August 3, 2017 at 13:41Offshore and foreign economic transactions: advantages and pitfalls
Hello, Habr! I continue to publish my book on the legal aspects of IT business. Today - about offshore.
The book "Startup Law":
Law is inherently national: it applies to individual countries. The law of even neighboring states can be very different. What principles apply here?
If entrepreneurs from different countries enter into an agreement, they can choose the law that will apply to the transaction and the court that will resolve the disputes. At the same time, both law and court can relate to a third country - for example, London Arbitration (LCIA) and English law can be applied to a transaction involving entrepreneurs from Russia and Kazakhstan.
Many modern entrepreneurs perceive the state as a service by analogy with a bakery: you can choose the one that is cheaper and tastier, and not the one that is closer to home. This phenomenon is called competition of jurisdictions.
Continuing the author’s thought: of course, the most delicious buns are in a specialized private bakery, and not in the one that is larger and consumes resources for allergy buns, social buns (tasteless, but free) and armed guards. In other words, social functions, maintaining the army and other expenses make large states a priori ineffective in the market of jurisdictions. Conversely, micro-states with a small population have long realized their advantages by optimizing taxation, company registration and reporting requirements. And some of them went very far in this business optimization.
While traditional trading powers like Switzerland, the Netherlands and Hong Kong attracted entrepreneurs with low taxes and a lack of formalities, the independent (and greatly impoverished) ex-British colonies began to compete in uncompromising capital raising from around the world. So offshore companies appeared - countries that do not levy taxes on non-residents and guarantee company owners complete anonymity. Cayman Islands, Belize, British Virgin Islands - everyone has heard about these countries, but not all offshore owners will be able to find them on the map.
The two described types of comfortable jurisdictions are called onshore and offshore. Onshores include countries that do not provide special treatment to non-residents. As a rule, in these countries a legal business that is not tied to a location prefers to work. For example, if a company (for example, an online store) operates around the world, it is logical that the head office will be opened in the country with the most favorable regime. Onshores are not used to evade taxes or to hide shadow capital.
Offshore companies, unlike onshore companies, offer zero income tax for non-residents, that is, for companies that do not conduct actual activities in offshore. An entrepreneur can pump up an offshore company with money and not pay any taxes on income or profit. However, there are some nuances.
Zero income tax cannot be maintained if offshore companies do not have anonymity. After all, as we already know, it is unprofitable to withdraw dividends offshore (the tax can be up to 30%). It is advantageous to pretend that the company in the offshore is independent (it has other owners), and conclude an agreement with it under which the Russian company will spend money (thus reducing its profit), and the offshore will earn (because it does not pay income tax ) For example, a Russian company pays offshore for the use of a trademark: the company spends money (reducing profits and taxes), the offshore receives income (and pays nothing for it). Money flows abroad to an offshore account.
However, in this case, the tax office will easily see that this transaction is, in fact, a fraud committed to evade taxation, because it involves two companies with the same owners, and the goal here is not to provide a trademark, but to avoid taxes . Therefore, companies in offshore companies are often created anonymously, and nominal local employees can be a director and even a participant - however, recently this has not helped against tax and, moreover, criminal prosecution by influential countries.
Using offshore companies for an untrained entrepreneur brings more problems than real benefits.
The first problem: offshore in the transaction is a marker that will immediately scare away all organizations with state participation, non-profit organizations, and also raise serious questions from the tax inspectorate and banks.
The second problem: offshore is easy to lose: due to problems with the island authorities or because of the intrigues of the nominal owners.
The third problem: the money lying in the offshore must be spent on something, and when you try to transfer it to a civilized jurisdiction, the first problem again arises.
As for the onshore, this is a completely legal tool in transactions. It allows for more hassle-free logistics, simplifies currency controls, and, in some cases, saves on taxes. In addition, many onshores, like offshores, belong to the former British colonies (Malta, Cyprus, Hong Kong), which means that they have common law (English law). Using such an onshore allows you to fully use common law instruments (for example, conclude advanced shareholders' agreements - agreements between shareholders), as well as consider disputes in British courts, famous for their integrity (as well as the deadlines and cost of the process).
At the same time, foreign companies (both offshore and onshore) impose a number of restrictions on the entrepreneur. They block access to government procurement, support and subsidy programs, loans from state banks and funds from state investors. The benefits of transactions under common law are also not unlimited: a Russian court may refuse to execute a decision of a foreign arbitration.
In a word, if you hesitate, not knowing what to do, open a company in Russia. A good accountant will help to allocate maximum costs to expenses, and taxes will not seem such a heavy burden. And your CFO will be in charge of foreign jurisdiction (when you have one).
