RS Brief news Offshore jurisdictions – beyond advantages

Offshore jurisdictions – beyond advantages

June 2013

The practice of structuring the ownership of real estate and other business assets by means of foreign jurisdictions is becoming more and more widespread, giving rise to an increasing number of cases where disputes with such companies come to be investigated in courts of justice. This results in the nascent formation of some practice that shows how Russian courts of justice react to such business organization methods. So, it turns out that corporate operational structuring using foreign jurisdictions has not only benefits, but also some drawbacks. Recently, the Presidium of the Supreme Arbitration Court of the Russian Federation has taken note of one of those drawbacks.

The Court examined a case between a Moscow-based company and a property owner registered in an offshore zone (the Commonwealth of Dominica). In this connection, the Moscow company tried to evict real property assets from the offshore company that had become their owner under a sales and purchase agreement. The plaintiff’s claim was based on the valid arbitrament to the effect that the disputed real property assets sold to the offshore company had been obtained illegally.

During the legal investigation a question arose whether the court could apply the conclusions contained in the initial determination without conducting an evidentiary hearing, or the plaintiff should reestablish the entire case. The answer to this question depends on whether the offshore company is affiliated to the original property owner with regard to whom the initial determination was made. So, in accordance with the general rules established in the Russian laws, it was the Moscow company that should have had to prove (or submit relevant documents) the company’s affiliation. However, the Presidium of the Supreme Arbitration Court of the Russian Federation pointed out that the plaintiff was not entitled to prove affiliation relations because the defendant was an offshore company. In this connection, in view of the nonpublic structure of holding shares (stakes) in the offshore company, proving unfairness of property acquisition or other facts, including affiliation, may be considerably complicated, because most offshore zones are governed by special regulations for disclosure of information about beneficiaries of offshore companies.

In this situation, according to the Presidium of the Supreme Arbitration Court of the Russian Federation, the burden of proving availability or nonavailability of circumstances that defend an offshore company as an independent entity in its relations with third parties lies with an offshore company.

In other words, the offshore company will have to disclose its beneficiaries submitting relevant documents or the court will consider it to be an affiliated entity.

In addition, the Supreme Arbitration Court of the Russian Federation separately emphasized that it is not illegal for a legal entity that is registered in an offshore zone and for this reason does not publicly disclose its ultimate beneficiary, to register title to real property based in the Russian Federation.

So, those who use foreign jurisdictions in their business should simply keep in mind that in some cases this fact may involve additional obligations. However, it is noteworthy that in the particular case there were also some other plaintiff-proved reasons to believe that the offshore company had acted in bad faith, which is why the court detected elements of fraud in that and made its relevant determination.

Anyway, a judicial precedent was created, and it should be taken into consideration while planning business operations with foreign companies. RS