On 25 March, President Vladimir Putin set out a whole series of measures planned in support of the Russian people, business and the economy, in view of the difficult situation caused by the coronavirus.
One of the head of state's near-revolutionary decisions was an order to tax, at a rate of 15%, all payments of interest and dividends leaving Russia for offshore zones. The announcement, though, is the quick part. Under the list of instructions following the address, published on the Kremlin's website, the government is to determine by 25 December this year the list of offshore jurisdictions that will be covered. In drawing up the list, double taxation must be avoided, the document states.
Who will this tax change affect, and how?
It is, of course, mainly about business. Ordinary Russians, as it turned out, hardly have savings to speak of, so offshore arrangements barely come into it. There are indirect consequences, though, because the money will go to payments for families with children and to help for people who have met with unemployment or who are on sick leave. The first receipts into the budget may appear no earlier than on the results for 2021.
New taxes usually bring a wave of resentment, but a step aimed at schemes for avoiding tax through conduit companies in foreign jurisdictions meets with approval from many people. Owners of Russian companies often hold their businesses through offshore companies, which formally own the Russian assets in question. They, and lenders, will of course suffer from the change. The budget will gain, because its revenue will rise. The initiative fits the international trend of acting against offshore structures, and it may lead to higher budget receipts and a smaller outflow of capital.
Who pays, and for what, was set out in detail by the managing partner of the law firm Sergei Pivovarchik of Consul Group:
"Interest and dividends were taxed before as well, including at the rate of 15%. Organisations that pay dividends to a foreign parent organisation which, under an agreement on the avoidance of double taxation (a double tax treaty), is entitled to a preferential tax rate do not pay tax at 15% on the dividends. For example, if a Russian subsidiary in which a Cypriot parent company has invested more than 100,000 euros pays dividends to the parent company in Cyprus, that payment is taxed at 5% under the double tax treaty between Russia and Cyprus. There are countries for which the preferential rate is 10%. Tax at 15% is, by contrast, paid by every company that pays dividends to individuals who are not non-residents of the Russian Federation, or to foreign parent companies that cannot apply a treaty relief (or where there is no treaty with the country at all: the British Virgin Islands, the Seychelles, the Cayman Islands). Even if a treaty provides a relief, it can be applied only where the parent company carries on business in its country of residence, and has not been created solely for a tax benefit, as an "accumulator" of income for onward transfer to accounts in other jurisdictions. For that reason, very few Russian companies can apply a preferential rate when paying dividends to foreign organisations. There are, however, also companies acting in good faith, such as foreign investors or public companies of the kind of The Coca-Cola Company."
There should be no dire consequences for investment and business, Yegor Klopenko believes, but only if Russia settles the questions of double taxation with its international partners. It has to be understood that a great deal of international work lies ahead: this country has signed a great many international agreements that contradict these ideas. If the money starts to be collected before that problem is settled, there may be serious difficulty in the international courts.
Ivan Kapustyansky, lead analyst at Forex Optimum: "To a certain extent, the practice that has grown up is a lawful method of reducing tax, and it matters to many Russian companies. Ending it will therefore increase the tax burden. The precise wording of the conditions for terminating agreements on the avoidance of double taxation, which may be needed to put the new practice into effect, will also matter. Depending on those conditions, some foreign companies that invest in Russian businesses may also face higher taxation. The measure will mainly affect shareholders of Russian companies who hold their stakes through conduit companies in countries with which an agreement on the avoidance of double taxation is in force."
Sergei Pivovarchik is not so optimistic, however. He considers that, once the decision is carried into effect, doing business in Russia will cease to be advantageous for some public companies, or for foreign investors and financial institutions.
Imagine a foreign investor who bought a Russian company a year or two ago, having calculated the return on the investment by reference to a double tax treaty under which the tax on dividends was expected to be 5%. A sharp and ill-considered move by the leadership of the Russian Federation now causes that foreign investor a loss. Will anyone gain from this? I fear that everyone will lose. The Russian economy will be deprived of investors who might have put their money into domestic businesses. Large companies such as The Coca-Cola Company will not, by an increase in the tax on dividends, make up for the absence of investment by new investors. I think that some existing foreign investors will try to exit Russian assets as early as this year. For ordinary Russians, though, this is unlikely to have any particular effect,
- explains Sergei Pivovarchik.
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