Many experts have little trouble to agree that in selecting a jurisdiction for transactions, the local tax regime and any restrictions on international money transfers must be considered, and it is important not to overlook special tax requirements and restrictions on transactions with foreign counterparties that are imposed directly by Russian law. Such special restrictions apply to transactions with countries that are “blacklisted” by the Russian Ministry of Finance (Minfin), the Central Bank, the Federal Tax Service and the Federal Financial Monitoring Service.
In this alert, we summarise the restrictions (largely tax-related) that may be imposed on businesses that are residents of “blacklisted” countries.
The Ministry of Finance’s list of offshore zonesOrder No. 86-N of the Ministry of Finance of the Russian Federation of 5 June 2023 “On Approval of the List of States and Territories That Provide a Preferential Tax Regime and/or Do Not Require the Disclosure or Provision of Information for Financial Operations (Offshore Zones)”; Order No. 35n of the Ministry of Finance of the Russian Federation of 28 March 2024 “On Approval of the Special List of States and Territories That Provide a Preferential Tax Regime and/or Do Not Require the Disclosure or Provision of Information for Financial Operations (Offshore Zones)”
The list of offshore zones approved by the Russian Ministry of Finance (“List of Offshore Zones” or “Minfin List”) includes states and territories (i) with a low tax burden; (ii) with extensive bank and corporate secrecy; or (iii) that do not share financial information with the Russian tax authorities.In short, restrictions on transactions with countries in this list make it impossible to take advantage of various favourable rates of profits tax (including withholding tax) and other incentives under the Russian Tax Code.
Importantly, the Ministry of Finance also introduced a special list of offshore zones (“Special List”) that involves certain restrictions that the Russian Tax Code imposes on the general Minfin List. The Special List applies only to transactions carried out in tax periods of 2024-26.
In terms of the listed jurisdictions, the key difference between the general (expanded) Minfin List and the time-limited Special List is that the expanded list includes “unfriendlyThe List of “Unfriendly” Jurisdictions was approved by Regulation No. 430-r of the Government of the Russian Federation of 5 March 2022” jurisdictions.
The Russian Tax Code imposes the following restrictions and exclusions on transactions with residents of countries in the List of Offshore Zones:
- A controlled foreign company (“CFC”) that is, by all indications, an active foreign holding or subholding company and a resident of an offshore jurisdiction is not eligibleArticle 25.13-1, clause 7, paragraph 3, of the Tax Code of the Russian Federation for a profits tax exemption.
For profits earned by a CFC in 2024-26, this restriction applies only to countries in the Special ListHereinafter, restrictions applying to the Special List are established by Article 4 of Federal LawNo. 595-FZ of 19 December 2023; - A Russian company cannot elect to exempt a CFC’s profit for profits tax purposes by adjusting it by the amount of the profit earned as per the financial statements, if the CFC is a resident of an offshore listed jurisdiction in compliance with the special adjustment mechanism, which applies only when the CFC cannot distribute the declared dividends to a Russian company due to the sanctions imposed.
For profits earned by a CFC in 2024-26, this restriction appliesArticle 25.15, clause 1.2, subclause 3 of the Tax Code of the Russian Federation only to countries in the Special List; - For Russian transfer pricing purposes, transactions with a resident of a listed state or territory in the Minfin List are equated with transactions between related entities and regarded as controlled if the combined income from all transactions with such entity exceedsArticle 105.14, clause 1, subclause 3, of the Tax Code of the Russian Federation; Letter
No. ShYu-4-13/620@ of the Federal Tax Service of the Russian Federation of 23 January 2024 RUB120 million.
Again, note that this restriction applies to the general Minfin List, not the Special List; - Income in the form of property (property rights) that a Russian company receives without consideration from a foreign company that is a resident of a listed country is not eligibleArticle 251, clause 1, subclause 11, of the Tax Code of the Russian Federation for a profits tax exemption. It is important to note that the Russian tax authorities currently apply this restriction to property that a Russian company receives without consideration from a foreign subsidiary as well as from the parent company. This approach is supportedRuling of the Arbitration Court of the West Siberian District of 13 June 2024 in Case
No. А45-11993/2023 by court arbitration practice.
For profits earned by a CFC in 2024-26, this restriction applies only to countries in the Special List; - A 0% rate of profits tax cannot be applied to dividends that a Russian company (including an international holding companyArticle 284, clause 3, subclause 1.1, of the Tax Code of the Russian Federation) receives from a foreign company locatedArticle 284, clause 3, subclause 1, of the Tax Code of the Russian Federation in a listed country.
