Entrepreneurs ask to soften the conditions of deoffshorization in government orders

Businesses are trying to revive a bill on easing the conditions for deoffshorization in government procurement that was previously withdrawn from consideration. In a letter from Business Russia to the government, it is noted that it is difficult to reduce the share of offshore companies in companies participating in procurement to the legally permitted 10% due to sanctions and Russian retaliatory measures. The resulting narrowing of the circle of participants in government procurement may negatively affect the state of competition at auctions and the efficiency of government procurement, the authors of the letter warn. Lawyers share these concerns – the expansion of the list of offshore zones and the blocking of Russian assets abroad now complicate the process of changing the structure of companies. In their opinion, the increase in the permissible share of offshore ownership to 25% proposed by business could solve the problem – although only partially.

The head of Business Russia, Alexei Repik, sent a letter to First Deputy Prime Minister Andrei Belousov (Kommersant has it) with a request to reconsider the terms of deoffshorization of government orders. Let us remind you that government transactions with offshore companies have been prohibited since 2015, and from January 2022 the ban extended to companies that have offshore companies and their beneficiaries with an ownership interest of more than 10% of voting shares (or 10% of the authorized capital) as participants or founders. . Business Russia has previously noted that for a significant number of Russian companies this requirement will be unenforceable, it will negatively affect the state of competition at auctions and may reduce the efficiency of procurement. Therefore, business asked to increase the permissible share of offshore companies – a bill to increase it to 25% was developed by parliamentarians, but in the spring of this year it was withdrawn from consideration by the State Duma on their own initiative.

Now “Business Russia” is asking to revive the bill, citing the difficulties of the deoffshorization process due to sabotage from “unfriendly” offshore residents (directors, secretarial companies, partners). Decisions on the withdrawal of foreign investors from the capital of Russian business companies are supervised by the government commission, which also complicates the process. The problem is exacerbated by the expansion of the list of offshore companies – since July 2023, it has been more than doubled by the Ministry of Finance (from 40 to 91 states and territories) at the expense of “unfriendly” countries. If previously the list included mainly classic offshore companies (Panama, British Virgin Islands, Seychelles), now it includes countries and the EU (including the Netherlands, Cyprus, Luxembourg), the USA, South Korea, Singapore and Taiwan. According to a Kommersant source in the government, the relevant department sent out an appeal from Business Russia for consideration to the Ministry of Finance, the Ministry of Economy and the Ministry of Industry and Trade – they must present their position to the government in the first half of October.

Lawyers share the concerns of entrepreneurs. Partner at Tomashevskaya & Partners Andrey Shpak notes that many foreign administrators refuse to serve companies with Russian beneficiaries, even if they are not under sanctions. Anton Namenov, senior partner at Pen & Paper, explains that the activities of offshore companies are almost always carried out by specialized organizations – registered agents, who, in turn, provide the company with a legal address, receive correspondence, generate and submit reports and perform other necessary actions. Recently, cases of refusals of registration agents accompanying companies managed by Russian persons have become more frequent. According to Anton Namenov, this has a detrimental effect on the deoffshorization process, since the activities of an offshore company can be blocked in this way. “Completing any corporate actions and moving companies to Russian jurisdiction is becoming much more complicated and takes much longer than before. In addition, some jurisdictions, in principle, do not allow relocation (redomiciliation), which until recently – before the introduction of a regime for the incorporation of legal entities from foreign jurisdictions in Russia – made the transfer of assets even more difficult,” explains the expert.

Managing partner of the law firm Enterprise Legal Solutions, Yuri Fedyukin, recalls that the rule on restricting access to procurement of offshore subsidiaries is already more than two years old, and in other circumstances this would be enough to change the ownership structure of organizations focused on government procurement. “But now, due to the blocking of Russian assets in foreign countries, as well as restrictions imposed on transactions for the alienation of shares in the capital of Russian companies for foreign investors, it is necessary to remove offshore companies from the list of shareholders or reduce their share in the capital for a number of companies, including public, even technically problematic,” the lawyer notes.

Note that the share of direct or indirect participation of offshore companies of 25% is an acceptable limit for other forms of government financing – subsidies and investments from the budget. Lawyers consider the increase in the ownership share to this threshold proposed by the business to be justified, although not sufficient. Anton Levdonsky, senior manager of the financial consulting department at Marillion, notes that this will solve the problem given that jurisdictions such as Switzerland and Cyprus are on the list of offshore companies, but only partially. According to Yuri Fedyukin, raising the threshold will not solve the problem the way a moratorium on the application of the norm could solve it, but for some companies it would reduce the risk of losing contracts due to the ownership structure. In turn, Anton Namenov explains the advisability of raising the threshold by the fact that a share of 10% does not give any corporate influence, while 25% allows you to block some decisions. “From this point of view, the exclusion from procurement of participants whose share of offshore companies in the structure of the authorized capital is only 10% is excessive,” the expert believes.

Diana Galieva