A So-Called Dutch Sandwich May Come Out of It

The President of the Russian Federation instructed the Government of the Russian Federation to introduce in the period till July 15 legislative amendments as regards deoffshorization and implementation of additional measures to limit participation of offshore companies in state and municipal contracts, as well as the right of such companies to receive state support.


Today, in fulfillment of the President's State of the Nation Address to the Federal Assembly the Government has issued instructions which obligate the responsible agencies to submit in the period till May 19, 2014 relevant finalized draft laws. In addition to the above, draft reports to the President of the Russian Federation on relevant matters are to be submitted to the Government until June 30, 2014.


Limitation of the right of offshore companies to participate in public procurement or, say, receive support is not a big problem, but it is important to take into account the fact that the ban should apply both to the right to "play" the role of founders of a Russian company by offshore entities and direct participation by offshore companies and their representative offices and branches.


However, the objective set to the Ministry of Finance and the Ministry of Economic Development to ensure introduction into the legislation of amendments which provide for taxation in the Russian Federation of revenues of companies under offshore jurisdiction (if those companies do not distribute the received profits in favor of Russian persons who control those companies) is rather difficult and legislators have to 'compute' a multi-step scheme. In case of negligence, there may arise a notorious tax evasion scheme called a Dutch Sandwich *. In solution of the above issue, it would be correct to use a complex approach which is partially reflected in the Guidelines of the Tax Policy of the Russian Federation in 2014 and the Planned Period of 2015 and 2016, namely, through introduction of the definition of a tax resident for entities via introduction of the institution of controlled foreign companies.


In addition to the above, the legislator should take into account taxation regimes in the neighbor states. There is no need to go to Holland if it is possible to incorporate a company in Belarus and pay a 15% offshore duty (Chapter 24 of the Tax Code of the Russian Federation) or secure privileges of a resident in Kazakhstan.


Н.Yu. Kornienko, PhD (Law), Head of the Tax System Development Department