The withdrawal of money from the country is monitored by special authorized organizations. Control over financial flows is called foreign exchange control . Its main task is to block the channels of irretrievable leakage of money (including offshore). This is just about those situations where Vasya, under a fake agreement, transfers money to Belize (previous example).
Since 2016, foreign exchange control in respect of entrepreneurs has been carried out by the Federal Tax Service of Russia and the Federal Customs Service of Russia, however, entrepreneurs rarely encounter government bodies in this area. The fact is that in the Russian system of currency control, banks are responsible for checking the operations of their customers and, formally not being agents of currency control, in practice often block suspicious transactions.
In very general terms, the requirements of foreign exchange control are as follows:
The last paragraph will dwell in more detail. When conducting transactions within the country, banks rarely ask for confirmation (except for very large transactions). You can transfer money to the counterparty without any reason - you only need to send an order to the bank to make a payment (payment order). True, documents will still be required for submission to the tax service, but their absence alone is not a reason for refusal by the bank.
In foreign economic transactions, the order is different - permissive. Even when opening an account, the bank will ask why it is for you and what you plan to do. And if a foreign transfer comes to the account without justification, the bank may reject it. The basis for approval of the payment is the contract with the counterparty. Since 2014, this agreement is not required to be presented in the original or translated into Russian. For example, if your company creates mobile applications, then a printed offer from their website will be enough to justify the proceeds from Apple.
If the transaction amount exceeds $ 50 thousand, the bank will require the original contract with a foreign counterparty and a special document - the transaction passport (in fact, a description of the required foreign exchange). The transaction passport is associated with other foreign economic documents (customs declarations, invoices), which together confirm your tax reliability.
Please note: fines for violation of certain rules of currency control (including repatriation of currency) are set at a rate multiple of the transaction amount.
For those who do not want to wait for the publication of the remaining chapters on Habré - a link to the PDF of the full book is in my profile.
The book "Startup Law":
- Startup vs. businessman
- Choose a form
- registration
- Corporate governance
How a company is built legally - Current work
Contracts and how they work
How to check an open source partner - Taxes
What pays IT-business in Russia? - Governmental support
- Startup cycle
How (in general) venture investment works - Venture deals
- Venture capital funds
- Intellectual property
- Offshore and foreign trade activities
Advantages and pitfalls of offshore
Law is inherently national: it applies to individual countries. The law of even neighboring states can be very different. What principles apply here?
- Public law (for example, the criminal code) is valid in a certain territory. Usually this is the territory of the state - land, underground and air objects (including warships abroad), territorial waters. For example, if a border passes along a river, the same action near one shore may be considered a crime, but near the other - not.
This approach is effective because criminal law usually “works” with the facts of the crimes committed, which are easy to tie to a specific territory. In some situations, there are difficulties - for example, computer crimes are not always equally regulated, and what is prohibited in one country may be legal in another. Therefore, law enforcement agencies have to lure hackers into their territory in order to detain and bring charges. - Private law is more complicated. First, ownership and similar property rights are governed by the law of the country in which the property is located. So, a foreigner can sell real estate in Russia only according to Russian laws (with the registration of a transaction in Rosreestr).
- The status of an individual, his rights and obligations are determined in accordance with personal law. Personal law depends on citizenship or place of residence.
So, a foreign citizen should not serve in the Russian army (personal law applies on the basis of citizenship). Moreover, a foreign citizen permanently residing in Russia is a tax resident. This means that he must pay taxes in Russia (the principle of residence applies). - But what about legal entities? Personal law is usually applied to them on the basis of the place of registration. Compared with obtaining citizenship, registering a legal entity in a foreign country is usually easier. So entrepreneurs have a choice: you can register a company in a country with suitable corporate and tax laws.
If entrepreneurs from different countries enter into an agreement, they can choose the law that will apply to the transaction and the court that will resolve the disputes. At the same time, both law and court can relate to a third country - for example, London Arbitration (LCIA) and English law can be applied to a transaction involving entrepreneurs from Russia and Kazakhstan.
Offshore and Onshore
In recent decades - with the development of the Internet, simplification of the visa regime, cheaper flights - traveling (both real and virtual) has become much easier, as well as running a business that is not tied to a specific physical residence.The entrepreneur opened the production of low-voltage electrical equipment using the following structure: his goods were manufactured in China, the management company was registered remotely in Hong Kong, and all the reports were submitted there. The goods were sent from China with the help of logistic brokers to the Amazon.com warehouse. The equipment was sold through the Low-Voltage Devices display case. The Internet giant independently processed orders, delivered and returned to customers. The entrepreneur (business owner) and several of his employees lived in the United States.
