Russia’s Duma passes de-offshoring bill

Thursday, 20 November 2014
The lower house of Russia's parliament has voted for a bill forcing Russian citizens and companies to pay tax on retained earnings and assets of foreign companies under their control.

The bill originated in President Vladimir Putin's office in March 2014, as the key to a 'de-offshoring' initiative to stop the use of controlled foreign companies for tax evasion.

Moreover, 55 per cent of foreign direct investment into Russia comes from Dutch or Cypriot companies. Much of that was suspected to have originated from Russian investors and 'round-tripped' back into the country.

Because only those dividends paid from offshore companies to shareholders in Russia were taxed, investors were thus able to move their capital out of Russia tax-free. Putin's aim is to repatriate this domestic capital and thereby boost Moscow's tax revenues.

In its final form, the bill requires Russian resident individuals or companies to inform the authorities of any holdings in foreign companies above 10 per cent by 1 April 2015. An individual who directly or indirectly holds more than 50 per cent of a foreign company will have to pay Russian tax on retained earnings. The same applies to Russian companies that hold more than 25 per cent of an offshore entity. If several Russian individuals or companies jointly own more than 50 per cent of the offshore company, those shareholders who hold more than 10 per cent will be regarded as controlling the company and will be taxed accordingly.

The transitional 50 per cent threshold for individual shareholders will be cut to 25 per cent by 2017, by which time it will also reportedly be a criminal offence to fail to declare offshore assets.

  • The law is of special importance for offshore companies that own property in Russia, as their shares will, from January 2017, be subject to Russian capital gains tax.

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