Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

All Offshore That's Going Offshore

Pummelled by the sheer numbers and extremes of the Russian tax system, more and more companies are taking advantages of loopholes to head offshore in search of asylum, away from the prying eyes of government.

Information is limited concerning the number of Russian offshore firms, and the lack of government regulation has created a game without rules.

"Everybody just exploits the absence of legislation," said a Moscow business consultant who asked not to be identified.

But despite the statistical vacuum, one official estimated that Russia has 4,000 to 5,000 offshore companies.

Vadim Mironov, deputy chief of the department of international tax relations at the Ministry of Finance, said that 2,000 or 3,000 of these firms are registered in Cyprus, which along with Malta and the Bahamas is a favorite nest for Russian flight capital.

The Central Bank of Cyprus said Russian firms account for more than 80 percent of offshore companies registered by Eastern Europeans -- a fact upon which Inkombank based its decision to open an affiliate in the island nation.

"Many firms registered in Cyprus have their roots in Russia," said Nikolai Chepurin, chief of the Inkombank affiliate's service department in Nicosia, adding that capital which travels through his office "is indirectly returned to [Russia] via Inkombank."

Many of Moscow's growing supply of brokerages likewise benefit from reduced tax payments by keeping an offshore affiliate, according to a Moscow securities analyst. Also, brokers can use offshore affiliates to make it easier to buy Russian securities, he said.

High taxes are the primary motive for Russian firms seeking offshore status, according to experts.

Scott Antel of Arthur Andersen's tax and legal department said there are many reasons for a Russian company to open offshore enterprises, including the ability of the "foreign" firm to take advantage of tax benefits while investing in Russian companies.

Many firms also register offshore for security reasons, Antel said, while others may be involved in legally questionable transactions.

"This year, the number of offshores registered by our company is increasing," said a representative of the offshore-registration firm JEL, who declined to be named. Others noted that firms are increasingly open about their offshore status.

"Previously, offshore companies were registered secretly," Antel said.

The growing tide of Russian offshore firms has resulted in boosting the company-registration business -- a trend likely to continue as long as offshore registration remains a complicated matter.

"Problems start appearing when documents are submitted," said Michael Khodorovsky, president of U.S. company Business Management International, who stressed that extreme accuracy is needed in completing paperwork.

Khodorovsky warned that care should be taken in choosing advocate bureaus such as his own, which are technically owners of the offshore firms they register.

"Generally, offshore companies in Russia are registered by representative offices of foreign companies, and firms that have been created abroad specifically for this kind of business," he said.

But one government official issued an admonition of his own, warning that using offshore firms to evade taxes is a risky business that could be the target of future legislative initiatives.

"While everything is kept in the dark, nobody is paying attention," said Dmitry Ignatiev, press secretary for the Ministry of Finance's tax reform department.