The entrepreneur accessed the online store from a tablet. Once he bought the same tablet for his son, and to distinguish between them, on his tablet he changed the name of the device in the system: from his name to “baba” (“dad” - in Chinese). However, the name in the Amazon account changed automatically and the online store found this suspicious and blocked sales until the entrepreneur confirmed the name change (which actually was not). The entrepreneur failed to get a different answer from technical support.
Stocks, transfers, logistics, salaries - everything was blocked for about a month, until the entrepreneur could reach out to one of the top managers. Only after that the problem was resolved.
Many modern entrepreneurs perceive the state as a service by analogy with a bakery: you can choose the one that is cheaper and tastier, and not the one that is closer to home. This phenomenon is called competition of jurisdictions.
“With services, everything is simple. You choose the one that is better, more convenient, cheaper: you can go to this bakery, or you can go to another. And the choice - in terms of the flow of capital, businesses, information and people - is determined by a simple economy. When deciding where to open an office and conduct business, we simply consider the costs and benefits of different jurisdictions: Moscow, Atlanta, London, Prague, etc. It is clear that many factors are taken into account, but first of all - the level of resistance of the business environment. ” (Dmitry Denisov, Business Journal)
Continuing the author’s thought: of course, the most delicious buns are in a specialized private bakery, and not in the one that is larger and consumes resources for allergy buns, social buns (tasteless, but free) and armed guards. In other words, social functions, maintaining the army and other expenses make large states a priori ineffective in the market of jurisdictions. Conversely, micro-states with a small population have long realized their advantages by optimizing taxation, company registration and reporting requirements. And some of them went very far in this business optimization.
While traditional trading powers like Switzerland, the Netherlands and Hong Kong attracted entrepreneurs with low taxes and a lack of formalities, the independent (and greatly impoverished) ex-British colonies began to compete in uncompromising capital raising from around the world. So offshore companies appeared - countries that do not levy taxes on non-residents and guarantee company owners complete anonymity. Cayman Islands, Belize, British Virgin Islands - everyone has heard about these countries, but not all offshore owners will be able to find them on the map.
The two described types of comfortable jurisdictions are called onshore and offshore. Onshores include countries that do not provide special treatment to non-residents. As a rule, in these countries a legal business that is not tied to a location prefers to work. For example, if a company (for example, an online store) operates around the world, it is logical that the head office will be opened in the country with the most favorable regime. Onshores are not used to evade taxes or to hide shadow capital.
Offshore companies, unlike onshore companies, offer zero income tax for non-residents, that is, for companies that do not conduct actual activities in offshore. An entrepreneur can pump up an offshore company with money and not pay any taxes on income or profit. However, there are some nuances.
Vasya opened LLC “Romashka” in Moscow and the company “Vasilek, Ltd” in Cyprus (recently Cyprus has ceased to be an offshore). Then he sold a 100% stake in Chamomile to Cornflower. Chamomile became 100% owned by a Cypriot company.
LLC "Camomile" made a profit of $ 100. With them she must pay taxes in Russia (for example, according to the simplified tax system - 15%). Then, if Chamomile pays the remaining amount as dividends to Cornflower, the latter will pay a small tax on dividends (about 10%). As a result, from 100 ₽ there will be about 76 ₽. In general, such a scheme is quite legal, but not very profitable. If Daisy does business in Russia, it is more profitable for her to leave money here and not withdraw it anywhere.
Now imagine that Vasya opened an offshore company - Nezabudka, Ltd - in Belize. He concludes a contract between “Chamomile” and “Forget-me-not”: for example, a license agreement on the use of a trademark (the trademark “Camomile” belongs to a company located in Belize; LLC “Camomile” uses it under a paid license). Accordingly, Romashka transfers all profits to Belize as payment for a trademark. In Russia, she does not pay taxes because she has no profit. In Belize, Forget-Me-Not also does not pay taxes because it is not a resident (does not operate in Belize).
Zero income tax cannot be maintained if offshore companies do not have anonymity. After all, as we already know, it is unprofitable to withdraw dividends offshore (the tax can be up to 30%). It is advantageous to pretend that the company in the offshore is independent (it has other owners), and conclude an agreement with it under which the Russian company will spend money (thus reducing its profit), and the offshore will earn (because it does not pay income tax ) For example, a Russian company pays offshore for the use of a trademark: the company spends money (reducing profits and taxes), the offshore receives income (and pays nothing for it). Money flows abroad to an offshore account.
However, in this case, the tax office will easily see that this transaction is, in fact, a fraud committed to evade taxation, because it involves two companies with the same owners, and the goal here is not to provide a trademark, but to avoid taxes . Therefore, companies in offshore companies are often created anonymously, and nominal local employees can be a director and even a participant - however, recently this has not helped against tax and, moreover, criminal prosecution by influential countries.
