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Russians will pay for off-shore companies

April 2012

Prime Minister Putin is pushing to make tax procedures between Russian and off-shore companies more strict

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Vladimir Putin, Chairman of the Russian government, is advocating for developing some new rules and regulations which will force Russian companies to declare and pay taxes based on the income they bring in from foreign assets. Following up on Putin’s initiative, specialists of the Federal Tax Authority have already drafted a bill which will change the current Tax Code. The authors of this bill suggest establishing special mechanisms for taxing income transferred by Russian organisational companies registered outside Russian borders.

What has the Russian Tax Authority proposed? Russian organisations fall under the jurisdiction of the Tax Authority; therefore these new measures will directly impact them. This means that if this bill is passed then Russian taxpayers will not be able to count profit or other income transferred to companies located abroad as part of their expenses, thereby decreasing their tax load. It is worth noting that these tax adjustments will apply to all kinds of expenses including work/service costs, interest on loans, etc.

A Russian company can get around this by submitting tax declarations that claim that it does not control a particular beneficiary, meaning that the company is by no means mutually connected with the beneficiary. But even in that case, the tax burden abroad may be lower than the tax to be paid in Russia, but no more than two times less. If the difference is greater than this, then a Russian company is graciously granted the opportunity to pay the remainder into the government budget.

A company can lower its tax burden by stating that an off-shore company is interdependent. Then proceeds for that company will be calculated separately and the tax rate will only be 9 percent, instead of 20.

As one can see, these measures are pretty strict, but there are definite loop-holes, which is to be expected since the bill was drafted quickly. Obviously, regulation should be unwavering and backed up by the Tax Code in order to establish interdependency (or its lack therefore) between companies. Russian companies should know exactly what documents they will need to submit and when as well as other details. The tax savings system should be regulated and companies should be able to confirm these savings. One can only hope that these, along with many other important technical points will be included in the final draft of the bill.

Aleksei Krainev,
Observer for Russian Survey
Special for russian-survey.com RS