Russia Tightens Tax Loophole as Kremlin Seeks to Plug Budget Gap

The economic crisis sparked by the coronavirus pandemic is pushing the Kremlin to clamp down on tax avoidance and close an offshore loophole popular with Russian business, as the government scrambles to plug holes in its budget. Starting in January, Moscow says it will begin taxing at higher rates profits that companies transfer to lower-tax jurisdictions such as Cyprus, Malta and Luxembourg, marking some of the most aggressive steps taken by Moscow in recent years to claw back tax revenue. Until now, companies based in Russia that sent profits - in the form of dividends or interest income - to holding companies domiciled in those jurisdictions paid only an average of 2% tax to Russian tax authorities. That rule originally sought to encourage foreign companies to set up business in Russia by lightly taxing profits they returned to their home countries. However, Russian companies have long used the loophole to lower their tax bill at home.

In Russia, most interest and dividend income is taxed at 20% and 13% respectively. In Cyprus, for instance, tax rates on such income can be as low aszero. The Russian government will now raise the tax on most dividend and interesttransfers to Cyprus, Malta and Luxembourg to 15%. Officials expect to earn over $2 billiona year. The changes could raise tax obligations for some major Russian businesses.

“Some company clients are looking into options to change their corporate structures,move jurisdictions or return to Russia,” said Rustem Ahmetshin, senior partner at Moscow-based law firm Pepeliaev Group. “But such changes are costly and take time.”