Once again President Vladimir Putin is putting pressure on Russian owned offshore companies to pay taxes.  In his state of the nation address, Putin announced Russia would be taxing offshore companies.  This continues the government’s crusade against offshore-declared income.  In 2012, the Federal Tax Service developed draft amendments to the Tax Code which would effectively terminate previously held deductions for costs paid to offshore companies, thereby reducing taxable income.  The amendments allowed for the recapture of the deductions if the taxpayer could prove that they had no control over the recipient of the payment.  There was significant push-back and watered-down versions were subsequently proposed to ease the burden on large companies and maintain an attractive market for foreign investors.

But Putin seems intent on pushing for further amendments that will result in retaining capital in Russia and minimize tax evasion.  Currently, gains and profits arising from assets held by offshore companies that are not repatriated to Russia are not taxed.  The use of offshore companies to hold assets has become more commonplace.  The use of a holding company in a country with a double tax treaty, Cyprus, for example, provides the benefits of minimal withholding rates.

The question remains, whether new tax laws imposing stricter control on Russian controlled offshore companies, if vigorously applied, will lead to a mass exodus of businesses from Russia and keep foreign investors away.