Implications of de-offshore for the Russian IT market

It has long been no secret that in the Russian IT segment, about 80% of all developers, startups and just people doing business in this field conduct it with the help of non-resident structures. Those. companies registered abroad (offshore), because almost all of their counterparties are also foreign.

In addition to this fact, there are a couple of very compelling reasons: all income received by such a company is either subject to the minimum tax, or not to be taxed at all. Not to mention the lack of currency control, VAT, lack of or extremely simple in the preparation and filing of financial statements, etc.
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That is, it is possible to accumulate profits in a foreign company, accumulate it there and use it for investment or other purposes. Until the accumulated profit at the company level is distributed back to Russia (in favor of the Russian beneficiaries), no income tax or personal income tax arises.

Thus, a deferred tax effect is achieved.

For example, it was very convenient to use foreign jurisdictions for an IT specialist, freelancer, mobile application developer . Not to mention that the holding companies of many Russian public IT companies (such as Yandex, Mail.ru, Qiwi, Luxoft) are in foreign jurisdictions (the Netherlands, Cyprus, BVI).

In this regard, all the changes that occur in the sphere of state and tax regulation of offshore companies and attempts to de-offshore began to affect IT companies first of all and now they also became involved in this formal struggle in an attempt to preserve their profits and avoid increasing the tax burden.

On November 18, the State Duma of the Russian Federation adopted the law “On Amendments to Part One and Two of the Tax Code of the Russian Federation (in terms of taxation of profits of controlled foreign companies and incomes of foreign organizations)” in the second and third reading. the text of the law has not sounded, but in fact the new law, following the example of the laws of many other countries, including the United States, aims to reduce the outflow of capital from the country and send it to the budget.

So far, residents of the Russian Federation are not prohibited from registering companies in foreign jurisdictions, however, it makes it significantly more difficult to use such companies to pay taxes at a lower rate, which are offered by such jurisdictions.

In essence, deoffshorization is a general global trend and in the context of sanctions, the fall of the ruble and oil prices, it seems logical to adopt such a law that would direct money flows to the budget. According to preliminary estimates, thanks to the new law, the budget can receive an additional 5-6 billion dollars per year. However, there is another side. In the current conditions of outflow of foreign investment and the fall of the national currency, an additional tax burden will at least become a brake on economic growth, and some companies will not be able to work at all after the payment of all new tax obligations.

Immediately after the adoption of the law, the Ministry of Finance announced that by spring it will consider options to soften the law, but so far it is worthwhile to focus on the existing text, since it is not known when these promises will be fulfilled and whether they will be fulfilled at all.

The new law will come into force on January 1, 2015 and obliges to declare in fiscal bodies incomes to individuals and legal entities that control foreign companies. The minimum profit for 2015 is set at 50 million rubles, but over time this threshold will fall below 30 million rubles. in 2016 and 10 million rubles. after 2017.

Also, the law introduces new concepts - “Controlling Person” and “Controlled Foreign Company” (CIC). The controlling person is a citizen who, together with spouses and minor children, owns more than 50% in the company’s capital, as well as citizens who together with spouses and minor children own more than 10% in the company’s capital, more than half owned by tax residents of the Russian Federation. Similar rules apply to legal entities that participate in the capital of foreign companies. From 2016, the share in the foreign company of the controlling person will decrease from 50% to 25%. As for the concept of a controlled foreign company, it means an organization or structure without forming a legal entity, which itself is not a tax resident of the Russian Federation, but is controlled by them.

Based on the above, it follows that if you (together with spouses and minor children) have 50% ownership of a foreign company, or 10% of a company, more than half of which is owned by residents of the Russian Federation, then you must submit information about this to the tax authorities.

Effects?

If a citizen decides not to inform the tax authority about his controlling share in a foreign company, for each company a new law proposes to impose a fine of 100 thousand rubles. And all this in addition to the existing criminal liability for tax evasion, from which the offender will also not be exempt.

And this is probably the very first consequences that come to mind. In fact, they are much more:

1) When distributing profits from its foreign company, a Russian resident pays from 9% for individuals to 0% for companies with a dividend tax. But if the profit of the controlled company is not distributed, its beneficiaries are taxed at rates of 13% and 20%, respectively. Those. there is discrimination in taxation depending on the approach.
2) Beneficiaries risk falling under double and even multiple taxation. If the same profit in different tax periods will remain in your non-resident structure, then within each tax period such profit runs the risk of being taxed as CFC profit two or more times . And later you also risk paying personal income tax when distributing dividends in favor of yourself, as an individual, outside the framework of the new law. For example, tomorrow you will buy 10% of Google shares, and our FTS will ask you to pay your profits, although you may still not receive it and it lies on the Google corporate account. And after you still receive these dividends, then you will be asked once again to pay taxes, but this time, the personal income tax from dividends. People operating foreign companies run the risk of being taxed by the same taxes several times + fines of 100,000 rubles for the mere failure to notify.

Inquisitive IT Group will try to argue: how will the fiscal authorities get information about my non-resident company, because the law of the Russian Federation can of course oblige me to submit such information, but who will oblige foreign jurisdictions to disclose all of their beneficiaries?

On the one hand, it is, but in October the 7th Global Forum on Transparency and Exchange of Information for Tax Purposes took place in Berlin, where representatives of 51 countries signed an agreement providing for the annual automatic exchange of data on non-resident accounts, and Russia announced its intention join this agreement. Thus, the information will be provided not even on request, but automatically.

In addition, international cooperation agreements in civil, family and criminal matters are already in place with a large number of countries (Latvia, Lithuania, Estonia, Hungary, Cyprus, France, etc.), which include the exchange of information in the field of combating violations of the law. Also, the exchange of information about beneficiaries between states can be based on the principle of reciprocity, and a simple leak of information can provide the fiscal authorities with everything necessary.

Therefore, you should not hope that simply ignoring the requirement to submit information to the tax service will relieve you from liability and additional tax burden.

How to adapt to the new law with minimal cost?

Of course, at this stage there is no one universal way to circumvent the consequences of the new law and the additional tax burden that could be suitable for any activity in any jurisdiction, it was not for nothing that many specialists worked on the law in an attempt to chop off all the old legal algorithms.

I do not advise you to give in to the proposals that are full of the Internet, that only the purchase of a second passport will solve the problem. Firstly, the cost of such a passport starts at $ 250,000, and secondly, the new law does not fall into the citizens of the Russian Federation, but its residents as a whole.

But there is always a way out, even from the most difficult situations, however, now each particular case must be considered separately and an individual solution must be found.

As a result, I would like to note that offshore jurisdictions already exist for many years and the rules for regulating their activities and disclosing information are constantly changing and supplemented, since any country does not want to issue money flows to tax havens where they cannot be traced, but always legitimate ways to adapt to the new rules and maintain parity between the state's demand and the desire of the business.