Nick Kochan in Limassol -
Cyprus is in the eye of the storm over “de-offshorisation” - the Russian plan to bring home companies that moved offshore to avoid being subject to Russian taxes.
The de-offshorisation law is a critical piece of legislation for President Vladimir Putin as his country’s economy and currency come under intense pressure. For Cyprus the law is also critical, as some 150,000 Russian companies are registered on the island to enable them to take advantage of a double taxation treaty between the Mediterranean island (and member of the European Union) and Russia.
The new law, which came into law at the beginning of the year, raises a number of critical points: will Russian businessmen bring their businesses home, in accord with Russian law? Will they raise their investment in Cyprus to enable them to comply with the law’s requirement to have their headquarters in the offshore jurisdiction to benefit from favourable tax arrangements with Russia? Will the beneficial owners renounce Russian citizenship to avoid being subject to the legislation? Will this result in Russian companies expanding investment outside their home country?
These options are being weighed up by all leading Russian investors with extensive international operations. At the same time the island’s status as a bolthole for Russians and Russian money is now also being questioned at all levels of Cypriot society. The measure also has potential consequences for Cyprus’s already-30,000 strong Russian population.
The law’s key impact for offshore centres like Cyprus is its requirement for the foreign-controlled company (FCCs alone can enjoy the benefit of the tax treaty with Russia) to have its “place of effective management” on the island. The law requires the company to have a “strong economic substance, in the offshore jurisdiction”. According to Katarina Charalambous of Eurofast, the accountants, companies will need a “physical office, local staff, domain and economic substance”.
Companies will not qualify as FCCs if they are “conduit foreign companies with a registered address of an accountancy office or a legal firm, effectively managed from abroad and factually presented only in paper format for using the benefits of the tax treaty”, she says. Companies that “ignore the fact of the economic substance in the foreign company may well lead to an increase of the tax burden for the whole group”.
The new law also impacts on Cyprus’s double taxation treaty with Russia as Russian capital gains tax will apply to the disposal of shares in foreign companies if more than half of the value of such shares is attributed to real estate in Russia. Russia has been working with other jurisdictions since 2007 to amend its double tax treaties and thus acquire the right to tax such disposals and prevent circumvention of Russian taxation simply by using two-tier offshore structures. Amendments to the Russia-Cyprus double tax treaty will come into effect in 2017.
Some Cypriots are talking up the strength of the island’s frail economy to deal with the impact of the new Russian on its offshore centre. But most are less sure. “Fewer high net worth individuals will come to Cyprus. They are scared of what Putin will do,” according to one local Russian observer who did not wish to be named.
The Cyprus commercial establishment, with its strong financial services sector, is putting a brave face on it. Cyprus finance minister Harris Georgiades, speaking at the recent Cyprus Investors Conference in Limassol, says that he believes the law will result “ in companies investing more heavily in Cyprus. It can only be a good thing long term for the island’s economy”.
The same view is shared by George Pamboridis, a senior partner at accountants Pamboridis. He says: “Russian companies must have an established place of operation together with offices. The president referred specifically to Cyprus when he announced the law. The law would make it less easy for Russian investors to use a double tax arrangement.”
“They have to set up a company here and operate from here. If they operate from here, it means there will be a positive impact. Quite a lot of Russian companies have staff here already. They would need to have an operating base out of Cyprus with a real operation and not just a brass plate. This is a step in the right direction for Cyprus. We will maintain companies that are substantial, that have a base, with business that is assisting local employment in Cyprus. There will be fewer companies but significantly increased level of business activity out of Cyprus. This is very important for any business or financial centre in expanding its services.”
The responses of Russian companies are being watched with interest. They vary considerably. Metal producers Rusal and Metalloinvest, telecoms giant MTS, electricity generator RusHydro and vehicle manufacturer Kamaz announced as early as late 2013 that they would play ball with Putin, by either stopping using their offshore entities or relocating their operations to Russia altogether.
The approach of Eurochem, the giant Russian fertiliser and mining firm, is at the other end of the spectrum. Its owner Andrey Melnichenko, the Russian oligarch owner of MDM Bank - who controls the company through a network of paper companies based in Cyprus, the British Virgin Islands and Switzerland - has recently announced a $1.5bn investment in a mining scheme in the American state of Louisiana. While there has been recent talk that Eurochem may not proceed with this investment, Melnichenko shows no sign of leaving the island or changing his tax structures, say local observers.
The overall impact of the law on the island economy remains open to doubt, says Marios Tannousis of the CIFA agency. He said: “People are scared that it will have huge detrimental effects for Cyprus. [But] if Cyprus is to move in the right direction and become a proper business centre with a physical presence, it has nothing to fear from it. We don’t need the brass plate companies. The future of Cyprus is with the physical presence. It would push Cyprus in the right direction.”
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