Russia: Legality of Russian Offshore Companies and Accounts in Regard to the Problem of Revenue Collection in Russia
| DOI | https://doi.org/10.1108/eb025927 |
| Date | 01 March 1999 |
| Published date | 01 March 1999 |
| Pages | 89-94 |
| Author | Timur Sinuraya |
| Subject Matter | Accounting & finance |
Journal
of
Financial Crime
—
Vol.
7 No. 1 —
International
Russia: Legality
of
Russian Offshore Companies
and
Accounts
in
Regard
to the
Problem
of
Revenue
Collection
in
Russia
Timur Sinuraya
The Russian Government
is not
only corrupt
— it is
a thief which steals money from
its own
citizens
by
imposing taxes, hard currency regulations
and
custom duties. Therefore
the
money which
is
made
in Russia should
be
moved
to
safe places abroad.
This
is the,
rather simplified, reasoning
of the
eco-
nomic criminal,
yet it
carries some very serious con-
sequences.
The
phenomenon
of
illegal capital
flight1
was probably
one of
the major factors2
of
the current
economic crisis
in
Russia.3 Russian experts point
out
that
the
main flow
of
illegal capital from Russia
is
channelled through
the
so-called offshore companies
and accounts.4 This paper will look
at the
legality
of business practices relating
to the
increase
in off-
shore assets
by
Russian investors
in
regard
to the
major problem
of
government revenue collection
in Russia.
WHAT
ARE
OFFSHORE COMPANIES
AND ACCOUNTS?
These
are
different incorporation forms (legal per-
sons) and monetary assets deposited in banks which
are
allocated
to tax
havens also known
as
offshore
zones
or
jurisdictions.
The
offshore zones
are
usually
characterised by:
— bank secrecy
and
confidentiality rules
in
commer-
cial transactions;
— little
or no
taxation of the foreign monetary assets
or incorporation forms;
—
the
banking sector
is not
heavily regulated;
— regulation concerning foreign businesses
is
mini-
mal
or
non-existent;
— marginal supervision over foreign legal persons;
— well-developed communication
and
transporta-
tion infrastructures;
— minimal regulation regarding (hard) currency
traffic effected
by
foreign legal
or
natural persons;
—
the
country enjoys
a
relatively stable political
atmosphere;
— professional service
is
available
in
banking
and
corporate sectors;
— authorities
do not
actively practise international
cooperation
in
legal, judicial
and
fiscal matters.5
There
are
numerous offshore zones
in or in
close
proximity
to the
major financial centres of the Amer-
icas,
Europe
and
Asia.
For
example, Austria, Cyprus,
Gibraltar,
the
Isle
of Man,
Liechtenstein, Luxem-
bourg, Monaco, Sicily
and
Switzerland6
are all off-
shore zones which provide access
to
West European
markets. Other offshore zones such
as
Antigua,
the
Bahamas, Bermuda,
the
British Virgin Islands
and
the Cayman Islands have also attracted investors
from Russia
not
least because
of
their proximity
to
the American markets.
In
reality, practically
all of
the investment-related assets from Russia which are
placed abroad
can
have some connection
to the
offshore zones which serve
as the
gateways
to
wider
international markets.
Cyprus
is a
good example
of
Russian offshore
companies
and
accounts.
The
investment atmosphere
in Cyprus
has
created
an
opportunity
for
Russian
legitimate investors
and
ill-gotten capital controllers
alike.
The
primary reason
is
that
the
offshore com-
panies
in
Cyprus
are
subject
to
only 4.25
per
cent cor-
porate
tax
rate
on the net
profit, against
a
maximum
of
35
per
cent
in
Russia, whether
the
company
has a
physical presence
in
Cyprus
or
not.7
In
addition,
the
double
tax
treaty between Cyprus
and
Russia, which
was concluded with
the
Soviet Union
in 1986 and
still applies, provides
for
zero withholding
tax in
Russia
on
dividends, interest
and
royalties received
by
a
Cyprus company from Russia,
as
well
as
zero
withholding
tax in
Russia
on
gains generated
by a
Cyprus company from
the
disposal
of
securities
in
Russia.8
The
registration procedure
is not
complex
and takes
a
maximum
of two
weeks.
The
foreign
owners (managers)
and
expatriate personnel
of the
offshore companies enjoy favourable taxation (duty
free),
accounting
and
auditing regimes
and are
exempt from currency exchange control restrictions
whereas residents
are
subject
to
these restrictions.
More importantly,
the
foreign owner
or a
share-
holder
of the
company
can
conceal
his or her
name
Page
89
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