Russians – How To Avoid Tax on Offshore Profits

Russia recently passed a Controlled Foreign Corporation Law.

 

A Controlled Foreign Corporation (or CFC) Law is an onshore law which purports to tax income or capital gains made by Companies incorporated Offshore but which are controlled from onshore.

 

Essentially how a CFC law works is if management and control of a tax free Offshore Company is seen to lie in your hands, or if you have the capacity to own the overriding majority of shares in the tax haven Offshore Company, then you are required to declare in your local tax return profits made by the nil tax Offshore Company.

 

How CFC laws came about was around 30 years ago the big western countries began to realise that certain of their citizens were using nil tax Offshore companies to avoid having to pay tax at home on their non-local sourced (ie international) income. In particular the CFC laws target the use of Nominee Shareholders and Directors. If you live in a country which has a CFC law (regardless of whether you are the director/shareholder of the Company or not) and if you have the capacity to own and control the company by reference to shareholdings then you would be required to declare and pay tax at home on your Offshore Company’s earnings.

 

TWO IMPORTANT TAX PLANNING ISSUES TO CONSIDER:

 

  1. 1.      Management and Control

 

The first thing to note is you will need to refrain from nominating yourself as Director and Shareholder of your tax free International Business Company (“IBC”) because this places management and control of the Company in your hands.

 

Generally speaking, and particularly where CFC laws are in place, an Offshore Company which is seen to be managed and controlled from Onshore can be taxed onshore.

 

Hence when setting up a tax free Offshore Company, if you want to minimise the chances of the Company being taxed “onshore”, Management and Control of the Company will need to be, and be seen to be, taking place from Offshore. How that can be achieved is by deploying a Nominee Shareholder and or Nominee Director as part of the Corporate structure.

 

There are a number of features that can be built into the Corporate/Legal structure of your IBC to ensure that your ownership rights are protected (and which will prevent the Nominees from running away with your property or money). For more information on that and how a Nominee Service can work for you please click on these links:

 

http://offshoreincorporate.com/faq/should-i-engage-nominees-or-should-i-direct-and-hold-the-shares-in-my-offshore-company/

 

http://offshoreincorporate.com/faq/how-can-i-protect-my-underlying-ownership-of-my-offshore-company-where-a-nominee-is-engaged-to-act-as-director-or-shareholder/

 

  1. 2.      The Impact of Russia’s CFC Law on the Shareholding Structure

 

The bottom line is with Russia having recently passed a Controlled Foreign Corporation a nil tax Offshore Company or IBC by itself won’t be of much use to you. Why? Because Russia’s new CFC law requires you to declare and pay tax at home on the income of any Offshore Corporation that you control or have the capacity to control (And if you fail to report the IBC’s income to the Russian authorities you will be committing an act of tax evasion. Tax evasion is a crime punishable by imprisonment).

 

There is a potential solution however. The solution is to set up a Foundation as well as an IBC.

 

Why set up a Foundation?

 

As discussed if an IBC alone is used you will still be liable to declare and pay tax at home on your IBC’s earnings

 

It would be wise then to set up a Private Interest Foundation to own the shares of your tax free Offshore Company.

 

We International Tax Planning Lawyers used to use Offshore Trusts for such purposes back in the noughties but the problem there is that you have someone (ie a Trustee) holding property for the benefit of 3rd parties who are inarguably beneficial owners of that property and probably/potentially entitled to the income/capital of the Trust (which can have tax consequences onshore).

 

A Foundation is very similar to a Trust in that it’s set up by a Founder (like a Settlor in the case of a Trust) and managed day to day by a Councillor (like a Trustee in the case of a Trust) who manages the Foundation property for the benefit of the beneficiaries of the Foundation. A key advantage of a Foundation is that it’s a separate legal entity in its own right (ie the Foundation actually owns the assets held by the Foundation – unlike a Trustee who holds property for someone else ie the beneficiaries) and generally speaking the beneficiaries are not entitled to the income or capital of the Foundation until it’s actually received.

 

What this means as a beneficiary is that you should be able to defer paying tax at home on the income of investments held by the Foundation enabling you to reinvest 100% of that income not just the after tax component. (One jurisdiction ie Seychelles has even taken this a step further by specifically stating in their law that the legal and beneficial owner of any asset held by the Foundation is the Foundation itself).

 

Prices start from as little as $1,600. For more information Foundations please visit this page from our website:

http://offshoreincorporate.com/private-interest-foundations/

http://offshoreincorporate.com/seychelles-foundations/

 

Local conditions can have an impact. Hence it would be wise to seek local legal/tax/financial advice before committing to set up an IBC or Foundation.

 

 

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