Offshore trusts: Asset protection chances
Let’s see how CIC rules affect the use of popular companies and structures in Malta, the UK, and Cyprus.
Case 1. Maltese Trust – for owning personal assets, investment portfolios and foreign companies
Malta provides an opportunity to create a trust as a special tool for owning real estate, personal family assets, protecting various assets from encroachment by lenders and raiders, as well as their subsequent transfer to the next generations of families without tax losses. Discover more information at https://offshorecitizen.net/asset-protection/.
In particular, a wealthy businessman can establish a trust – personally, or by transferring assets from companies owned by him to the trust. The ownership of the assets will go to the address of the trust (trust manager), which, as a rule, is a trusted lawyer of a businessman who is knowledgeable about family assets, its business and financial expectations. A trust is bound by a written assignment of a businessman (trust declaration) and is obliged to manage the assets received on the trust with the greatest benefit for the beneficiaries (beneficiaries), who are the persons identified by the founder.
From the point of view of the Russian rules, CFC Trust is a structure without forming a legal entity. We can say that this is a separate complex of property owned by the trust manager. Of course, with incorrectly “tuned” / created trust structures, various negative tax duties, consequences and risks in Russia can arise. However, with a balanced approach, they can still be avoided.
In particular, the tax resident of Russia will not be recognized as the controlling person of the trust if he is not entitled to receive the trust profit, cannot dispose of such profit and has not retained the rights to the property transferred to the trust, does not exercise control over the trust. Under the control is understood the ability to influence decisions made by the trust manager for the distribution of profit (income) of the trust.
Case 2. British Partnerships (UK LLP) – for international trade
A worthy and more respectable alternative to the classic “offshore” may be the British partnership, which is a legal entity. Partners are liable for its obligations only to the extent of the value of their contributions to the partnership (the rest of the property remains outside the risk zone from operating trading activities). The advantage of the partnership is that it is a tax-transparent structure.
The partnership itself is not obliged to pay income/income tax since the income comes from the partners, and not from the partnership itself. As a result, taxes should be paid only by partners in the country of their tax residency. In the case when the partners are non-residents of Great Britain, the income from activities is obtained from sources outside of Britain, such income and profits will not be taxed in “Foggy Albion”. By the way, partners can operate in countries with a territorial tax regime (for example, Hong Kong, Singapore), which excludes taxation of partners on such incomes and in the country of their incorporation.
These features make the British partnership a very interesting tool for running a trading business. It is important for Russian businessmen to take into account that the profit of active foreign companies does not equal the personal income of a shareholder as a controlling person in Russia. At the same time, an active company is a company, more than 80% of whose revenues are active (in particular, income from international trade in goods). It is required to notify about participation and control over such a partnership in Russia, but his profit will not be equated with the personal income of a Russian businessman.
Case 3. Cyprus Holding – for groups of companies from Russia and the European Union
Cyprus does not burden investors with a tax burden. Companies that are created and managed by Cyprus directors are considered tax residents of the Republic of Cyprus, and their operating income is subject to corporate tax at a rate of 12.5%. In addition, Cyprus boasts a good infrastructure, qualified personnel to conduct business, a pleasant location in the Mediterranean.
For contributions to the capital of a Cyprus company after 2015, a special regime is provided – “Notional Interest Deduction”. It provides an opportunity to reduce the company’s profit before tax by the amount of the deposit up to 80% of the profit. Thus, the current corporate tax burden, the rate of which is only 12.5%, is further reduced (up to a maximum of 2.5%).
Dividends received by a Cyprus company from abroad are exempt from corporate tax (provided that they are not recorded as expenses at the source of payment).
With respect to foreign incomes, a Cyprus company is granted the right to reduce the corporate tax on taxes paid/withheld abroad – on the basis of numerous bilateral agreements on avoidance of double taxation concluded by the Republic with many countries of the world. Even if there is no such agreement, the Cypriot state provides the right to offset foreign tax unilaterally. When paying a tax on dividends received from companies – residents of the European Union – you can also deduct the tax paid on the profits of the company – the payer of dividends (the so-called underlying tax).