For profits earned by a CFC in 2024-26, this restriction applies only to countries in the Special List; - Limitation for a reduced 10% rate of profits tax (withholding tax) that cannot be applied to dividendsArticle 284, clause 3, subclause 1.3 of the Tax Code of the Russian Federation, interestArticle 284, clause 4, subclause 4, of the Tax Code of the Russian Federation (on any type of debt obligation) or royaltiesArticle 284, clause 4.3, of the Tax Code of the Russian Federation paid by an international holding company to a resident of a listed jurisdiction. At the same time, any consideration of this matter should also be guided by the provisions of double tax treaties with (i) unlisted and (ii) “friendly” jurisdictions that may provide for reduced rates or exemptions from withholding tax;
- A 0% tax rate cannot be applied to income from the sale of shares (interests) of a foreign company (including income received by an international holding company) that is locatedArticle 284.2, Clause 4, Article 284.7 clause 2 of the Tax Code of the Russian Federation in a listed country.
Note that this restriction applies to the general Minfin List, not the Special List.
Note that, along with “unfriendly” states such as the US, UK, Netherlands, Cyprus and Switzerland, the general Minfin List still includes the United Arab Emirates (UAE). The UAE are captured by the time-limited Special List as well.
The Special List is essentially an abbreviated version of the general Minfin List, excluding “unfriendly” states and their territories. The Special List is also limited in time, since for now it applies only to tax periods of 2024-26. Some restrictions imposed by the general List of Offshore Zones thus do not apply to a number of countries such as the UK, US, Netherlands, Cyprus, Switzerland and other “unfriendly” countries in tax periods of 2024-26. This is likely to give Russian entities a transition period to “deoffshorise” their presence in “unfriendly” jurisdictions.
The Federal Tax Service’s “blacklistOrder No. ЕD-7-17/914@ of the Federal Tax Service of the Russian Federation of 1 December 2023 “On Approval of the List of States (Territories) That Do Not Provide for the Exchange of Information for Tax Purposes with the Russian Federation””
The Federal Tax Service of Russia has its own list (“Tax Service List”) of states and territories that do not share information with Russia for tax purposes. Note that this list has a negative impact not only on residents of traditional offshore jurisdictions (eg, the Cayman Islands, Jersey, Guernsey, etc.), but also on companies — residents of conventional jurisdictions that the Tax Service now considers “uncooperative” (for example, the UK, Germany, the US, Switzerland, etc).A company that carries out a transaction with a resident of a country in the Tax Service List will be unable to take advantage of preferential tax regimes, and this applies especially to companies with the status of international holding company (“IHC”).
The Tax Service imposes the following restrictions on transactions with residents of states and territories in the Tax Service List:
- A company in which a foreign country listed by the Tax Service participates directly or indirectly cannot beArticle 24.2, clause 1.3 of the Tax Code of the Russian Federation a controlling entity of an IHC that is a Russian company. This restrictionArticle 24.2, clause 1.1, subclause 4, of the Tax Code of the Russian Federation could potentially result in a Russian company being denied IHC status because it failed to observe the required size of a controlling entity’s participation in such Russian company in a given period;
- An IHC cannot retainArticle 24.2, clause 4, subclause 2 of the Tax Code of the Russian Federation that status if the shares of public companies participating in the IHC are traded on the stock markets of listed countries;
- An entity is recognisedArticle 25.13, clause 4, subclause 2 of the Tax Code of the Russian Federation as a controlling entity if it participates in a CFC via direct or indirect participation in a company whose shares are traded on the stock markets of listed countries.
Normally, such an entity would not be recognised as a controlling entity and would thus not have to follow all Russian CFC rules in their combination (including reporting, payment of tax on the CFC’s profit, etc.); - A CFC’s profit is not eligibleArticle 25.13-1, clause 7, of the Tax Code of the Russian Federation for a tax exemption based on the applicable effective tax rate or if such CFC is recognised as an active foreign holding or subholding company that is permanently located in a listed jurisdiction;
- The “look-through” approach cannot be appliedArticle 208, clause 1.1, of the Tax Code of the Russian Federation to dividends paid by Russian companies for personal income tax purposes if a foreign company that is a resident of a listed country is an intermediate tier shareholder.
Although many Russian companies no longer use the look-through approach in practice when paying income to individuals who are the ultimate beneficiaries, the look-through approach generally enabled a taxpayer that is the actual recipient of income to transfer and recognise the entire amount of dividends paid by Russian companies for personal income tax purposes (ie, before tax withholding); - The profit of a CFC that is a resident of a listed country may be determined based on its financial statements (ie. not according to the rules in Chapter 25 of the Russian Tax Code) only if such financial statements are accompaniedArticle 309.1, clause 1.1, subclause 1, of the Tax Code of the Russian Federation by an auditor’s conclusion that does not give a negative opinion or decline to express an opinion.
Otherwise, the profits of such CFC will be determined in accordance with the rules in Chapter 25 of the Russian Tax Code; - A foreign company in which a listed foreign country has a direct participation of 50% or more cannot automatically be recognisedArticle 312, clause 1.5 of the Tax Code of the Russian Federation as the true beneficiary owner of income.
