This is a rather complicated procedure of offshore business confidentiality, if you managed to hide the beneficiary at the stage of registering an offshore company, then at the stage of opening a bank account, this information may leak out.
Here are some points that offshore company owners need to consider:
- 1 Transparency of corporate registers: the current situation
- 2 Reliability of the service provider
- 3 Agreements and confidentiality clauses
- 4 Use of a nominee service
- 5 Funds and trusts
- 6 Obligations to disclose information about foreign companies in Russia
- 7 How can information about a CFC be obtained that has not been notified?
- 8 Confidentiality and “capital amnesty”
Confidentiality is a necessary component of normal commercial turnover and the most important element of business security, regardless of whether it is a domestic or international business. This is a broad concept that has many facets and “points of application”. In this article, we will focus on the most important points that should be taken into account when it comes to the non-resident (“offshore”) part of the business.
The choice of an offshore jurisdiction for registering a company is often determined by the advantages of confidentiality (namely, confidentiality of the ownership of the company itself, the assets it owns, and the transactions concluded on behalf of the company, but for the benefit of its true owner).
At the same time, today there is no possibility of anonymous ownership of foreign companies and assets. Bearer shares (at least their free circulation) and procedures for registering companies and opening accounts that do not require disclosure of their beneficial owners are a thing of the past. In most countries, the requirements of legislation on combating money laundering are consistently tightened, and mechanisms for the international exchange of tax-relevant information are developing. Therefore, despite the legislative guarantees of confidentiality in the relevant countries, at present the effectiveness of any measures to ensure the confidentiality of offshore business is initially limited.
Transparency of corporate registers:
First of all, let’s look at the state of confidentiality in the offshore jurisdictions themselves.
In most classic offshore jurisdictions, information about shareholders and beneficial owners of companies is closed and inaccessible to local government agencies under normal circumstances. This means that the registers of shareholders and beneficial owners of companies are maintained and stored in the office of the registration agent (a local licensed corporate service provider), and the state regulator or local judicial and law enforcement agencies can obtain information from these registers (as well as the company’s financial documentation) only upon request in the event of the initiation of any proceedings against a specific company. As for directors, the practice of mandatory submission of a copy of the register of directors to the registration authority is expanding. In particular, such rules already exist in the Seychelles and the British Virgin Islands, however, they do not entail disclosure of this data to the public.
Thus, in classic offshore jurisdictions (except Panama, where information about directors is public), even in the case of mandatory filing of corporate registers with government agencies, the relevant information still remains closed (non-public). And it is this fact that is still decisive for many when choosing a jurisdiction for business registration in terms of confidentiality.
Other (onshore) jurisdictions provide for rules for disclosing corporate information from moderate to maximum. In Cyprus, Hong Kong and Singapore, information about both directors and secretary, as well as shareholders (but not beneficiaries) is publicly available. In EU countries, the process of forming centralized registers of beneficial owners of companies with varying degrees of public availability is underway. In the UK, information about directors, participants and “persons with significant control” (i.e. beneficiaries) of any private company or partnership is available for public inspection on the website of the Register of Companies.
Reliability of the service provider:
One of the key factors in ensuring the confidentiality of information about an offshore business is the initial selection of a reliable service provider (registration agent, legal or secretarial company).
Since in practice the client usually does not deal directly with the final service provider, but, at a minimum, also with a professional intermediary in his country (and sometimes with a whole chain of subcontractors), it is necessary to be sure of the reliability of each of the links through which personal and corporate information is transferred.
Therefore, it is recommended to contact those professional intermediaries who, firstly, work directly with the final service providers, and, secondly, have a good reputation and long-term experience in the market. The final provider (if we are talking about offshore jurisdictions) must have a valid license from the local regulator to provide services for the registration and administration of companies (and, if necessary, trusts and / or funds).
Careful handling of information about the client and his business is the most important sign of professionalism of the provider of offshore company registration services and related services. Of course, there are extraordinary situations related to abuse or negligence on the part of agents – fortunately, quite rare. But there are also situations when even the most reliable providers cannot ensure absolute security of the information they receive. Examples of recent years are the “offshore leaks”, “Panama” and “paradise” documents, the leak and publication of which on the Internet became the most widespread and unpunished violation of professional secrecy by people calling themselves investigative journalists.
