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Federal Law No 376-FZ is designed to create incentives for organizations and individual to file tax declarations and pay taxes levied on the non-allocated profits of controlled foreign companies. The federal law introduces the notion of a 'controlled foreign company' and a 'controlling person'. The controlling persons of foreign companies are to be recognized as individuals and legal entities whose participatory shares in a foreign organization exceed 25% (during a transition period - 50%), or 10% if the aggregate share held by owners recognized to be RF residents exceeds a total of 50%. In this connection it is important to note that an individual's share will be calculated with due regard for the amount of shares held by his or her spouse, and even of those held by minor children. Entities that are not registered as legal persons can also be recognized to be controlled foreign organizations, namely funds, partnerships, trust funds, societies. However, not-for-profit organizations are not included in this list because they do not allocate any profit. Among other things, the State will monitor the cash flows in the accounts of these companies with the purpose of exercising control over their activity in order to identify corruption schemes based on the use of 'passive money'.

A violation of these requirements is to be punished by a fine in the amount of 20% of the unpaid tax, but no less than Rb 100,000. A failure to properly report to a tax agency is punishable by a fine in the amount of Rb 100,000 per company. In addition, the violator will be subject to the tax evasion provisions stipulated in the relevant articles of the RF Criminal Code. The only exception will be the companies registered in those countries that have signed double taxation avoidance agreements with the Russian Federation and set up proper tax information exchange channels.

These legislative initiatives are primarily aimed at replenishing the government's budget, and not at identifying all the tax-evading organizations and individuals and bringing them to responsibility. As estimated by the RF Ministry of Finance, the implemented de-offshorization policy may generate some additional tens of billions of rubles for Russia's budget.

However, the Federal Law also has a number of discrepancies. Thus, for example, under Federal Law FZ-376, a trust fund's controlling person is recognized to be the holder of a share in excess of 50%, but the law does not explain how the amount of share in a trust fund is to be determined, bearing in mind that the relations between the participants in a trust fund differ dramatically from the type of relations between the shareholders in a joint-stock company.

Besides, the Federal Law has a global orientation - that is, it can also be applied to companies registered in the USA or any other country. When the draft of this law was still being discussed, the business community asked the RF Ministry of Finance to specify that it was to be applied only to the countries functioning as offshore zones - that is, those on the RF Ministry of Finance's black list. However, the RF Ministry of Finance chose not to apply this approach. So, any company whose effective rate is below 75% of Russia's effective rate (that is, 15%) becomes subject to the provisions of the new Federal Law.
On the whole, Russia's Federal Law No 376-FZ is tougher than the international legal practices in that field, which means that Russian companies, when handling their foreign assets, will be at a disadvantage by comparison with their foreign counterparts, because the existing foreign legislations applied to controlling organizations are based on softer principles.
The new Federal Law will be especially harmful to venture companies, which carry on all their transactions in offshore zones due to the absence, in Russia, of key venture instruments and underdeveloped property protection and intellectual tights legislation. And finally, many companies operate in offshore zones not because they wish to avoid taxation, but because it is more convenient to do their business and protect their interests there.

By way of summing up it can be said that the de-offshorization policy, on the one hand, is aimed at reducing capital outflow, while on the other, it actually reduces the competitive capacity of law-abiding Russian companies in the international market.

Margarita Gvozdeva – Researcher