SPECIAL ADVICE ON CYPRUS
Методы снижения налоговых платежей при использовании Российских и иностранных офшорных компаний
Misunderstanding prevails about Russian tax laws as well as the appripriate uses of Cyprus corporation for conducitng business with Russia. This has prompted Palms & Company to have its tax advisors in Russia write a series of brief articles on tax planning options in Russia that are open to foreign companies wishing to do business in Russia.
Thus series of articles will be a reference guide on tax planning in Russia and serve as the basis for our consulting services concerning tax planning in Russia. This article is about the role of Cyprus in inbound investments into Russia and outbound investments out of Russia. This article has been written as a rebuttle to a series of articles that appeared in the latest edition of Offshore Outlook and which were devoted to offshore tax planning possibilities in Cyprus.
After reviewing those articles Rusisan nationals, tax planners for palms & Company, felt that it would be helpful for tax planning professionals and businessmen, considering doing business in Russia, to receive a clearer more precise interpretation of the merits and drawbacks of making investments into Russia via Cyprus.
As a rulks a rule Russian businessmen have been misinformed or ill-advised about the correct structuring of Cypriot offshore entities and they have also tended to ignore other offshore jurisdictions when making investments outside of Russia.
Therefore we would like to debunk some of the most common misconceptions regarding Cypriot offshore entities.
The misconceptions are as follows:
"It is clear that Cyprus is currently the best positioned offshore financial center for businesses trading with Eastern Europe and the Commonwealth of Independent States."
This is incorrect. Cypriot companies are only useful in so far as they can be used to take advantage of the Double Tax treaty provisions between Russia and Cyprus, namely routing dividends, interest and royalties out of Russia as well as tax free profits from securities trading.
In case of import and export operations there hardly can be any advantages. On the contrary, the 4.25% tax rate that the Cypriot companies are liable to makes them less attractive than regular offshore companies in places like The Bahamas, Isle of Man, Gibraltar, etc.
The tax planning possibilities provided by the DTA between Cyprus and Russia are quite limited in scope and it is a little perplexed to read read that Cypriot trading companies are taking advantage of the DTA between Cyprus and Russia.
The DTA between Russia and Cyprus does not protect the Cypriot company from Russian taxes when doing business in Russia because it leads to creation of permanent establishment of the Cypriot company liable to all Russian taxes.
Besides, in case of routing dividends out of Russia, profits would be taxed at least by 5.5% profit tax + 15% VAT if the Russian company is correctly structured. Normally the profits of Russian companies are taxed at 35% profit tax + 20% VAT as well as 40% salary tax (social security).
Because of this Cypriot companies are not widely used by Russian businessmen. More often than not Cypriot companies were organized or acquired by Russian businessmen at the beginning of the 1990's when the tax environment in Russia was very relaxed and contaned numerous a loopholes. Presently the situation is changed and many Russian owners of Cypriot companies are not using them or have no idea how to use them. correctly
The fact of the matter is that foreign offshore companies can be advantageously used only by certain Russian low tax companies.
The tax system of Russia has unique peculiarities . There is a very interesting possibility (loophole) provided by the use of a correctly structured Russian company having its bank account with a Latvian bank.
If we consider remittance of money out of Russia as dividends we will see that dividends are paid out after the profits have been eaten by the profit tax (35%) and VAT (20%). Tax free repatriation of dividends out of Russia provided by the DTA between Russia and Cyprus is not a significant saving considering the said 55% taxation.
In certain cases foreign businesses expanding their operations in Russia can use low tax (offshore) Russian companies that are liable to reduced level of taxation in contrast to regular Russian companies. With correct structuring and assistance of tax professionals such as Palms & Company's tax planners in Russia ,these companies could achieve significant reduction of overall taxation amounting to about 3-5% profit tax and 5-10% VAT.
Thereafter it is possible (again with correct structuring) to transfer accumulated profits out of Russia via Latvian banks that have ruble correspondent accounts with Russian banks with very little taxation at source (1-2%).
The reason for this difference is the existence of exchange control regulations in Russia that prevent Russian companies from transferring moneys out of Russia. Under the tax laws of Russia any transfers or payments out of Russia are subject to 20% VAT + 20% foreign income tax which can be mitigated or reduced to zero by the double taxation treaty between Russia and other countries (most notably with Cyprus). However the DTA provisions can not reduce VAT since VAT is not covered by DTA.
This difficulty could be easily circumvented by routing money through a Latvian bank by executing transfers in rubles rather than dollars and thus avoiding exchange control regulations. The Latvian bank would convert money of the client into dollars and remit anywhere in the world without any reporting to any government and without any tax liabilities.
Currently the said scheme is much more efficient than any other Cypriot tax planning possibilities despite its dubious legality.
The exchange control regulations of Russia are avoided by the fact that the company that wants to take profits out of Russia writes contracts with another Russian company and it appears that the money is sent to another Russian company whilst in fact it gets sent to a Latvian bank, converted into hard currency and remitted anywhere in the world by the Latvian bank.
The said scheme is the best method of getting profits out of Russia and currently no standard text book methods of international tax planning can compete with it because of strong anti-avoidance provisions in the tax laws of Russia.
As you can see Russian tax planning has a certain twist and any discussion of Cypriot possibilities and advantages with regard to DTA between Russia and Cyprus should take into account the current practice that has been described.
