indicate the likelihood of a tougher approach which might result in fairly severe restrictions for "offshore-controlled" Russian companies and possibly even restrictions on the creation in the first place of certain offshore foreign legal structures (such as trusts and foundations). It is not yet quite clear what tools might be deployed in Russian legislation for the implementation of such restrictions.

Our advice to Russian holding structures is to act immediately to diagnose and evaluate your company's readiness for the planned changes and to assess the potential risks in order to determine right away whether it might be worth taking steps to change the business structure. It cannot be ruled out that offshore companies which are on the Finance Ministry's "blacklist" will need to be eliminated from corporate structures.

As noted above, the proposed provisions might change significantly in the course of the law-making process.

Vladimir Gidirim is a Partner and Svetlana Yakushina is an Executive Director in the International Tax Group at EY Moscow and may be contacted on email at and respectively. Dmitry Sartovkin is a Senior Manager in Business Tax Services at EY Moscow and can be contacted at  



1 Draft Federal Law "Concerning the Annulment of Certain Provisions of Legislative Acts of the Russian Federation Based on Articles 198 to 199.2 of the Criminal Code", restoring the common procedure for examining the matter of the institution of criminal proceedings.


2 Draft Federal Law "Concerning the Introduction of Amendments to Article 82 of the Tax Code of the Russian Federation and Article 9 of the Federal Law Concerning Auditing Activities".


3 Federal Law no. 115-FZ of 7 August 2001 "Concerning the Countering of the Legitimisation (Laundering) of Proceeds of Crime and the Financing of Terrorism".


4 OECD (2012), "R(6). Double taxation conventions and the use of conduit companies", in OECD, Model Tax Convention on Income and on Capital 2010: Full Version, OECD, 2010, p. R(6)-8 [DOI:10.1787/9789264175181-99-en].


5 OECD Model Tax Convention: Revised Proposals Concerning The Meaning of "Beneficial Owner" in Articles 10, 11 and 12". 19 October 2012 to 15 December 2012 [].


6 Article 309, clause 1, subclause 5) of the Tax Code.


7 Order no. 108n of the Ministry of Finance of the Russian Federation of 13 November 2007 "Concerning Approval of the List of States and Territories Which Grant Preferential Tax Treatment and (or) Do Not Require the Disclosure and Provision of Information in Relation to Financial Operations (Offshore Zones)".