Using offshore companies for an untrained entrepreneur brings more problems than real benefits.
The first problem: offshore in the transaction is a marker that will immediately scare away all organizations with state participation, non-profit organizations, and also raise serious questions from the tax inspectorate and banks.
The second problem: offshore is easy to lose: due to problems with the island authorities or because of the intrigues of the nominal owners.
The third problem: the money lying in the offshore must be spent on something, and when you try to transfer it to a civilized jurisdiction, the first problem again arises.
As for the onshore, this is a completely legal tool in transactions. It allows for more hassle-free logistics, simplifies currency controls, and, in some cases, saves on taxes. In addition, many onshores, like offshores, belong to the former British colonies (Malta, Cyprus, Hong Kong), which means that they have common law (English law). Using such an onshore allows you to fully use common law instruments (for example, conclude advanced shareholders' agreements - agreements between shareholders), as well as consider disputes in British courts, famous for their integrity (as well as the deadlines and cost of the process).
At the same time, foreign companies (both offshore and onshore) impose a number of restrictions on the entrepreneur. They block access to government procurement, support and subsidy programs, loans from state banks and funds from state investors. The benefits of transactions under common law are also not unlimited: a Russian court may refuse to execute a decision of a foreign arbitration.
In a word, if you hesitate, not knowing what to do, open a company in Russia. A good accountant will help to allocate maximum costs to expenses, and taxes will not seem such a heavy burden. And your CFO will be in charge of foreign jurisdiction (when you have one).
Currency control
The withdrawal of money from the country is monitored by special authorized organizations. Control over financial flows is called foreign exchange control . Its main task is to block the channels of irretrievable leakage of money (including offshore). This is just about those situations where Vasya, under a fake agreement, transfers money to Belize (previous example).
Since 2016, foreign exchange control in respect of entrepreneurs has been carried out by the Federal Tax Service of Russia and the Federal Customs Service of Russia, however, entrepreneurs rarely encounter government bodies in this area. The fact is that in the Russian system of currency control, banks are responsible for checking the operations of their customers and, formally not being agents of currency control, in practice often block suspicious transactions.
In very general terms, the requirements of foreign exchange control are as follows:
- You can’t pay with currency in transactions between Russian entrepreneurs;
- currency should be transferred abroad through a special bank account (transit or current currency account);
- it is impossible to pay foreign trade transactions and accept payment on them without any reason (in particular, an agreement and closing documents).
The last paragraph will dwell in more detail. When conducting transactions within the country, banks rarely ask for confirmation (except for very large transactions). You can transfer money to the counterparty without any reason - you only need to send an order to the bank to make a payment (payment order). True, documents will still be required for submission to the tax service, but their absence alone is not a reason for refusal by the bank.
In foreign economic transactions, the order is different - permissive. Even when opening an account, the bank will ask why it is for you and what you plan to do. And if a foreign transfer comes to the account without justification, the bank may reject it. The basis for approval of the payment is the contract with the counterparty. Since 2014, this agreement is not required to be presented in the original or translated into Russian. For example, if your company creates mobile applications, then a printed offer from their website will be enough to justify the proceeds from Apple.
If the transaction amount exceeds $ 50 thousand, the bank will require the original contract with a foreign counterparty and a special document - the transaction passport (in fact, a description of the required foreign exchange). The transaction passport is associated with other foreign economic documents (customs declarations, invoices), which together confirm your tax reliability.
Please note: fines for violation of certain rules of currency control (including repatriation of currency) are set at a rate multiple of the transaction amount.
The Russian company sold several tons of its products to the offshore company, which was exported from the country, but the money was not received into the account. The currency control authority (FCS) fined the company for violating the rules of repatriation by 100% of the transaction amount.However, one must understand: such an approach by state bodies is not the same as “walking in a short skirt, which means that she’s to blame herself.” In most cases, violators really understand what they are doing. The trouble is that when innocent people fall under the distribution, there is so much noise that it drowns out the rest of the information background on the topic.
The logic of the company: “We were fined unfairly, because we already suffered losses (the counterparty refused to pay), and now the customs has collected the same amount from us! Why should we be responsible for the fact that the counterparty did not fulfill the contract as promised? ”
The logic of customs: “Surely this company actually transferred the goods to its own offshore in order to sell it abroad and not pay taxes in Russia. Otherwise, why didn’t they take the advance, why did they conclude an agreement with some garbage can? Why didn’t the company go to court and law enforcement? Even if it is not associated with offshore, then it is itself to blame for the offense!
For those who do not want to wait for the publication of the remaining chapters on Habré - a link to the PDF of the full book is in my profile.