Another disadvantage of going the official way is the reporting requirements that are imposed on all Russian companies transferring payments out of Russia in hard currency. The reporting requirements (certain forms must be filled out and mailed to the Moscow office of the tax authorities of Russia) are easily avoided by sending money in rubles rather than dollars.
The statement that "Cyprus is The Optimum way for Russians to enter the international markets" is simply not accurate for the following reasons:
1. 4.25% tax on profits of the Cypriot company
2. Due to rapid development of telecommunications technology the advantage of the physical location of Cyprus has lost its importance.
3. Disclosure of the ultimate beneficial owner to the Central Bank of Cyprus whereas many other offshore jurisdictions do not require the same.
Our tax advisor never recommends to Russian clients, that they open Cypriot offshore companies ,if their motivation is solely to "go offshore".
It is more convenient and less expensive to do international business through, say, a Bahamian company and it does not matter where the jurisdiction of incorporation is located since it may have a bank account anywhere in the world and it is very easy to control the company from anywhere in the world via Internet or fax.
Cypriot offshore companies are only useful in taking advantage of the Double Tax Treaty between Russia and Cyprus, namely taking advantage of preferential tax treatment of dividends, interest, royalty and capital gains.
Simple trading operations (import/export) are not likely to benefit.
Conversely Cypriot companies are liable to 4.25% on their worldwide profits whereas in the majority of offshore jurisdictions there are no taxes whatsoever.
Cypriot lawyers say that the payment of a 4.25% tax is good because it shows that the owner is paying some taxes.
But what difference does it make to a Russian businessman if Russian tax laws deny him the right to open foreign bank accounts and companies without obtaining permission from the Central Bank of Russia?
And what about disclosure of the ultimate beneficial owner to the Central Bank of Cyprus?
What would the Central Bank of Cyprus do if Russian authorities come to Cyprus with trumped up charges and falsified documents "alleging" that a certain Russian businessman is a drug dealer or a convicted rapist?
Our Russian tax advisors advise us.. "never open a Cypriot company in your own name, use the company only as a conduit to get money out of Russia and out of Cyprus".
"The Russian press has also on occasion alleged that the confidentiality rules in Cyprus were not strictly adhered to. This has been strongly denied by authorities in Cyprus".
Of course authorities in Cyprus would strongly deny it. Why should they not refute the allegations and spoil the image of Cyprus when so much money is coming through Cyprus?
On the other hand, without reservation, Cyprus is The Optimum way for Westerners to invest in Russia
And Iour tax advisors would never recommend clients make investments into Russia through Latvian banks because the Latvian loophole could be closed at any moment and then the investor would be left with no protection against exchange control regulations in Russia because he would not be able to take his money out of Russia tax free.
The deductibility of royalties in Russia is a very complicated matter and only in limited cases it is deductible for taxation purposes in Russia.
However the tax situation in Russia is changing rapidly and perhaps there will be improvements in the deductibility of royalties in Russia.
Besides, in most cases royalties are liable to 20% VAT in Russia and the DTA does not protect from VAT.
Our tax advisors do not agree with the following statement:
"It is relatively easy to avoid being considered as having a permanent establishment in Russia as there are numerous exceptions to this definition under the treaty".
The list of activities that are exempt from being considered as having a permanent establishment in Rusisa is limited and does not allow a Cyprus company to carry out trading operations within Russia without being subject to Russian taxation.
It must be noted however that certain Rusisan tax planning professionals construct schemes whereby a Cypriot company uses two Russian companies in the capacity of its agents or brokers which they say does not lead to a permanent establishment - therefore no taxes are to be paid in Russia.
However this scheme does not protect from VAT in the amount of 20% although it must be noted that Russian "agents" could convert to simplified system of taxation (3.33% turnover tax or 10% income tax if correctly structured) which is not liable to VAT assessment.
In spite of the above mentioned considerations it is more practical to use low tax Russian companies incorporated in certain low tax regions of Russia in conjunction with a Cypriot company by routing profits to the Cypriot company and by trading in shares and thus avoiding capital gains tax and withholding tax on dividends in the amount of 5% which is expected to go into effect later this year.
IOur tax planners also disagree with the following:
Cyprus is not a "tax haven" and does not offer "brass plate" companies. Therefore, the entity will not suffer from identification with an obvious "tax haven" country. In this respect, a Cyprus international entity is indistinguishable from any other entity registered in any developed country in the world.
Nothing could be further from the truth. Due to wide media coverage, every Russian citizen knows that Cyprus is an offshore jurisdiction. Lots of Russians have opened Cypriot companies. It is becoming a sort of a national habit to open Cypriot companies.
Any tax inspector would become suspicious as soon as he learns about any transaction with a Cypriot company.
IOur tax planners disagree with the following statement:
"Note: Had the building contract been of a duration of less than 12 months then no tax would be payable in Russia but in Cyprus at only 4.25%. In this case tax savings are even greater!"
The Double tax treaty between Russia and Cyprus does not protect the Cypriot companyfrom VAT liability in Russia in the amount of 20%.
IWe believe our tax planners have been, and continue to demonstrate that they are able to competently depict the current advantages and disadvantages of Cypriot offshore entities with regard to the tax laws of Russia and we welcome any inquiries from any interested parties wishing to expand their operations in Russia. IWe can assure all the inquiries of prompt and reliable assistance in planning the tax matters that they encounter when doing business in Russia.
Our hourly rates are $100.
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