Actuality, December, 10, 2007

In spite of Cyprus being in the list, it is still very attractive for the Russian business.

The Ministry of Finance has published the list of offshores, registration in which will not allow the companies to transfer tax-free dividends to Russia. According to the experts’ opinion, there is no importance in the regular black list publication. Close to the state large companies, as a rule, do not use doubtful tax jurisdictions as they have a dividend privilege.

The order of the Ministry of Finance “About ratification of the states and the territories list confering a preferential tax treatment and (or) not providing disclosure and produce the information on conducting financial operations” was registered by the Ministry of Justice on December, 3, 2007 and on December, 7 it was published on the official department web site.

Occurrence of the 41 offshores’ list is caused by amendments’ coming into effect to the tax code since January, 1, 2008. It establishes zero rate of the profit dividends tax received by the companies from other companies capital contribution (i.e. from subsidiaries). Till now these incomes were taxed at the rate of 9%, if the dividends were paid by a foreign company then the rate was 15%. Owing to Vladimir Putin’s initiative such tax profit dividents release was given to taxpayers. He also charged to create a good atmosphere for companies’ placement in Russia.

The government and the State Duma, having discharged this order, determine the list of the terms for receiving such benefits. The company should possess an authorized capital stock share of the company paying dividends at the cost of minimum RUR500 mln (more than $20 mln.) in order to receive such tax release. Besides, this company should not be registered in an offshore. Such territory list was defined by the Ministry of Finance and it was published in the order on December, 7. Two criteria were used while making this list. They were unaccordance of the information on financial operations by the countries and application of the profit tax rate with a minimum of one third lower than a Russian one (24 %).

Making the list, the Ministry of Finance has made a mistake at least twice. At first, the officials have forgotten to include such obvious offshores with zero taxation as Seychelles and Barbados in it. However, this omission has no huge practical value. Mainly huge, affiliated to the state companies will be able to take an advantage of this privilege because of the share possession requirement of RUR500 mln in the authorized capital. And these companies will scarcely use unpopular offshores.

According to the predictions, the investments will be transfered mainly to absent in the list Luxembourg, Holland, Austria and Great Britain soon. However, as the experts mark, presence in the list of Cyprus will not influence upon its attractiveness among Russian business. After all, the Ministry of Finance does not create any barriers in using of former tax planning schemes with the participation of the Cyprian companies and in applying quite favourable agreement about double taxation avoidance with this country.

Besides, the restriction in use of Cyprus for dividends payment can be easily avoid. For example, the Cyprian company according to the existing agreements between two countries will pay dividends the Dutch one without the tax. The Dutch company, in turn, will transfer the money to Russia where the money will be included in the applying of the zero rate. However, the experts warn, that after occurrence of the plenum decision of the Supreme Arbitration Court # 53 dated 2006 (it is about the unreasonable tax benefit of the tax payer). It will be, probably, necessary to prove the court, that the Dutch company enter a chain of firms has not been directed to evade law established restrictions.