The Federation Council discussed possible measures to deoffshorize the economy

Russian business is gradually returning from foreign jurisdictions, but this process is caused not so much by the incentive measures of the Russian authorities, but by external circumstances – under sanctions, work in previous formats has often become impossible, as shown by the discussion held yesterday in the Federation Council of possible measures to deoffshorize the economy. If they have interests in foreign jurisdictions, Russian beneficiaries remain abroad for the time being, and some companies, in agreement with the Russian authorities, are delaying their move, since technological dependence on partners in “unfriendly” countries forces them to rebuild interaction chains before leaving. Judging by the past discussion, the authorities now have to choose whether to continue to stimulate the natural return of capital or to resort to coercive measures to speed up the process.

Representatives of the government and parliament discussed possible measures to deoffshorize the Russian economy on Tuesday at a round table meeting in the Federation Council. From the statements made there it became clear that the process of returning capital as a whole is not particularly amenable to control.

Let us recall that after the expansion of sanctions and the blocking of assets, the government began to more actively build the infrastructure of the deoffshorization process, in particular, the conditions for moving to special administrative regions (SAR) on the islands of Russky (Primorye) and Oktyabrsky (Kaliningrad region) were improved. We are talking about the possibility of redomiciliation, that is, re-registration of a business, or incorporation (creation of a new company in the Russian Federation) if the requirements for investment and “actual presence” of companies are met (see Kommersant on May 11).

Before the start of the military operation in Ukraine, the SAR mechanism was not particularly popular (as of February 2022, there were 66 residents), but now, according to the Ministry of Economy, there are 292 residents. Rosfinmonitoring notes that from March-April 2022, financial flows to offshore jurisdictions of “unfriendly” countries have decreased significantly. “We see that less money is flowing there, and more is coming back,” noted Evgeny Shevlyakov, head of the risk assessment department of Rosfinmonitoring, at a meeting in the Federation Council.

The key fork in the past discussion is that companies must be forced or encouraged to return capital. So far, the government has largely created opportunities for companies to move naturally. As Raisa Sevastyanova, deputy director of the department of corporate regulation of the Ministry of Economy, reported, for example, the issue of extending the period during which a company must be excluded from a foreign register when moving to the SAR from two to five years is being considered. As the Executive Vice President of the Russian Union of Industrialists and Entrepreneurs Maria Glukhova noted, the current two years are objectively not enough even if the company is “ready to let go,” not to mention situations where direct redomiciliation is impossible, for example, to move a company from Switzerland to Russia, an intermediate “stop” will have to be made ” In Cyprus.

Also, some companies with technology partners in foreign countries are delayed in moving, because the technology is needed by the Russian Federation and it is necessary to build other chains of interaction – if the presidential administration does not object, as Maria Glukhova explained, then they will not rush their move. However, the delay in the return of capital still raises concerns among the Ministry of Finance – they fear that companies “will remain there if sanctions are lifted to some extent in three years.”

Along with this understanding, the Russian authorities also demonstrate their readiness to take tough measures in their jurisdiction. Thus, the law on economically significant companies (470-FZ) was adopted, which provides for the suspension of the corporate rights of foreign holdings in relation to such organizations upon the application of their Russian owners with an ownership share of at least 50%. The law provides for the obligation of citizens to obtain rights in a significant Russian company – the State Duma is currently considering bills to establish administrative liability for failure to take such ownership. The Ministry of Economy cannot name the exact number of companies that will fall under the new regulation, since applications from relevant departments are still being submitted (see Kommersant on November 13). Maria Glukhova expects that only about 20 companies will fall under its scope.

According to the first deputy chairman of the Federation Council Committee on Economic Policy, Alexander Sinitsyn, the legislation has created the conditions for companies to transfer themselves to the Russian Federation, but at some point it is necessary to move on to measures that will make the choice impossible.

Deputy Director of the Tax Policy Department of the Ministry of Finance Alexander Smirnov noted that the transfer of business to the Russian Federation could also be facilitated by the suspension of certain provisions of double taxation agreements (DTAs) with 38 countries. However, he adds, the department is not yet ready to talk about coercive measures, at least in terms of tax regulation, for example, about increasing rates in the SAR for new residents in order to push them to move faster. The main “paradigm,” according to Mr. Smirnov, is to create conditions in the Russian Federation similar to the jurisdictions from which business is expected to return.

Note that the main limitations of the compulsory model are related to the fact that the state does not have data on the number of foreign companies with Russian beneficiaries, and therefore, on the potential number of “returnees.” The Federal Tax Service explains that while the service can trace the chain of ownership of a company through an LLC, information about the shareholders of a JSC is limited. If necessary, companies provide it upon request. Rosfinmonitoring confirms that they also do not have the full data, and the ability to work in query mode has now been reduced. Until 2022, we recall, it was assumed that the ability to track capital outflows would arise with the expansion of the international exchange of tax information. Now the White House plans to collect such data from Russian businesses in fragments by tightening control over its foreign operations (see Kommersant, November 21). Thus, the forced “cutting off” of ties and withdrawal from international, including fiscal, agreements creates additional difficulties for the Russian authorities.

So far, the limited return of capital “home” is dictated mainly by deteriorating external conditions, and beneficiaries who are strongly interested in continuing to operate abroad may still remain there. The Ministry of Finance notes a trend towards the transfer, for example, of Cypriot holdings to the UAE, where rates on a number of taxes have been reset to zero. According to Rosfinmonitoring, financial flows to the UAE increased by 96% (both general and suspicious transactions). They indicate the emergence of other “harbours” – in the countries of the Middle East and Asia. As a result, according to Alexander Sinitsyn, the scale of the return of capital to the Russian Federation may not be comparable with the more significant volumes of its movement to new harbors.

Diana Galieva, Evgenia Kryuchkova