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Opinion
May 24, 2019 www.intellinews.com I Page 21
COMMENT: Russian offshore? Not so fast...
Polina Lyadnova and Matthew Fisher of Cleary Gottlieb
The first birthday of Russian offshore is fast approaching. However, the two offshore zones established in Russia last August for the purposes of tempting foreign-based Russian businesses back to the Motherland have yet to catch on. Indeed, few companies have moved
(or ‘redomiciled’) their legal home to either of these ‘Special Administrative Areas’ so far – reportedly just three in the eight months following enactment of the offshore law.
While certain legal and practical difficulties explain the limited appeal of such a move to
many Russian businesses registered abroad, the potential advantages of being resident in a Special Administrative Area could yet see a handful of companies go through with redomiciliation. Most notably, the industrial giants Rusal and En+ have announced plans to redomicile their respective parent companies from Jersey to one of the Special Administrative Areas.
The 90s: Russian companies ‘escape to the sun’ The corruption, underdeveloped corporate law and ineffective enforcement mechanisms that marred the early days of Russian capitalism prompted many businesses to establish their legal homes outside Russia. They typically moved to offshore jurisdictions, which offered robust protection of property rights under an established body of law and practice overseen by an independent and experienced judiciary.
While the problems that drove Russian businesses abroad have become less acute over time, the foreign jurisdictions of choice for
The bridge to Russky Island near Vladivostock, one of the two offshore zones established in Russia last August.
Russian businesses continue to offer more- established pathways to the international capital markets and, in most cases, a low- or zero-tax environment. Accordingly, even now, more than one in four of Russia’s top businesses (excluding state-owned entities) have their parent company incorporated in a foreign jurisdiction – foremost Cyprus and Jersey.
2019: Russian companies return home?
In an effort to increase its tax take, the Russian government has since 2014 sought to bring foreign-incorporated Russian businesses back
to mainland Russia via a process dubbed ‘de- offshorisation’. In summer 2018, however, the government changed tack by passing laws 290- FZ and 291-FZ, which enable such businesses to move their legal home to two newly established offshore jurisdictions on Russian territory – the Special Administrative Areas of Oktyabrsky Island (in Kaliningrad’s Pregolya river) and Russky Island (off the coast of Vladivostok).
This is the redomiciliation procedure that Rusal, En+ and a number of others are planning to follow. It is distinct from dissolving the company and set- ting up a new company in a Special Administrative Area since the company at no point ceases to exist and its existing contractual rights and obligations remain intact throughout the procedure. In addition, while the redomiciled company will by default be- come subject to Russian corporate law, insolvency law and capital markets rules, it may until 2029 opt to continue to apply many of the laws of its original jurisdiction (including those governing foreign secu- rities listings and relations between shareholders).