June 11, 2013, 01:27 / Finance

There will be no offshore in Russia

There will most likely not be an offshore in Russia - the Ministry of Finance did not like the idea of creating it on the basis of the International Investment Bank (IIB) Margarita Papchenkova Maxim Tovkaylo

The Ministry of Finance does not allow the construction of an offshore in Russia / PhotoXpress

Prime Minister Dmitry Medvedev proposed creating an internal offshore company in Russia in April. He wanted to “shake up” European officials who decided to save Cypriot banks at the expense of their clients, he explained.

Cyprus is the center of transactions with Russian assets; according to Moody's estimates, as of October 2012, Russian depositors kept about 15 billion euros in local banks. Russian state-owned companies also operate there legally, Medvedev was indignant: “Let them close the Bahamas and the British Virgin Islands.” It is convenient for companies to work through an SPV (special legal entity), he explained.

Over the past two months, the government has been discussing the idea of creating an analogue of an SPV based on IIB (see inset), say a person close to the bank and two government officials. This is an initiative of the bank’s management, the federal official recalls: during the crisis in Cyprus, the chairman of the board of IIB, Nikolai Kosov, came with this idea to First Deputy Prime Minister Igor Shuvalov, and he instructed the Ministry of Finance to work on the issue.

According to the bank's management, the IIB, as an international structure with a special status, can serve as a jurisdiction convenient for financing projects. Transit low-tax countries (for example, Cyprus or the Netherlands), with which an agreement has been concluded to avoid double taxation, are used to transfer profits from Russia to offshore. For example, an offshore company gives a loan to a Cyprus company at 10%, and that company gives a loan to a Russian structure at 10.3%, says Denis Shchekin, managing partner of Shchekin and Partners: interest payments from Russia are exempt from tax by agreement, and in Cyprus tax is levied only on the difference at 0.3%.

The IIB offered itself to replace the Cypriot layer, explains a person close to the bank: the company can place a deposit in the bank, and the IIB will issue a loan to the Russian structure for this amount. The IIB is already exempt from income tax; the bank can share this additional income with the investor in the form of an increased deposit rate, says Vedomosti’s source. Investors will not pay tax on interest on the deposit while the money remains in the bank: therefore, it will be profitable for them to reinvest the income, he continues. In his opinion, the scheme may be of interest to companies that are afraid to keep money offshore: “In IIB, not a single raider will reach you, not a single European body that will decide tomorrow to take a haircut from your deposit.”

Through the bank, one can invest in areas that are key for the state, a government official believes: the IIB can issue infrastructure bonds, for example, for projects in the Far East.

But the Ministry of Finance did not like the idea. The government received a negative review from the Ministry of Finance, says a government official. “The idea is still very crude, the Ministry of Finance does not understand how this can be done,” explains a ministry employee. True, negotiations are ongoing, he admits, the special structure of the IIB is currently underused. Other options for creating an internal offshore are not being discussed, a government official says. Work on the ideas of the IIB continues, but it is too early to talk about any specific decisions, said a representative of Shuvalov’s secretariat. Representatives of the Ministry of Finance and IIB declined to comment.

Experts are skeptical about the MIB idea. When a company creates an SPV, it controls this structure, and an investor is unlikely to want to give money to MIB, Shchekin is sure. It is possible to turn the MIB into a clearing and settlement center, but then it must lose its special status, points out Paragon Advice Group partner Alexander Zakharov: any commercial use would be an abuse of its international status.

In addition, it is unlikely that offshore investors can hope for anonymity when working through the IIB, lawyers say. And SPVs are created for this purpose, to hide the beneficiaries, notes Zakharov. Experts advise not to create an offshore in Russia, but to improve the conditions for doing business in the country. Our legislation does not allow structuring transactions in the same way as in Cyprus, Sberbank President German Gref explained in an interview with Vedomosti: the solution is to create the same opportunities in Russia and slightly reduce taxes, for example on dividends.