Russia: Restrictions on the use of offshore holding companies

Offshore ownership threshold is now limited to below 25% starting on the 1st of January 2023, paving the way for Russian corporate legal structure.

Business ban

Russia will ban businesses with significant offshore ownership from receiving government support as part of Moscow’s ongoing campaign to push Russian firms to bring their corporate headquarters back home.

No help for businesses

Firms where offshore entities have a stake of at least 25% in the business will not be able to get help through programs such as emergency coronavirus relief or low-interest government-backed loans starting on the 1st of January 2023.

Offshore countries with favorable corporate tax

Cyprus, Ireland, Malta, and Switzerland are among the countries Russia considers “offshore” for the purposes of enforcing the legislation.

57 countries and jurisdictions were included on the list in total, including U.S. states Delaware and Wyoming, home to many international companies due to their favorable corporate tax rates.

Cyprus: Popular offshore country

Cyprus is a popular destination for Russian companies to register their corporate headquarters, due to its status as a low-tax jurisdiction, an EU member and its use of a legal system based on English law.

Restrictions to bring funds back to Russia

The new rules will deprive some of Russia’s largest companies of government support from next year, unless they undertake potentially complex and expensive restructuring.

Russia has taken steps in recent years to clamp down on Russian companies registered abroad in low-tax jurisdictions.

Analysts see the move as motivated both by a desire to bring funds back into the country in line with international attempts to frustrate the use of low-tax jurisdictions by the world’s largest companies and subjugate Russian firms to Russian laws and courts, thus increasing the Kremlin’s ability to control them.

The Finance Ministry of Russia said 1.9 trillion rubles (US$25 billion) of corporate earnings made in Russia were booked in Cyprus in 2019, and the value of dividends sent to owners registered in Cyprus tripled to more than 300 billion rubles (US$4 billion) in the first nine months of 2021.

Double taxation treaties: Revision

Russia has revised double taxation treaties with several low-tax jurisdictions to increase the tax paid to Russia on dividends sent abroad.

Russia also revoked a double tax treaty with the Netherlands another hub for Russian companies such as the country’s largest technology firm Yandex in 2021 after the country refused to agree to Russia’s new terms of higher tax rates.

The Netherlands was not included on the new list of offshore jurisdictions.