THE INSIDERS: Russia’s road to deoffshorisation and capital amnesty still ‘under construction’

By bne IntelliNews May 7, 2015

Artem Toropov of Goltsblat BLP -


More than a year has passed since the Russian “deoffshorisation” reform was switched into “active” mode by the Russian president. 2014 was dominated with work on the new legislation – but the result, to many, was quite unsatisfying.

To meet the deadline and make legislation effective as of 2015, the authorities had to take a near final version of the legislation (according to some public statements and press reports) and rapidly push it through the parliament.

There are a few notable things about this process.  First of all, the Russian regulator had only one year to put together a piece of legislation on controlled foreign company (CFC) rules and other international tax matters – a process that took years and decades in some other jurisdictions. Secondly, although there was an attempt to arrange a “public discussion” of the new proposed rules, the drafting process was still not quite transparent. Furthermore, the “public discussion” was mainly used by the authorities to get some feedback from the market, identify key loopholes in the initial drafts and close them in subsequent drafts in order to combat the simplest circumvention techniques. Finally, the law, despite being passed in November, is still “under construction”, having been revised and amended at least once with new amendments on “active holdings” and irrevocable trusts on the way. 

Against the backdrop of a continuing negative macroeconomic situation, sanctions and exchange rate volatility, 2015 is the year when businesses are still learning how to carefully navigate the new anti-avoidance rules and prepare for the new challenging times.

Not keeping up with the schedule

A number of important deadlines have not been met during the reform, and it has caused obvious tension in the market.

First of all, the law itself should have been passed in mid-2014, but it took a second half of the year to finalise it. The version that was passed still requires “polishing” and additional amendments, which is why many businesses are taking a “wait and see” approach and are reluctant to start their restructurings.

Secondly, the passing of the law itself probably made some officials forget that the legislative task is far from being completed and that the law still requires multiple forms and subordinate procedures to be developed to make the new mechanisms truly effective. In particular, only on April 24 the authorities approved the form for mandatory disclosure of foreign companies and trusts that is due to be filed by June 15.

Other mandatory forms and procedures are still yet to be finalised (eg. a form for foreign special purpose vehicles (SPVs) to claim themselves as Russian tax resident companies, a form on “fiscal transparency” for withholding tax and “beneficial ownership” purposes, etc.), which slows down the restructurings of groups who want to bring their corporate structures “onshore” to Russia for tax purposes.

Also, because the latest amendments have introduced an exemption from reporting obligation for participations terminated and structures liquidated before June 15, businesses will be busy getting rid of excessive offshore elements in their structures.

Voluntary disclosure programme needs work

While the deoffshorisation regulations are clearly the “stick”, a much-expected president-announced “carrot” has also been prepared – the authorities have published a draft of the “capital amnesty” or voluntary disclosure law. 

The “amnesty” concept is advertised as follows: it is a voluntary, rather than mandatory, disclosure programme that offers individuals the opportunity to disclose until the end of 2015 their foreign CFCs, bank accounts, real estate and other holdings with no extra charge in return for “guarantees” that a participant will not be subject to criminal, administrative or tax liability in connection with assets that he or she has disclosed. The guarantees, however, apply only to pre-2014 (ie, pre-deoffshorisation) actions and do not cover the restructurings made in 2014 and 2015.

The law also offers the ability to transfer overseas assets from nominees to personal ownership without extra tax charges. It is intended to give a “clean bill of health” and peace of mind to taxpayers who are afraid of general anti-avoidance charges in relation to past years.

However, at the moment, the draft law as such looks more like a vague manifesto rather than a solid legal document that reaches the goals set by the president. To make the “amnesty” truly effective, additional detailed amendments are required, which haven’t been developed yet. Russia needs to relax its excessively harsh exchange control rules in order for Russian residents to use personal foreign accounts instead of accounts opened in the names of companies and structures.

There are several key criticisms of the “amnesty” concept that have been voiced.

First of all, many hold a view that participation in the programme and additional voluntary disclosures might trigger new charges and make participating persons more exposed to potential claims – despite the secrecy regime that is offered for voluntarily disclosed information. Proper use of this information is also in doubt. For example, an “amnesty” for tax crimes would not per se make a taxpayer immune from accusations of vague crimes such as “money laundering” or “fraud” in relation to disclosed assets, while including such crimes in the amnesty may make Russia run into trouble with FATF (Financial Action Task Force).     

Secondly, compliant and transparent taxpayers are now left wondering whether they should participate if they haven’t done anything wrong in the past – some may be inclined to jump on the bandwagon just to obtain an additional immunity against aggressive claims of tax authorities and, by doing so, admit a certain degree of guilt. This leads to a question of potential inequality – those who have committed violations and who use the programme may be exempt from liability, whereas compliant taxpayers who do not participate in the voluntary disclosure but do a mandatory one can face frivolous and aggressive charges from tax and internal affairs authorities.  

Whatever the outcome, individuals should seek legal advice on whether or not they should participate, whereas participating individuals should approach their disclosure carefully in order to benefit from guarantees and not to expose themselves to new potential charges.

Changing environment

Russia’s tax environment for business has changed significantly during the last few years. 

Russian regulators, tax authorities and courts have developed a better understanding of international tax concepts and are trying to use the global BEPS trend to implement their own domestic anti-avoidance regulations and practice.

The problem is that the change is happening at times of macroeconomic difficulties, as well as falling public and corporate revenues, while anti-avoidance international tax rules are being used to raise large arbitrary claims against leading compliant western multinationals working in Russia.   

Deoffshorisation has already resulted in a significant number of businessmen and companies, particularly in the innovative and IT sectors, to relocate outside of Russia, which may eventually result in the reduction of taxpayer population and tax revenues instead of their planned increase.

The proposed “capital amnesty” needs substantial additional work, not only in the legislative sphere but by way of making additional reforms and strengthening the rule of law, to restore the trust of the business community and its faith in positive changes in the future. 

Without such changes it is highly unlikely that the current negative trend and increase of capital outflow would be reversed and that the “amnesty” would be successful.

Last call or a just a warning sign?

With all these changes, Russian and foreign businesses are facing a tough choice with the new reform, with most questions basically going down to whether information exchange in the future is successful.  

Russia has taken significant steps forward with ratification of the OECD Mutual Assistance Convention and announcement of its intent to participate in automatic information exchange by 2018 based on common reporting standard (CRS). 

Russia has also introduced domestic FATCA-style regulations that indicate the country’s desire for foreign financial institutions to exchange information on accounts opened abroad by Russian citizens and their controlled SPVs.

At the moment most people doubt that Russia’s participation in automatic exchange system will be effective, and that Russia will be as successful as the some other countries in pressuring foreign governments to collect and exchange information on Russian taxpayers. However, the situation with information exchange is changing so rapidly that any current predictions look more like a guessing game rather than a solid business strategy. 

Once and if Russia is successful in its information exchange and collection efforts, for many taxpayers there would be limited or no possibility for successful legal defense unless a proper prior restructuring was made. Then would probably come a massive need for “capital amnesty-2”, but there is no assurance that there will be one or that the one presented will be on favorable terms.

Whatever the choice, now is the right time to recognise that the times have definitely changed. From now on, for businesses working in Russia, long-term compliance and sustainable structuring as opposed to risky short-term gains should be the key priorities. “Business as usual” simply doesn't work anymore.

Artem Toropov, senior associate in the tax practice at law firm Goltsblat BLP


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