Confidentiality Agreements and Clauses:
In some cases, it makes sense to legally record the obligations of the corporate service provider to non-disclosure of information that is important to the client. Such obligations may be contained directly in the service agreement or in a special confidentiality or non-disclosure agreement.
In such an agreement or contract, the client and the service provider can specify what exactly is confidential information, what are the limits of its use and what measures should be taken to protect it.
When defining confidential information in such agreements, the scope of this concept should be limited to reasonable limits. Thus, information that:
- was already known to the receiving party (or was legally received from a third party) before the conclusion of the confidentiality agreement;
- is generally known and publicly available (for example, contained in public online registries or freely available on the Internet);
- is disclosed by its owner to third parties without any restrictions, etc.
Other legal instruments may be used to protect the confidentiality of information, in particular, confidentiality clauses included in the texts of contracts concluded by the company, internal company documents, e-mails, etc. The purpose of these clauses is to prevent the unlawful disclosure of data that the company considers confidential.
The practical effectiveness of such measures can be debated, however, a serious attitude to confidentiality issues, including in such “trifles” as contracts and e-mail correspondence, implies the development (with the help of qualified lawyers) and inclusion of appropriate clauses and warnings in all “sensitive” documents issued by the company. Data on offshore companies and details of international transactions will not be an exception here.
Of course, the confidentiality of commercial information is not absolute. It is inevitably provided to third parties in the normal course of commercial transactions (including international transactions) and within the framework of the company’s internal activities. Thus, the company’s counterparties receive this data first to assess the possibility of cooperation, and then – to effectively implement their rights and obligations under the concluded transactions. The Company’s employees (and related companies), external lawyers, accountants and auditors inevitably gain access to information constituting a commercial secret and use it to perform their functions.
Using a Nominee Service:
For many years, the traditional recommendation for maintaining the confidentiality of offshore company ownership has been to use the so-called “nominee service”. However, today it is necessary to take into account a number of significant reservations, which are described below.
A nominee service is a widespread practice in common law countries of appointing nominees in a corporate structure – directors, participants (shareholders) or partners. The use of nominees in corporate legal relations in such countries is completely legal, unless otherwise established by local law. What does the use of nominee services provide?
Nominee directors are listed in the register of directors, but do not exercise real powers to manage the company. Their functions, as a rule, are limited to simply signing corporate resolutions, contracts and other documents, as well as performing other actions solely on the instructions of the beneficial owners.
The scope of the functions of nominee directors is usually set out in a special agreement on the provision of nominee services concluded by the owners of the company with a local provider of corporate services (registered agent, legal or secretarial company) providing services of such persons.
A similar situation is with shareholders. The details of nominee shareholders are entered into the register of company participants and in the certificates of shares issued by the company in their name, but such shareholders do not have the right to the profit distributed by the company. Their obligation to unconditionally transfer all rights to dividends and other distributions in favor of the actual (beneficiary) owners is recorded in a special document – a trust declaration.
Thus, the only role of nominee directors and shareholders is to replace the true owners and controlling persons of the company in corporate registers (with the exception of the register of beneficiaries, if the obligation to maintain it is established for the company).
However, when opening bank accounts or other procedures where due diligence measures are carried out in relation to the company, the fact of using a nominee service will not in any way affect the applicant’s obligation to disclose the beneficial owners – the true owners of the company.
Every bank, including an offshore one, will in any case establish the beneficial owner of the legal entity for which the account is opened. Any bank knows the essence of the “nominee-beneficiary” relationship, and therefore the bank will request identification documents, various certificates and biographical data for the beneficiary, and not for the nominal owner. Therefore, using nominee directors and shareholders in order to “declare them to the bank” does not make any sense.
As noted above, in some countries (primarily in the UK) there is already a statutory obligation to disclose the beneficial owners of companies (“persons with significant control”) for public information. In other countries (in particular, EU member states, Hong Kong, Singapore), there is a process of creating closed state registers of beneficiaries/controlling persons of companies. The criteria for classifying persons as “controlling” (including options for informal influence and control) are established by law, and the fact of having nominee directors or shareholders is of no significance for these purposes.
Finally, there is currently a tendency to move from the model of nominee directors in its pure form to the model of “managing” directors, that is, directors who actually perform functions to manage the company’s affairs, including having full access to its bank accounts. Such directors, as a rule, are residents of the country of incorporation of the company and carry out their activities on a professional basis (and for a significant fee) within the framework of legally recorded fiduciary agreements with the owners of the company.
