By the end of 2015, Russia, despite the economic downturn, remained the leader in growth and terms of private assets among Eastern Europe countries, follows from the data report the Boston Consulting Group “Private assets in 2016: how to navigate the new reality.” While overall the region’s private assets in 2015 increased by 6.4%, to about €3.3 trillion, in Russia, the increase amounted to 8.1%, while total assets reached €1.4 trillion (at the average exchange rate).
To private assets the authors of the report include cash and deposits, equities, debt securities, insurance and pension instruments. Taken into account as assets in offshore zones and countries with standard tax system and not considered an investment property and luxury goods.
Under the leadership of Russia in Eastern Europe, the growth of the private assets of Russians has slowed down compared to 2014, when it stood at 19%. The authors of the BCG report attribute this to a decline in energy prices, international sanctions and conflict in Ukraine.
Worldwide private assets in 2015 increased by 5.2% to $168 trillion. “Unlike previous periods, in 2015 the growth of the world’s private assets was mainly due to the formation of new assets (such as increased household income), not the efficiency of existing assets, as in many markets of stocks and bonds growth was zero or even negative,” note the authors of the report. Subject to the recovery of the stock market in the next five years compound annual growth rate of the world’s private assets may rise to 6%, with the result that by 2020 they will reach size of $224 trillion. The forecast for Russia is 9.6%, the report said.
Russia and offshore
The report notes that in 2015, global assets in offshore jurisdictions increased by only 3%, to about $10 trillion. About a quarter of the global volume of offshore private assets stored in Switzerland, says BCG. A key factor slowing the growth of offshore capital, according to the authors of the report, was the repatriation of assets by investors from developed countries. Investors from North America, Western Europe and Japan have reduced their assets in offshore zones more than 3%. But the greatest increase (approximately 10%) in 2015 was observed in offshore Hong Kong and Singapore. Offshore assets in these jurisdictions, according to the forecast, will increase annually by approximately 10% until 2020. In the result the combined share of Hong Kong and Singapore in the world’s offshore assets will grow from about 18% in 2015 to 23% in 2020. The authors of the report write that, on the one hand, the fight against tax evasion will force investors from countries of the Old world to return assets to the Motherland, but at the same time, “regulation stabilizes the markets and will create new opportunities to transfer assets after payment of all taxes in offshore zones, which provide the best quality service, a wide choice of products, economic stability and other benefits”, says one of the authors of the report, a BCG partner Anna Zakrzewski.
Russian investors, according to Zakrzewski will not rush to return assets to the Motherland — the volume of Russian assets in offshore zones will not change in the next five years or will show a very slight increase. This, in her opinion, “may be due to General instability and a distrust of equity markets”.
What proportion of Russian assets is offshore, said in the report. Zakrzewski did not comment on it. In June last year, BCG has estimated that about a quarter (24%) of the total private wealth in Russia’s $2 trillion in offshore accounts.
The possible failure of the opaque offshore companies, but a complete rejection of foreign tools — no, as they are handy for non-tax reasons, says EY partner Marina Belyakova. According to her, not all domestic owners are ready to abandon foreign structures, including taking into account the experience with them. Speech including goes about the protection of ownership. “I do not exclude that in 2018-2019, when presumably Russia will earn an automatic exchange of information [the international regime under the auspices of the OECD], will start some changes, but their magnitude is difficult to predict,” she says.
Foreign companies were actively used, for example, for trading securities, income on debt instruments; tax considerations in addition to the driver were restrictions on currency legislation — not all foreign exchange income of a resident of the Russian Federation can get to your overseas account, said the Director of international tax services group of KPMG Alexander Tokarev. Now the owners of these companies consider different strategies: someone declares in the framework of the law on deofshorizatsii, and will continue to use these companies with the payment of taxes from the profits of a CFC, and someone transfers the ownership with other offshore companies in Cyprus. Part of the income in Cyprus is not taxed, and in others there are opportunities to reduce effective tax rate.
To simplify and return
Of Russian power in the second year of implementing a plan of deoffshorization. According to which entered into force on 1 January 2015 the law on controlled foreign companies, are still the owners of shares of more than 10% of CFC’s were required only to notify the Russian tax service, but in the spring of next year, the Russian beneficiaries will be required to declare and pay tax on undistributed profit of a CFC is 20%, if the company is controlled by a legal person and 13%, if physical. In General, the interviewed tax consultants seeing an increase in requests from customers for liquidation of foreign companies or their re-registration in Russia. Partner Ekaterina Lazorina, PwC, head of tax and legal practice in Russia and the CIS, said that in the past year increased the number of requests from clients associated with the simplification of the ownership structure of the assets, which implies a reduction in the number of foreign companies, translation of Russian assets in direct ownership of Russian shareholders and change of tax residency of foreign companies on the Russian. In the translation of a foreign company “to the Russian level”, in the case that its investments meet the criteria of applicable Russian tax legislation, the company in obtaining tax residency can use the benefits provided to Russian holding companies: dividends from such subsidiaries will be exempt from tax, she explains.
An increasing number of shareholders are considering a tax-free liquidation of Kicks and the transfer of assets under direct ownership of physical persons — tax residents of the Russian Federation or Russian companies, says Tokarev.
“Many customers are preparing for a tax-free liquidations, in particular, complete reporting of the companies, if such did not exist before. This is important because on the basis of statements of the Russian recipients of the assets (individuals) will be able to form their tax value — adds Belyakova. Alternative, some clients — individuals planning to acquire assets from their foreign companies, using introduced a temporary exemption from tangible benefits”.
Tokarev also noted that, among Russian asset owners popular is the use of so-called “cross-cutting” approach in the distribution of dividends, when the ultimate beneficiary is a tax resident of the Russian Federation — is claimed as the actual recipient of the dividends, which allows immediately to pay tax at a rate of 13% and exempts from the tax consequences of CFC with respect to such dividends.