2020 is a remarkable period in modern history. It is obvious that we are now taking part in an unprecedented global crisis. At the same time the direction of economic development is changing, tectonic shifts are under way, and business processes are adapting to new conditions of life. For most business people the new realities are an absolute catastrophe. But there are also those for whom new opportunities are now opening, including in the optimisation of taxation and the improvement (simplification) of the legal structure.
Time to take decisions
For international holdings with Russian roots that have been thinking about a restructuring, now is the most suitable time to make use of such options.
First, because the amount of the transaction (the tax consequences) will be smaller. In the current conditions, when in the short term some types of business have been practically devalued, the value of assets as a whole is falling, and most countries are introducing tax relief or a relaxation of tax-accounting requirements, a restructuring and rearrangements of the legal structure will entail fewer fiscal costs than before.
Second, many countries, including Russia, have introduced temporary relief on tax and credit obligations. In the Netherlands, Switzerland, Luxembourg and Cyprus, businesses that have suffered have been given longer deadlines for filing tax returns, penalties for late payment of tax have been cancelled, and they have been partly released from social contributions. In some countries of the European Union, affected companies have had their tax rates reduced, or have been given the chance to reduce the profit-tax base for 2019 by the amount of the loss incurred in 2020.
Third, the deoffshorisation campaign (the measures of the BEPS plan) continues actively around the world. From 1 January 2021 the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Multilateral Instrument, MLI), aimed at countering the shifting of profits out of taxation into other low-tax jurisdictions, begins to apply with 27 countries.
And, most important, on 25 March 2020, in his address to the nation, the President of the Russian Federation indicated that from 2021 the tax rate on the payment of dividends (or other payments) from Russia in favour of countries with a low-tax jurisdiction must be raised to 15%. According to information published on the official website of the Ministry of Finance of Russia, letters have already been sent to the ministries of finance of Cyprus, Luxembourg and Malta on amendments to the bilateral double tax treaties (DTTs) so as to raise the rate of tax on income in the form of dividends and interest to 15%. The Ministry of Finance of Russia indicated that the changes will not affect interest income paid on Eurobond loans, on bond loans of Russian companies, or on loans provided by foreign banks. The corresponding payments from Russia will be governed by Russian tax legislation.
"Thus, from 2021 the tax burden on intra-group transactions (deals) using foreign legal entities will inevitably increase, even if the whole of the activity is carried on in full compliance with the requirements of a real economic presence in other countries," notes Vasile Lupu.
Reassessing existing models
Given the changes under way, the question of the effective tax burden, and of whether the cost of maintaining foreign legal entities (substance) is justified, becomes especially pressing: that is, the question of how rational and commensurate the tax-saving tools now in use actually are. Until quite recently it was economically justified for Russian companies to have an affiliation with international holdings from low-tax jurisdictions that have a real economic presence (substance) in one of those countries. For example, a Russian company forms part of an international holding and carries on business in Russia. At the same time it is a subsidiary of a Cypriot organisation. The Cypriot company, in turn, is interconnected with Luxembourg legal entities, but ultimately a Dutch company manages all of these firms and controls them. The actual recipient of the income of this holding is a resident of yet another country. An example of such an international legal structure can be found in the TD "Perekrestok" case (judgment of the Arbitration Court of the City of Moscow of 22 November 2019, No. A40-118135/2019).
The main aims of such holdings are:
a) using the institutions of international law to achieve sound legal protection of assets;
b) applying tax relief;
c) a presence on the global stage at minimal cost, in order to attract international investors.
"The situation that has now developed clearly creates, for participants in international business, a need to reassess the priorities of their "presence" in one or another low-tax jurisdiction. For many, a restructuring, that is a simplification of the corporate structure and a "relocation" of employees to Russia or to other countries, will become a logical necessity, one that will make it possible to cut unjustified expenditure and the risk of additional fiscal costs. For some, a move to low-tax special administrative regions (SARs, or "Russian offshore zones") may be an advantageous option," Vasile Lupu points out.
It should be noted that not all business people choose so-called offshore jurisdictions solely in order to save tax. Progressive business owners create international corporate structures in low-tax jurisdictions and vest them with Russian assets, in part because of a stable and transparent legal system.
Possible scenarios
In the event of inaction in the present conditions, one can forecast an increase in costs and risks in carrying out any cross-border financial transactions later on. Thus, depending on the individual aims and resources of each business, the following scenarios in tax planning for 2021 appear likely. They will make it possible to avoid overpayments and ineffective savings.
1. If the corporate presence in foreign jurisdictions was driven mainly by the prospects of tax optimisation, the most suitable scenarios will be:
a) recognition of the actual recipient of the income (a citizen of the Russian Federation or of the country receiving the income), liquidation of the foreign legal entities, and transfer of the assets to the Russian Federation;
b) redomiciliation (moving the company from one country to another) to an SAR, which from the point of view of tax savings and preferences may be the most advantageous option (it is important to note, however, that obtaining the SAR preferences requires the company's direct presence and investment of at least 50 million roubles in the region (Federal Law of 3 August 2018 No. 290-FZ "On International Companies")).
2. Where the motives for creating an international structure in foreign jurisdictions were shaped by a focus on foreign partners, or on the stability of the legal system and the protection of assets, it is reasonable to define the purpose of the presence in the jurisdiction in question, to liquidate legal entities and expenditure that are not economically justified, and to carry out a redomiciliation to the desired country (if the legislation of the particular country allows it). In this case, however, one must bear in mind the active position of the Federal Tax Service of Russia: practically all payments of dividends from Russia abroad require a tax rate of 15%.
3. A hybrid restructuring scenario is also acceptable, in which the foreign parent company redomiciles to an SAR and an international holding company is established which receives substantial tax relief and also controls and manages the Russian and foreign legal entities.
In addition to the general requirements for a presence in an SAR, there is also a political risk that foreign business will be excluded from international economic activity (sanctions), since at present the international community has no unambiguous reaction to "Russian offshore zones". That option, despite its tax attractiveness, is therefore not available to everyone.
The inevitable changes in the legislation will, one way or another, affect everyone. Today an international business faces a growing likelihood of incurring tax arrears, fines and penalties even if it is conducted in good faith, with an economic presence abroad and in compliance with the rules of international law. Legal structures with international participation therefore need promptly to consider using the temporary relief, and to analyse whether the presence is justified and what the tax consequences are in each country where there is even real economic activity.
"Now, more than ever, the question of building a correct legal structure, oriented towards protecting clients' interests within the legal framework in force, is becoming urgent. Timely adaptation to the new realities is a matter of survival, and it cannot be delayed." Vasile Lupu, head of the international taxation practice at Consul Group.
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