Experts propose options for businesses to adapt to sanctions

Russian companies with structures abroad should think about changing jurisdiction due to sanctions, consultants advise. Among the options are the UAE, Shanghai and "Russian offshores".

Russian businesses that have foreign structures or work with foreign suppliers have faced a number of problems due to sanctions - from logistics to difficulties with the movement of capital, according to an EY review (RBC has). In particular, the researchers note that continuing to use structures registered in unfriendly countries is fraught with blocking of assets and accounts, problems with chartering ships, with transportation insurance, etc.

Another problem not related to the foreign subsidiaries of Russian companies is the refusal of foreign suppliers to send goods to RUSSIA.

“Obviously, the crisis will be long and deep, so we advise companies to be proactive and already start rebuilding the structures, logistics and production of their business in order to restore operations in the new realities as soon as possible,” EY notes in the review.

Emirates and CHINA

In addition to the risks of blocking accounts and other restrictions from unfriendly jurisdictions, Russian companies that have registered structures there have lost the opportunity to finance foreign subsidiaries, EY points out. Previously, intra-group loans were often used to finance cash gaps, but such transfers in foreign currency are now prohibited both due to sanctions and Russian authorities' restrictions on the movement of capital out of the country.

According to EY experts, there are several options for changing the jurisdiction of trading and holding structures of Russian business. Thus, the infrastructure for trading is well formed in the UAE (mainly in Dubai), as well as Hong Kong and Shanghai.

“Turkey repels businesses with high inflation and an unstable legal system, but traders settle there too, Israel [repels] with high taxes,” writes EY. A combination of options is possible: for example, using a Hong Kong company whose traders work through a branch in the UAE, but whose accounts are opened in Chinese banks.

Read on RBC Pro Pro How to replace Arial, which is not available in Russia:24 similar fonts Articles Pro We remain:How to Capture Consumers in Empty Marketswhy companies massively return people to the office Articles Pro They definitely won’t be fired:Which Employees Shouldn't Worry About Downsizing Articles Pro The company has suspended business in Russia.What to prepare for its DIRECTOR Articles Pro Safe harbor or risk:what will Russian metallurgy be like for investors Articles Pro The European sky is closed for Russia.Who will benefit from this air blockade Pro Articles You need to lower your payroll.How to do it legally Instructions

China says it does not deliberately bypass sanctions against Russia Politics

Approximately the same set of jurisdictions is suitable for holding activities, but there is always a risk of “cooling” their relations with Russia, advisers warn.

“There is no jurisdiction that is ideally suited for all factors, so the alternative is to build parallel structures in different jurisdictions, possibly not formally associated with Russia and Russian shareholders,” the authors of the review argue. “Jurisdictions such as Qatar, Saudi Arabia, Macau, Indonesia can be included in the spectrum for analysis.”

Eligible Jurisdiction Evaluation Criteria

When choosing a country for a new “tax residence”, EY advises considering four factors:

Possibility to open a bank account without hindrance. While problems arise, for example, in Hong Kong, where persons of Russian origin or affiliated with Russians may be denied opening an account. The political position of the country. The position of neutrality is publicly occupied by the League of Arab States (it includes 22 countries, including the UAE) and China, remind EY. currency control requirements. In China, the regulator evaluates each payment, which complicates the work of the business, while there is the possibility of opening so-called offshore accounts. Possibility of business redomiciliation(complete transfer of a company from one country to another). For example, it is impossible to “transport” a company from another jurisdiction to Hong Kong, but it is possible to the UAE. In some cases, it may be necessary to transit through a third jurisdiction, which greatly complicates and lengthens the process.

For holding and financial activities, Russian Special Administrative Regions (SARs) on the Russky Islands in Primorye and Oktyabrsky Islands in Kaliningrad can become an alternative to Hong Kong and the UAE, EY experts add. In February, the Russian authorities allowed not only foreign businesses, but also Russian companies to move there, RBC wrote.

Risks when changing residence

When moving to another jurisdiction, the question of the tax efficiency of companies may arise, EY warns: the use of an alternative jurisdiction and the accumulation of part of the profit there without the presence of personnel there will also have to be justified by the Russian tax authorities. If the staff is planned to be transported, then it is necessary to calculate how much the payroll taxes will cost.

In addition, leaving the traditionally popular European jurisdictions for Russian groups will result in high costs. In the Netherlands, Switzerland, as well as in almost all European jurisdictions, there is an “exit tax”, reminds KMPG partner Alexander Tokarev. In particular, in the Netherlands, the “exit tax” is up to 25% of the amount of the conditional sale of all company assets. Plus, the amount of taxes is added to the payment of tax, legal and audit specialists to accompany the process of moving, he adds. According to Tokarev, the average change of jurisdiction takes five to six months.

Problems with the supply of goods

Due to sanctions pressure, some foreign partners broke off trade relations with Russian companies. “The first thing a business does is analyze Chinese and other supply alternatives and evaluate product stocks in Russia, but this is only a temporary solution,” EY believes.

If it is not possible to lobby for the permission of deliveries on an individual basis, it is necessary to rebuild the supply chain through distributors in other countries or repackage goods into prefabricated commodity units, advises Sergey Kudryashov, partner of the Deloitte Risk Management Department in the CIS.

The largest independent trader will stop buying oil from Russia Business

Meanwhile, the logistics industry has not yet got rid of the “coronavirus” problems, to which new ones have been added, recalls Andrey Semenov, Director of PwC Supply Chain Advisory Services in Russia. The main restrictions in the field of transportation are the lack of a fleet of containers, the risks of shipping in the Black Sea due to military operations, restrictions on the import of goods from China associated with the latest outbreak of covid-19 . The routes open for Russian goods - in the CIS countries and in the Asian direction - lack the capacity of border crossings and railway infrastructure, Semenov notes. According to him, the transportation of a number of goods is also affected by the restrictions imposed on Russia for leasing an air fleet for cargo transportation.

“In the long term, business should start developing cross-border logistics and, possibly, production infrastructure in the direction of the Caucasus, the Azov-Black Sea basin, the Middle East, Central and Southeast Asia - to build hubs, simplify customs processing processes, and negotiate special conditions,” Semyonov concludes.