This model is significantly more expensive compared to the services of a nominee director and carries certain risks, however, its main advantage is ensuring that the company complies with one of the key features of tax residency of the country of its incorporation, namely, the resident status of its directors. The fact is that in many countries the criterion for tax residency of organizations is precisely the place of their management, which, in turn, is determined by the place of tax residency of its director or the majority of board members.
Funds and trusts:
Offshore private funds and trusts are special forms of ownership and management of certain property (property rights) in favor of certain persons (beneficiaries). Legally, these are more complex and expensive instruments than corporate nominee services. Unlike the latter, the trustee (in a trust) or the fund itself as a legal entity (represented by its management body) are not only the title owners of the assets transferred to the trust/fund, but also perform real functions for the management and disposal of such assets within the limits permitted by the trust agreement or the constituent documents of the fund.
In some cases (subject to the legally correct structuring of the fund or trust), they allow for a sufficiently high degree of confidentiality of ownership of the relevant assets (for example, shares of companies transferred to the trust or to the ownership of the fund), as well as persons in whose favor such assets are managed.
For example, in relation to an offshore private foundation, only the following information is usually subject to registration with the local registration authority: the name of the foundation, its legal address, information about the registration agent, information about the founder (the initial founder may be a nominee), the composition of the management body (council) of the foundation, the initial assets of the foundation, the text of the charter. At the same time, information about the subsequent assets of the foundation, specific beneficiaries or the procedure for determining them, as well as their rights, may be contained in the internal documentation of the foundation, closed both to the registration authority and to public access. Therefore, special attention should be paid to the delineation of the content of these documents (the charter and the internal documents of the foundation).
Discretionary trusts are structured in a similar way. In them, the trustee has a high degree of discretion – the right to exercise discretion regarding the distribution of benefits in favor of specific beneficiaries, and the composition of the latter can be determined according to an established formula, without fixing specific names in the constituent documents of the trust.
It should be noted that the establishment or receipt of benefits from foreign funds or trusts (which are “foreign structures without the formation of a legal entity” within the meaning of the Tax Code of the Russian Federation) may entail the obligation of tax residents of the Russian Federation to send relevant notifications to tax authorities and report on the profit of such structures as part of their tax base. The key to the emergence (or absence) of such an obligation will be the presence of signs of “control” of a specific person over a foreign structure, determined in accordance with paragraphs 8-12 of Article 25.13 of the Tax Code of the Russian Federation.
Obligations to disclose information about foreign companies in Russia:
Above, we described ensuring the confidentiality of information about offshore business in ordinary commercial turnover – in relation to third parties. Now let’s consider the same issue, but in relation to the state represented by the tax authorities of the country of residence of the owner of a foreign company.
First of all, we discussed the obligations stipulated by the norms of the Tax Code of the Russian Federation on taxation of controlled foreign companies (CFC) and existing since January 1, 2015. Tax residents of the Russian Federation are required to notify tax authorities of their participation and/or control over foreign companies or other structures (clause 3.1 of Article 23 of the Tax Code of the Russian Federation).
In other words, secret ownership of shares/participatory interests in foreign companies, as well as secret control over them (even in the absence of formal ownership of participation interests) by a Russian resident, without notifying the tax authorities about it, is currently recognized as a violation of the law and entails penalties in the form of fines (Article 129.6 of the Tax Code of the Russian Federation).
However, information about the ownership of foreign companies by a Russian resident or about control over them, received by the tax authority from the taxpayer, does not become publicly available, constitutes a tax secret and has a special storage and access regime. The loss or disclosure of such information and documents entails liability provided for by law (Article 13.14 of the Code of Administrative Offenses of the Russian Federation, Article 183 of the Criminal Code of the Russian Federation).
Please note that providing relevant information to foreign tax and law enforcement agencies in accordance with international treaties, including within the framework of the international automatic exchange of information on financial accounts, is not a violation of tax secrecy.
How can information about a CFC be obtained that has not been notified?
The abbreviation (CFC) stands for controlled foreign corporations – these are features of the income tax system designed to limit the artificial deferral of tax payments through the use of offshore companies with low taxation.
