Forte Tax & Law » News » Russian Ministry of Finance Expands List of Countries Recognized as Offshores
Russian Ministry of Finance Expands List of Countries Recognized as Offshores
Dear Clients,
A new list of states and territories that provide preferential tax treatment and/or do not require the disclosure and provision of information when financial transactions are conducted (“offshore zones”)[1] will take effect on July 1, 2023. There has been a significant increase in the number of offshore zones in the new version of this list. It now comprises 91 countries and territories that have been recognized as offshore zones, which is 51 offshore zones more than in the current version. Surprisingly, a list of the added states matches that of so-called ‘unfriendly’ states[2], and yet we have no knowledge of whether all these added states do not actually exchange information with Russia when financial transactions are conducted.
It is important to note that none of the states or territories on the current list have been dropped from its new version.
You will find a complete list of the added states and territories in Appendix 1.
What tax consequences will ensue from the inclusion of a country on the list of offshore zones?
The inclusion of a country on the list of offshore zones will give rise to the following tax consequences, most of which will be associated with an increased tax burden on Russian entities.
- No exemption from corporate income tax on the property or property rights received from a foreign subsidiary gratuitously.
The general rule is that the property or property rights that a Russian entity receives from a subsidiary gratuitously are exempt from corporate income tax[3]. However, the parent company may use this exemption only if the transferring subsidiary and the company, through which the parent company owns the subsidiary (in the case of an indirect interest), are not located in an offshore zone.
- Ineligibility for a 0% rate of corporate income tax on dividends received from companies that are located in offshore zones.
Subject to certain conditions, Russian entities and so-called international holding companies may use a 0% rate of corporate income tax on the dividends that they receive from foreign companies. However, if a company paying dividends is located in an offshore zone, the Russian taxpayer may not enjoy this exemption.[4]
- Ineligibility for exemption from corporate income tax on income from the sale of shares or interests in foreign companies (capital gain).
Income from the sale of shares/interests in foreign companies may be subject to corporate income tax at a 0% rate, subject to several conditions[5]. However, this exemption will not apply to the sale of companies that are located in offshore zones.
- Ineligibility for a preferential 10% rate of corporate income tax on license fees, dividends, and interest that are paid by an international holding company.
The Russian Tax Code provides for a 10% rate with respect to (1) income received from an international holding company when it uses intellectual property rights[6]; (2) interest on the debt obligations of international holding companies[7]; and (3) dividends paid on shares (interests) in international holding companies that are not referred to in Article 284(3)(1.2) of the Russian Tax Code, or the rights that are conferred by depositary receipts[8]. A preferential 10% rate of corporate income tax on such income may be used only subject to certain conditions, including the fact that the relevant income beneficiary is not located in an offshore zone.
- Expansion of a list of controlled transactions for the purposes of transfer pricing (TP)
The Russian Tax Code recognizes as controlled a transaction, one of the parties to it is a person whose place of registration, place of residence, or place of tax residence is an offshore zone, irrespective of whether the parties to the transaction are related or not[9]. Considering a significant increase in the number of offshore zones, apparently the number of controlled transactions will also grow.
- Ineligibility of a Russian subsidiary for being recognized as a small and medium-sized enterprise (SME).
The Russian subsidiaries that are more than 49% owned by foreign legal entities (e.g., a 100%-owned subsidiary), may claim an SME status, subject to certain conditions. Among other things, this status enables a company to pay insurance contributions at a reduced rate. We discussed this here.
However, a Russian entity that is more than 49% owned by foreign entities may receive an SME status only if the income and the personnel of these foreign entities do not exceed the thresholds set for medium-sized enterprises, and they are not permanent residents of an offshore zone[10].
Because of the significant expansion of the list of offshore zones, many subsidiaries of foreign entities will lose the right to receive an SME status and the related benefits.
- Other restrictions
The Russian law also imposes several other restrictions on Russian companies whose shareholders are located in offshore zones.
We recommend that you find out what restrictions may apply to your business in Russia due to the expansion of the list of offshore zones and the inclusion of the USA, countries of the European Union, and some other states in it. The Forte Tax & Law team would be pleased to assist you in this matter.
If you have any questions left or you would like to discuss something, please send an email to Anton Kabakov.
Sincerely,
[1] Order No. 86н of the Russian Ministry of Finance dated June 5, 2023 On the Approval of a List of States and Territories that provide Preferential Tax Treatment and/or do not require the Disclosure and Provision of Information when Financial Transactions are carried out (Offshore Zones).
[2] Directive No. 430-р of the Russian Government dated March 5, 2022 On the Approval of a List of Foreign States and Territories taking Unfriendly Actions with respect to the Russian Federation, Russian Legal Entities and Individuals.
[3] Under certain conditions. See Article 251(11)(1) of the Russian Tax Code for more details.
[4] Articles 284(1) and 284(1.1) of the Russian Tax Code.
[5] Articles 284(4.1), 284.2, and 284.7 of the Russian Tax Code.
[6] Article 284(4.3) of the Russian Tax Code.
[7] Article 284(4)(4) of the Russian Tax Code.
[8] Article 284(3)(1.3) of the Russian Tax Code.
[9] Provided that the threshold for a transaction to be recognized as a controlled one is exceeded. Article 105.14(1)(3) of the Russian Tax Code.
[10] Article 4(1.1)(1)(a) of Federal Law No. 209-FZ dated July 24, 2007 On the Development of Small and Medium Entrepreneurship in the Russian Federation.