The above-described international trends and tools to counter the use of offshore and foreign structures require reciprocal decisions and actions from wealthy citizens of Russia.
It is advisable to do this now, without delay. The tax authorities will test the norms of the tax legislation on the CIC on those structures whose owners have ignored the new trends and the wind of change.
CICs were often created and used to save taxes in the shareholder’s country of residence. For a long time, this did not create problems for Russian businessmen.
Multinational companies, large and even medium-sized businesses around the world have been actively used by foreign companies and structures for hundreds of years to conduct business in other countries and for “covert” tax optimization by transferring profits from the source country to low tax (offshore) jurisdictions.
Every year losing millions and billions of dollars, some states have passed legislation on controlled foreign companies, which equates the profits of a foreign company to the personal income of its shareholder. And regardless of whether the profit was distributed to the shareholder as dividends or remained in the accounts of the foreign company itself. This is done in order to demotivate shareholders from high-tax countries to create offshore companies and use them to accumulate capital as “wallets” without paying high taxes in their country of residence (tax residence).
There are quite a few countries that have adopted legislation on controlled foreign companies (or abbreviated to KIK): Australia, Argentina, Brazil, Great Britain, Hungary, Venezuela, Germany, Greece, Denmark, Egypt, Israel, Indonesia, Iceland, Spain, Italy, Canada , China, Korea, Lithuania, Mexico, New Zealand, Norway, Peru, Poland, Portugal, Russia, USA, Turkey, Uruguay, Finland, France, Sweden, Estonia, South Africa, Japan.
There is a group of countries in which the rules on CFC are not established, however, there are legal instruments that, to a certain extent, perform similar functions and are aimed at countering the use of offshore companies in business. Such “analogues” are in Austria, Latvia, the Netherlands, Slovenia, and Malta.
A number of countries, for various reasons, still do not have legislation on the CIC at all, without restricting their citizens and tax residents to use offshore companies, including to reduce taxes payable to the budget. For example, Belgium, Gibraltar, Hong Kong, Cyprus, Luxembourg, Singapore, Czech Republic, Switzerland.
72 states agreed to fight against the erosion of the tax base in their territories and to oppose the transfer of profits to low-tax jurisdictions. And in support of June 7, 2017, in Paris, they signed the Multilateral Convention – the so-called BEPS plan. The plan includes, among other things, recommendations on how to correctly pass laws aimed at effectively combating the use of foreign companies to reduce taxes.
This ensures that CFC rules will be actively developed in many countries around the world. However, this does not preclude the use of foreign, including offshore companies in the future.
Russian version of de-offshore
In 2015, CIC rules appeared in Russia. They obliged Russian residents to notify the tax inspectorate of participation in foreign companies with a share of more than 10%, to notify about control over them (with a share of more than 25% or above 10%, with the additional condition that all residents of Russia account for more than half of the company’s capital), to give financial statements / audit of the performance of such CFC. The rules also provide in some cases the obligation of a shareholder / controlling person to declare the profit of a foreign company as their personal income for tax purposes in Russia.
The December list of countries that have agreed to automatically send to Russia information on the accounts of tax residents of Russia and foreign companies controlled by them added oil to the fire.
A transparent world. How information exchange will be arranged between Russia and the tax authorities around the world
Why do I need a CIC and how are they used
KIK has long been created by investors all over the world, including from Russia, for doing business in an international format, opening accounts in foreign banks, and also for the following reasons:
1. Owning assets through CFC is more confidential and secure.
2. Flexible management of foreign assets with minimal taxes.
3. Indirect sale of foreign assets through the sale of shares in the company that owns them – with minimal taxes.
4. International trade, the production of goods, the construction of real estate abroad – without taxes and without respecting the hard currency restrictions in Russia, etc.
Thus, in many cases, CICs were often created and used precisely to save taxes in the shareholder’s country of residence. For a long time, this did not create problems for Russian businessmen. Since the probability of obtaining by the tax authorities, the necessary information for additional taxation was illusory, and it could be safely neglected. In 2015, the tools appeared, which created a lot of questions on the further use of the CIC by businessmen from Russia.