Financial Crime World

Tax Haven for Russian Oligarchs: Special Administrative Regions Offer Low-Tax Escape Route

In August 2018, the Russian government quietly passed a law creating two special administrative regions (SARs) that have since become a haven for Russian billionaires looking to escape economic sanctions. Located on Oktyabrsky Island and Russky Island, these offshore zones offer tax incentives that entice companies based abroad to relocate to Russia.

Designated for Sanctioned Companies

The SARs were designed to help sanctioned companies return to Russia while minimizing legal risks, says Ivan Nasonov, international tax director at KPMG Russia. However, they have since become popular among non-sanctioned firms as well, offering low taxes on dividends, income, and capital gains.

Tax Incentives

The SARs offer a range of tax benefits that are too good to pass up:

  • Zero taxes on dividends and capital gains from publicly traded companies: As long as the beneficiaries invest at least $650,000 in a Russian company within six months of transferring their firm.
  • Foreign bank accounts can still be used for payments and transfers: Making it easier to move money across borders.

Russian billionaires like Oleg Deripaska and Viktor Vekselberg have taken advantage of the SARs to move their companies out of reach of US sanctions. Deripaska’s En+ Group moved its legal headquarters from Jersey in the British Channel Islands to Oktyabrsky Island in December 2018, while Rusal followed suit in September 2020.

Over 70 Companies Have Relocated

The SARs have attracted over 70 companies since their creation, including those owned by billionaires named in the US Treasury Department’s list of Russian oligarchs who have prospered under President Vladimir Putin. Some of these individuals, like Viktor Kharitonin and Andrey Melnichenko, have transferred their Cyprus-based holding companies to the SARs.

Not a Safe Haven for Personal Assets

However, while the SARs offer a tax haven for large corporations or holding companies, they do not provide a safe haven for personal assets held in Western countries. The US government may soon target other Russian oligarchs with visible assets in the West that would be difficult to transfer to a Russian SAR.

Future of the SARs

The Russian government has emphasized the tax incentives of relocating to the SARs, but new US sanctions could convince firms to make the move. “There are companies in Russia which didn’t relocate their foreign holding companies to SARs,” says Nasonov. “If those groups or beneficiaries are under [new] sanctions, they may decide to move to a SAR as soon as possible.”

Draft Law Aims to Attract More Investment

A draft law being considered by the Russian parliament would offer additional tax cuts for those investing $3.9 million in certain industries in the SARs, which could make it cheaper for billionaires with companies in the SARs to reinvest their profits outside Russia.

Conclusion

For now, the SARs remain a tax haven for Russian oligarchs looking to escape economic sanctions and keep their assets safe from US authorities.