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. “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.
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In Russia, the government and sports teams are working to attract more foreign sports fans – as well as private investment. To this end, officials are – among other things – looking at relaxing visa requirements for foreigners visiting for sporting events. “(Russian sports teams) need to be more competitive, not just on the field, but commercially,” said Andrey Tereschenko, a partner at Pepeliaev Group.
Russia has been going through a volatile period the past few years, as the country continues to suffer from depressed oil prices and the effect of Western sanctions imposed following Russia’s 2014 annexation of Crimea that prohibit European and American companies from doing business with numerous wealthy Russian individuals (or companies owned by them), and prohibit specified Russian companies in the financial, energy, and defense sectors from accessing US and EU markets. While the international law firms are struggling to stay afloat, domestic Russian law firms have been doing just fine. Pepeliaev Group Managing Partner Sergey Pepeliaev says his firm is doing “brisk” business as well and increased in size in both 2017 and in 2018.
In February 2018, Russia’s Constitutional Court ruled that trademark owners’ claims against parallel importers may themselves be “abusive” if they unjustifiably limit importers into Russia or if the owners’ branded goods are overpriced. The Court also ruled parallel imported goods may only be confiscated and destroyed if they fail to meet required standards of quality, safety, health, environment or culture. The court effectively ruled that IP rights should not be used to limit competition, even where rules offer the opportunity to seek compensation from the parallel importer, said Elena Sokolovskaya, head of the antitrust practice at Pepeliaev Group.
Bilateral trade and investment flows between Hong Kong and Russia are expected to expand over the next couple of years as Russia shifts its economic focus to Asia, and the conclusion of the comprehensive double taxation agreement (CDTA) between the two parties.
The Russian government has proposed an increase in the maximum value of the tax base for social insurance and pension payments by 8 percent beginning Jan. 1. All companies in Russia, including foreign and multinational enterprises, are liable for compulsory insurance contributions for their employees to fund social welfare programs. The payments include social insurance in case of employee's temporary incapacity to work or maternity leave, medical insurance to fund the free public health care system, and pension contributions for retirement.
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