Identifying the risks of additional tax charges and developing an alternative international tax planning strategy

Background

The initial strategy of restructuring of the holding, recommended by Cypriot lawyers, entailed the risk of additional tax assessments in the amount of 7.2 billion rubles, according to the norms of the Tax Code of the Russian Federation. The amount of the holding's assets is 34 billion rubles.

The case

The group of companies included 15 legal entities. In this structure, six Russian companies belonged to Cyprus legal entities and / or companies in the British Virgin Islands (BVI), their beneficiary was a citizen of the Russian Federation.

Five Russian legal entities had debt obligations to the affiliated companies in the BVI, individuals in the CIS (the Commonwealth of Independent States), and the sixth legal entity - to the bank of the Russian Federation. Cypriot tax advisors have suggested a strategy for the restructuring of the holding group and financial flows without considering the current tax legislation and the judicial practice (according to the actual income recipient) in the Russian Federation. The CG team:

1) conducted a risk assessment (tax audit) of the suggested strategy and found an inevitable risk of additional tax assessments in the amount of 7.2 billion rubles;

2) developed an alternative strategy for international tax planning, taking into account the norms of the legislation of the Russian Federation and BEPS (Base Erosion and Profit Shifting).

With this algorithm, the tax consequences would have amounted to 300 million rubles for 3 years, while minimizing the risks for the citizen of the Russian Federation to be recognized as the actual income recipient.

Why is it of importance? 

The dynamically developing, thanks to the OECD (the Organization for Economic Cooperation and Development), strategy to counter tax base erosion and profit shifting (BEPS), a part of the requirements of which is known in Russia as “deoffshorization”, limited the possibilities and scope of permitted transactions, and some options were completely banned since 2015. In other words, many legal structures and "schemes" of financial flows, which made it possible to reduce tax costs and have been applied for more than 20 years, have recently been banned, and entail penalties in accordance with the RF Tax Code up to 40% penalty, and up to 100% penalty in case of violation of currency laws. Therefore, it is extremely important to review the current structure in terms of tax planning in order to meet current requirements.