The Ministry of Finance offered new tax incentives to companies in "Russian offshore"

The Ministry of Finance proposed to expand the capabilities of companies that have moved to special administrative regions (“Russian offshores”). In particular, they can receive new tax benefits, including when dividends are paid to them Bridge to Russky Island

The Ministry of Finance proposed a list of tax changes that will expand the opportunities for companies when moving to “Russian offshores” on the Oktyabrsky and Russky Islands. The document was developed as amendments to the bill on tax benefits for residents of special administrative regions (SARs), previously introduced by a group of senators and adopted in the first reading in May. RBC got acquainted with the text of the amendments.

The document was considered at the site of the government apparatus, a source close to the Cabinet of Ministers told RBC. RBC sent a request to the Ministry of Finance.

The amendments proposed by the ministry can be divided into two groups. The first clarifies the procedure for obtaining the status of an international holding company (IHC) in order to receive preferences from the ATS regime. The second establishes new tax benefits for residents with MHC status. In particular, the range of organizations that are entitled to exemption from tax on property located abroad, as well as the application of a zero income tax rate on dividends from foreign organizations, is expanding.

The opportunity to move to “Russian offshores” has existed since 2018. Initially, only foreign companies could register in special administrative regions on the Oktyabrsky Islands in the Kaliningrad Region and Russky Islands in the Primorsky Territory. Under a number of conditions, they received the status of international holding companies (IHC), which entitles them to receive tax benefits. The preferences from the application of the regime include, among other things, a zero tax on dividends received, provided that the company paying them (Russian or foreign) owns at least 15% in the capital and a zero tax on income from the sale of shares/stakes in Russian or foreign companies. Against the backdrop of anti-Russian sanctions to support the domestic business of the authoritiesadopted norms that allow Russian companies “registered” in special areas to obtain the status of MHK.

One of the amendments concerns the use of a black list of offshores compiled by the Ministry of Finance for tax purposes in RUSSIA. The zero tax rate on dividends can be used only if their payer is a foreign company that is not registered in a country from this list of the Ministry of Finance (officially - “the list of states and territories that provide a preferential tax regime for taxation and (or) do not provide for the disclosure and provision of information during the financial operations (offshore zones)”).

Before the 2022 anti-Russian sanctions, the blacklist included about 40 jurisdictions, mostly offshore, but now it has more than doubled due to unfriendly countries. Since July 1, their number has increased to 91 (the countries of the European Union, Great Britain , Switzerland , usa , CANADA , Japan , South Korea , Singapore, Taiwan, Australia , New Zealand  were included ).

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The new amendment provides for fixing the list for the purposes of taxation of dividends in the SAR as of March 1, 2022, that is, until large-scale replenishment by unfriendly states. In this form, the list can be applied until the end of 2026. “This will make it possible to continue applying the existing 0% rate when an international holding company receives dividends from a foreign organization, even if after March 1, 2022, the state of permanent location was included in the list of offshore jurisdictions of the Ministry of Finance,” notes Pavel Kondukov, partner at BGP Litigation.

However, in practice, this change may not have a significant effect, because due to sanctions, it is difficult to receive funds from unfriendly countries to Russia, the expert adds.

New rules for obtaining preferences

The amendments also specify the conditions for acquiring the status of an MHC by a resident of a “Russian offshore”.

In particular, the right to provide documents and information (financial statements, audit report) for MHCs registered in the SAR is extended until the end of 2023 instead of the end of 2022.

For international companies registered by way of re-domiciliation of foreign structures in the SAR before March 1, 2022, the condition is canceled according to which, as of March 1, 2022, a share of at least 75% of the direct / indirect participation of controlling persons must be maintained (that is, the share for this period, according to the amendment, can change as you like).

Among the amendments is a provision potentially restricting the relocation of Russian companies to the SAR (domestic companies received such a right in 2022). It will affect organizations that move to special areas from federal cities (Moscow, St. Petersburg and Sevastopol).

Under current legislation, companies that bring more than 1% of income tax to the regional budgets cannot freely move to “Russian offshores” - local authorities may not let them go. The changes proposed by the Ministry of Finance reduce the threshold value of the share of income tax receipts from 1 to 0.1%. In this case, the regional authorities may file objections regarding the acquisition of the MHC status by the company. “This amendment can be interpreted as a restriction, but, obviously, it is introduced on the basis of a higher level of income tax payments in these regions compared to the amounts in other regions,” explains a senior lawyer in the Structural and Tax Consulting practice of the law firm “ Lemchik, Krupsky and Partners Albina Nurusheva.

Additional tax benefits

The bill provides for the expansion of the circle of organizations entitled to exemption from property tax located “outside the territory” of Russia and used in the implementation of projects for geological study, exploration, and mining. Now only international companies (ICs) get this opportunity, and the amendments propose replacing the wording with MHC. The latter can be recognized both by international companies that have re-registered from foreign ones, and by Russian organizations that have moved to the SAR from another region.

Kondukov believes this amendment is potentially in demand for Russian oil and gas companies. “This amendment may be relevant for Russian oil and gas companies operating on the continental shelf, the exclusive economic zone or in the Russian sector of the bottom of the Caspian Sea,” he says (according to the Constitution, the continental shelf and the exclusive economic zone do not belong to the territory of Russia). Or, for example, a Russian company from the SAR leased property abroad to its "daughter" or representative office for use in a foreign project, although this property is listed on the balance sheet of a Russian organization, the expert suggests.