De-offshorization of Russia

As we predicted, the "de-offshorization law" - or more precisely the Federal Law "On Amendments to Part One and Part Two of the Tax Code of the Russian Federation (in Respect of Taxation the Profits of Controlled Foreign Corporations and Incomes of Foreign Entities)" - has been signed by the President and came into force on January 1, 2015.

Although adoption of the law occurred with lightning speed, its appearance wasn't really a surprise.

Talks about restricting the use of offshore structures have been going on for a long time. For example, in 2012 Vladimir Putin in his address to the Federal Assembly said that Russian goods of a value of $111 billion go through offshore companies. "This is a fifth of our export," he said. "These figures indicate an outflow of capital which should have been working for Russia; it is therefore a direct loss for the country's budget."

Legislators have high hopes for the new law. According to the chairman of the Committee on Budget and Financial Markets of the Upper House of the Russian Parliament Sergei Ryabukhin, "de-offshorization of the economy ... can bring to the Russian budget up to five trillion roubles (app. 65 billion Euros) a year".

To what extent these hopes are going to be fulfilled is a big question.

The law introduces the concept of "controlled foreign company" and expands the concept of tax residency on foreign companies controlled from Russia. Thus, private persons and legal entities will be required to notify the tax authorities about foreign organizations they control (including trusts and unincorporated entities) and to pay taxes on the income of such organizations even when such income was not distributed to shareholders (beneficiaries).

In many cases, in order not to fall under the scope of the new law one needs to stop being a tax resident of Russia, and for this it is sufficient to stay out of Russia 183 days a year.

The law will of course result in some business coming under Russian jurisdiction and / or a certain increase in tax revenues from foreign companies.

However, the truth lies in the fact that a significant number of Russian businessmen will not want to disclose their ownership structure and prefer to spend most of the year outside of Russia. This has been indirectly confirmed by the increase in demand for overseas property by Russian citizens, especially in such countries as Monaco, UK, Malta and others.