The Tax Service List currently includes many African and Latin American countries as well as such countries and territories as the UK, US, Taiwan (China), Germany and Switzerland.
The Central Bank’s list of offshore zonesInstruction No. 1317-U of the Bank of Russia of 7 August 2003 “On the Procedure to Be Followed by Authorised Banks in Establishing Correspondent Relations with Non-Resident Banks Registered in States and Territories That Offer a Preferential Tax Regime and/or Do Not Require That Information Be Disclosed or Submitted for Financial Transactions (Offshore Zones)”
This is essentially the first effort in Russian legal practice to list so-called offshore jurisdictions. Appendix 1 to Instruction Note that this is a separate list of offshore zones that the Central Bank uses to regulate relations with banks that are residents of countries in the Central Bank List and to determine the level of risk involved in financial transactions.
The list of the Federal Financial Monitoring Service and FATF lists
The Financial Action Tax Force (“FATF”) is a global organisation dedicated to the prevention of money laundering and terrorist financing. Russia’s membership has currently been suspended, but Russia continues to meet all of its commitments and follow FATF recommendations, including those on financial transactions with companies from countries in the FATF lists.FATF has “black” and “grey” lists. The grey list includes countries that, in the organisation’s opinion, don’t comply fully enough with standards for the prevention of money laundering and terrorist financing. “Blacklisted” countries take no measures whatsoever to prevent money laundering and terrorist financing. In international financial transactions, countries in these lists may come up against various restrictions imposed by the national law of FATF members.
In Russia, such restrictions currently involveOrder No. 361 of the Federal Financial Monitoring Service of the Russian Federation of 10 November 2011 “On Determining the List of States (Territories) That Fail to Follow the Recommendations of the Financial Action Task Force (FATF)” mandatory monitoring of transactions worth at least RUB1 million with entities in the Federal Financial Monitoring Service’s list, which is based on the FATF “blacklist”. The following transactions are subjectArticle 6, clause 1, subclause 2 of Federal Law No. 115-FZ of 7 August 2011 “On Measures to Counter the Legalisation (Laundering) of the Proceeds of Crime and the Financing of Terrorism” to mandatory monitoring:
- the deposit or transfer of cash to an account;
- the extension or receipt of credit (loans); and
- transactions with securities.
At the present time, North Korea and Iran are the only countries listed by the Federal Financial Monitoring Service, although the FATF “blacklist” also includes Myanmar. The FATF grey list includes such countries as the Philippines, South Africa and Vietnam. These countries could potentially be added to the FATF “blacklist” and thus also to the list of the Federal Financial Monitoring Service.
We should also note that membership in FATF or a similar regional organisation is a prerequisiteArticle 2, clause 3, of Federal Law
Practical takeaways
- In general, all cross-border transactions, not only those involving investments, should be planned and elaborated in view of the full range of factors that could affect their feasibility and/or ultimate success as well as a reasonable degree of subsequent support;
- The tax component of a cross-border transaction is, if not the key aspect, then one of the critical aspects that must be planned in depth in order to minimise a structure’s financial burden, both during its operation and when exiting the structure;
- Transaction planning should take into account not only the authorities’ officially published lists and their implications, but also current political and economic relations between the countries of the investor and investee (eg, disputes between Cyprus and Turkey and between India and China are significant non-tax barriers for a resident of one such country seeking to develop its business in the other);
- Efforts to prevent suspicious transactions in the financial system involve close cooperation between the Russian Central Bank, the Federal Financial Monitoring Service, law enforcement agencies, the Federal Tax Service and other regulatory bodies. Companies, to avoid having their funds frozen and other complications affecting settlements, should thus monitor and assess all these lists in combination to determine whether a major planned transaction involves a resident of a listed country;
- A number of countries (eg, the US, UK and Switzerland) are “blacklisted” by both the Ministry of Finance and the Federal Tax Service. As a result of Russia’s suspension of tax treaties with these countries and the US’s symmetrical response (the US Treasury Department effectively suspended its tax treaty with the Russian Federation as of 16 August 2024), new trade relations are problematic and tax-ineffective, and existing operations are extremely difficult to maintain;
- In addition to the “blacklists” of foreign states and territories that are compiled and periodically updated by the Russian authorities, it should be kept in mind that Russia itself may be included in such lists. The EU, for example, has included Russia in a “grey list” of countries that do not cooperate with the EU on tax matters (the “EU list of non-cooperative jurisdictions for tax purposes”). The formal reason for Russia’s inclusion is that it “has not fulfilled its commitment to amend its harmful preferential tax regime” for IHCs. What is meant in this case is the preferential tax regime for IHCs in SARs on Russky Island in Primorsky Territory and Oktyabrsky Island in Kaliningrad Region.