Modified geography: rich people have fallen out of love with offshore

In what jurisdictions and why do the capitals of multimillionaires move?
Origin source
Wealthy citizens of Russia traditionally favorably treat European, especially Swiss banks, as a place of storage of liquid assets: securities and cash. At the same time, before the CRS (automatic international tax information exchange) and the introduction of CIC rules (controlled foreign companies), the ownership of assets was usually registered with a foreign company from offshore jurisdictions: the British Virgin Islands, the Bahamas, Bermuda. These structures solved two problems: simultaneously provided both protection of assets and tax efficiency. But the introduction of CIC regulations and the tax residency of foreign companies in Russia, as well as the launch of automatic information exchange between most civilized countries, practically offset the advantages of these jurisdictions.

Why offshore is no longer in fashion

Offshore companies, for the most part, operate under a special regime for international companies (for example, international business companies in the BVI), which stipulates that the company does not operate in the territory of the state of incorporation and is probably managed from abroad. The very essence of this regime increases the risks of recognizing such companies as tax residents of Russia, and against the backdrop of the recruiting CRS, lawyers can only bet on who will be the first foreign company-victim recognized by the Russian tax resident in accordance with Art. 246.2 of the Tax Code. There is no optimism about the use of off-shores and the so-called panamagate, in which there was a massive disclosure of confidential data on offshore registrars' customers from around the world.

The abolition of tax advantages, as well as the growing risks of offshore countries, made investors turn to more protected jurisdictions for owning and managing family capital, for example, Cyprus and Luxembourg. Both countries are EU members, provide a high level of capital protection and provide infrastructure servicing such capital. What do they offer for structuring Cyprus and Luxembourg investments today?

Cyprus: no longer offshore

Cyprus is one of the most popular foreign jurisdictions for Russians. In 2013, Cyprus was excluded from the offshore lists, which further strengthened its position (the presence of the country on the offshore list imposes a number of restrictions, in particular, it does not allow the CEC profit to be exempted from taxation in a number of cases, and also complicates the calculation of such profits).

Why does the capital of Russia love Cyprus? First of all, for the developed legal system based on English law, which, for example, allows using the inaccessible in Russia trust institution for hereditary planning and asset protection. Moreover, the Cyprus trust went beyond its English original in regulation: changes from 2011 expand the powers of the founder of the trust, leaving behind him some of the authority to control the structure, which is difficult to implement in England. Cyprus is also located in one time zone with Russia, which is convenient for doing business: it coincides with the time for banks to conduct payments and other service providers.

There are no special organizational and legal forms of companies for private capital in Cyprus, most often private companies with limited liability or trusts are used to own assets. In both cases, the legislation of Great Britain is taken as a basis with some insignificant changes. The private company is a bit like Russian LLC - the key characteristic of these two structures is the fencing of the founder's liability from the obligations of the company and vice versa.

Unlike offshore companies in Cyprus, there is a corporate tax, which is 12.5%, but there are a number of important exceptions, for example, the receipt of dividends as a general rule is exempt from tax. An additional advantage is the existence of an agreement on avoidance of double taxation between Cyprus and Russia, establishing a preferential tax regime, which in the end makes Cyprus an attractive jurisdiction for the storage and management of securities, as well as for structuring direct and portfolio investments. Cyprus companies by default should audit the financial statements, which is important for the purposes of disclosing the CEC in the Russian Federation and calculating taxable profits.

In Cyprus, there are a large number of service providers specializing in providing services to Russian clients. At the same time, competition in the market for fiduciary and administrator services is quite high, and consequently the prices for such services are quite attractive.

Luxembourg: financial locomotive of Europe

Along with Cyprus, Luxembourg is an annual record holder in terms of investment in the Russian economy, which indicates the close economic ties of these countries. Luxembourg has always been one of the locomotives of a united Europe and stood at the origins of the EU, claiming to be the financial center of the European Union.

What are the competitive advantages of Luxembourg? Luxembourg has never been included in the offshore lists and has a good reputation as a financial center with a developed banking and stock infrastructure. According to GDP per capita, Luxembourg traditionally occupies one of the leading places among the economies of the world. According to various estimates, the financial sector provides up to a quarter of the country's GDP. The economy is stable, in the new history of the country there were no crises comparable to the crisis of 2013 in Cyprus, when, among other things, the interests of foreign investors suffered. The country's overall focus on attracting investment has led to the establishment of a stable legal framework and a judicial system that protects foreign investment. English is not a state language, but the overwhelming majority of the population speaks English, moreover, any corporate documents, for example, statutes and extracts from the register of companies can be compiled in two languages.

For the possession and management of family capital in 2007, Luxembourg introduced a special type of company - SPF (Société de gestion de patrimoine familial). The difference between SPF and ordinary company is for the purpose of the activity: SPF is created and functions for the acquisition, possession and management of financial assets, that is, acts as a family purse. Among the shareholders of such a company can be only individuals or trusts, private funds. One of the main differences between such a company is the tax regime: the structure is exempt from all taxes except one - the taxe d'abonnement in the amount of 0.25% of the paid statutory and additional capital. At the same time, payment of dividends from a source to non-resident taxpayers is not subject to taxation in Luxembourg. SPF mode is ideal for managing family wealth through investment in securities and attracts investors from around the world. We see in practice a great interest in such companies among Russian citizens.

Among the shortcomings should be noted the company's narrow target activities and relatively expensive services in Luxembourg compared to Cyprus due to more expensive labor resources and transport distance.

It seems that Russian business has already adapted to the new reality: the term CEC has firmly entered the lexicon of beneficiaries and persons managing their assets, the best practices of working in a new "anti-world" world are beginning to form, and against this background the companies in Cyprus and Luxembourg are becoming more and more more in demand.