Federal Tax Service came up some offshores short

Federal Tax Service came up some offshores short

The Federal Tax Service of Russia has presented its updated draft of the order concerning the change in the "black list" of areas and countries that do not share tax information with the Russian Federation.⁠

It is expected that such well-known to the Russian businessmen offshore countries as the Cayman Islands and Bermuda, as well as Hong Kong which has entered into a tax treaty with Russia, will be out of this list.

According to experts, the Russians, enjoying the "unfolding" offshores, have previously prepared themselves to increase their level of transparency. With regard to tax evaders, they are still glad that the British Virgin Islands, as well as Belize, Panama and the Seychelles still remain in the "black list".

The new draft of the Federal Tax Service order regarding changes in the list of offshore companies was published on the eve on regulation.gov.ru. At the same time, the current list of offshore territories has been applied since 1 April this year. In accordance with the order of the Federal Tax Service of its introduction, it should be reviewed annually, and this should take place no later than 1 October.

In the explanatory memorandum to the draft, it is specified what reasons to amend the list which appeared during the past six months. In particular, from March to August of this year, "a number of States and territories have demonstrated a willingness to carry out a full-fledged exchange of tax information with Russia under the provisions of the Council of Europe and OECD Convention on Mutual Administrative Assistance in tax matters", stated in the accompanying document.

In view of the above fact, the Federal Tax Service decided to exclude such countries as Estonia, Georgia, Mauritius, Aruba, Bermuda and the Cayman Islands, the Isle of Man and Guernsey from the list.

In addition, the FTS indicates the completion of the procedures necessary for the Treaty concerning the avoidance of double taxation between Russia and Hong Kong to enter into force. To date, this area has also been removed from the list.

It should be noted that in the previous version of the draft of the order published by the FTS in July of this year the list of the excluded areas was shorter. Now, according to the information from the explanatory note to the draft, the list has become more extensive. This was due to the inclusion of the Isle of Man and Guernsey. In addition, the list included South Korea. This is due to deterioration of the information exchange practice with this area.

We add that the meaning of compilation of the "black list" is related to the law on controlled foreign companies which entered into force last year and assigns profits of the offshore companies owned by Russians for further taxation in the Russian Federation. Accordingly, at the beginning of next year, the owners of the controlled foreign companies will be required to report on their retained earnings.

At that, the Tax Code provides for the cases when this type of income is exempt from tax. In particular, this applies to the profits that the company received, being "registered" in the territory with which Russia has international tax treaties. In the event that the company is registered in the territory which does not exchange information with Russia, tax exemption will not be applied. Companies will have to pay 20% income tax, and individuals - 13%.

This list is made by the Federal Tax Service. Its current version includes 111 states and 22 territories. After the amendments, the list will include 109 states and 19 territories.

It should be stressed that the Russian partner at BRICS Brazil is in this list. In addition, the list will also include such countries and areas commonly used by the Russian businessmen as: Andorra and Liechtenstein, Cyprus, the Netherlands and Luxembourg. The last three are popular among entrepreneurs in the area of jurisdiction. According to the opinion of the Federal Tax Service, these territories are completely "transparent".

The FTS explains that the exclusion of offshore companies such as the Cayman Islands and Bermuda from the list does not mean that the companies registered there will not have to pay profit taxes. The fact is that in addition to the requirement of the absence in the list, for the tax exemption, the other criterion must be met: the company’s effective rate must be not less than 75% of the Russian one and the offshore companies’ ones usually are below that.

Rustam Vakhitov, who is the partner of International Tax Associates, expressed his opinion about the tax treaty with Hong Kong, which the parties have signed and ratified within the shortest possible period of time. "Most likely, the planned removal from the list is due to Hong Kong’s willingness to sign the protocol on the automatic exchange of information", said Vakhitov.

According to him, things are the same with Aruba, the Isle of Man and Estonia, as no tax treaties have been concluded with them. Regarding South Korea, the situation there is as follows: there is an agreement, however, most likely, there are also problems associated with the signing of the protocol on automatic exchange.

According to Rustam Vakhitov, the consequences of signing the protocols with Bermuda and Guernsey will be visible only in 2018. At that, information from them in the form of queries can be obtained already within the framework of the Convention on Mutual Assistance.

The partner of the Paragon Advice Group Alexander Zakharov said that because of the exclusion of Hong Kong from the list, the Russian residents who control Hong Kong companies can get some tax benefits for their legitimate use in transparent mode.

According to experts, the removal of Guernsey and the Isle of Man from the list for many was a surprise. The situation with cooperation between Russia and Bermuda, and the Cayman Islands, is clear enough. "This is a place for the registration of specialized funds, the managers of which got out of the Russian tax jurisdiction before the end of 2014, and the shareholders are undisclosed investors, who have nothing to do with the tax information sharing (because they are not the controlling ones by the law of any state, including the Russian Federation)."

Alexander Zakharov added that for many "clams" who do not wish to disclose their companies the good news is that British Virgin Islands, Belize, Seychelles, Panama are still in the list.

At that, they finally will be able to relax about the risks of the automatic exchange of information only in the end of May 2017: that is when OECD will post a list of specific bilateral agreements, and the list of those who will automatically exchange data for 2017 will be known.

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