Egor Noskov discusses the current situation with offshore companies in Cyprus.
The authorities have once again headed for deoffshorization, and this time they are acting with both carrot and stick, not even fearing an aggravation of relations with Cyprus — the world's legal Mecca.
Egor Noskov, Chairman of the Board of Directors of PJSC “Kirovsky Zavod”, managing partner of “Duvernoix Legal” and a specialist in international tax planning, told “Fontanka” that Cyprus is no longer a comfortable tax haven for a number of reasons. “The process began a long time ago, in 2013, when two of the largest Cyprus banks collapsed. Then Cyprus began to make very high demands on the Russian beneficiaries of Cyprus companies. Concurrently, the Russian legislation on controlled island companies began to change and the deoffshorization process was launched, which, in addition, was accelerated by the deterioration of the economic situation in Russia and the reduction of foreign economic activity of Russian businesses,” the lawyer recalls.
According to Egor Noskov, now the termination of the double taxation agreement with Cyprus in fact will affect few people. Previously, the main advantage for entrepreneurs was that Russian legal entities were able to withdraw dividends to their holding companies in Cyprus at the rate of 5%, but in fact for several years the tax authorities have been blocking attempts to pay remuneration at this low rate. “There is a stable judicial practice, according to which the tax authorities prove that the holding company did not have a real presence in Cyprus in the form of a large number of staff and any other commercial activity other than the ownership of Russian shares. In this case, the tax authorities block the withdrawal of dividends at the rate of 5%, so this advantage has long been lost,“ the expert says.
“Approximately 80% of companies that used Cyprus holdings have stopped using them in the last 7 years. Those who stayed in Cyprus did so because of the advantages of English law, which makes it possible to conduct a legal dispute outside of Russia, since businesses generally do not trust Russian courts. I think that the initiative with SARs in Kaliningrad and Vladivostok is good, but it will definitely not be able to replace offshore jurisdictions for the reason that any dispute concerning investment and use of these zones will be considered in Russian courts and in case of any conflict, the investor will always lose,” Egor Noskov says.
The main advantage of Cyprus offshore with the original double taxation agreement was not only that large owners could withdraw their dividends at a low rate, but also that through Cyprus, money was poured into Russia, and investment was recycled. “Cyprus was a very convenient financial hub, which requires a special financial system, international law, and so on. Previously, we have already adopted, for example, the initiative to organize a gambling zone in Krasnodar region, but the criteria for bylaws were such that there was virtually no gambling zone, since only one investor met all the requirements. The fact is that our state behaves very clumsily in legislative matters and remains extremely inflexible. For this reason, so far all declared tax initiatives, in particular the Neudorf zone in St. Petersburg, do not really work. Good ideas are destroyed by bylaws and the reluctance of the grassroots level tax authorities to make advance in some way,” the expert concludes.