The tax authorities of the Russian Federation can obtain information (and, accordingly, prove the fact of ownership of a foreign company for the purposes of taxation of a CFC or management of a company from the territory of the Russian Federation for the purpose of recognition as a tax resident of the Russian Federation):
a) as part of tax audits and collection of evidence to support their position in court;
b) as a result of international information exchange (upon an individual request in the manner prescribed by the relevant agreement on the avoidance of double taxation or the Convention on Mutual Administrative Assistance in Tax Matters, or automatically according to the CRS standard based on the multilateral agreement MCAA). The latter primarily concerns foreign bank accounts of tax residents of the Russian Federation or accounts of foreign companies with predominantly passive income controlled by them.
To identify the fact of control over a foreign company, it will be of decisive importance to identify the factual circumstances indicating such control. The following may be used for this:
- witness testimony;
- results of document (information) requests, seizure of documents and objects;
- other open sources (e.g., information from websites that are in the public domain, information disclosed to investors, the media, public online registries of companies in a number of countries, and even data from global information leaks such as the Panama Papers, etc.).
The fact of control over a foreign company may also be evidenced by:
- the content of electronic correspondence;
- the fact of storing documents and seals of the CFC in the office of a Russian affiliated company or directly with the controlling person;
- keeping office work (including the preparation of corporate documents) and accounting of the CFC from the territory of the Russian Federation;
- the actual performance of the functions of the director of a CFC by a person who is not formally one (acting on the basis of a general power of attorney.
Confidentiality and “capital amnesty”:
Currently (until February 28, 2019), the second stage of the “capital amnesty” is in effect in Russia – voluntary declaration of foreign assets and accounts by individuals in exchange for guarantees of exemption from tax collection, tax, administrative (for certain types of offenses, including currency offenses), and criminal liability (for certain types of offenses) for acts related to the declared property and committed before January 1, 2018 (and with respect to currency transactions – before the date of submission of a special declaration).
Many are concerned about whether the information submitted under the amnesty will become the basis for any actions against declarants or even become public knowledge. The law provides special guarantees in this regard.
Firstly, the information contained in the declaration and the documents attached thereto cannot be used as grounds for initiating a criminal case, proceedings on an administrative and (or) tax offense against the declarant and (or) the nominal owner of the property, or as evidence in such cases (clauses 3 and 4 of Article 4 of the Federal Law of 08.06.2015 No. 140-FZ).
Secondly, the information contained in the declaration and the documents attached thereto is recognized as a tax secret in accordance with the legislation of the Russian Federation on taxes and fees. The storage of such information and documents and access to them are provided exclusively by tax authorities. Other state or non-state bodies and organizations have no right to gain access to such information and documents. Such information and documents can be requested only at the request of the declarant (clause 6 of Article 4 of the Federal Law of 08.06.2015 No. 140-FZ).
It is obvious that the practical use of the guarantees provided by the capital amnesty law may require the presentation of a copy of the special declaration to the relevant authorities in addition to the Federal Tax Service (FTS). If it is necessary to demonstrate to the relevant government agency or bank a copy of the special declaration with a tax authority mark on its acceptance, an official of such agency or bank has the right (but is not obliged) to verify such a copy through the FTS (i.e. send such a copy to the FTS of Russia for verification with the original special declaration located in specialized storage). The FTS of Russia sends a response notification on the conformity or non-conformity of the copy of the declaration with the original within 5 days (subparagraph 5 of paragraph 8 of Article 102 of the Tax Code of the Russian Federation).
As for the tax authority employees themselves who have gained access to special declarations, the law establishes a special guarantee, according to which tax authority officials are not subject to questioning as witnesses about circumstances that became known to them in connection with the information provided, contained in a special declaration submitted in accordance with the Federal Law “On Voluntary Declaration…” (clause 6, part 3, article 56 of the Criminal Procedure Code of the Russian Federation).
In conclusion of this article, I would like to note certain conclusions:
The most important role in ensuring the confidentiality of offshore business is played by the choice of a reliable service provider at the stage of registration of foreign companies/structures. If necessary, mutual obligations of the client and the corporate service provider regarding maintaining confidentiality can be recorded either directly in the service agreement or in a special confidentiality agreement;
In everyday business, information about offshore assets and accounts, like any other significant commercial information, requires reasonable caution. In some cases, they can be classified as a commercial secret;
If it is important for the client not to have information about himself in the registers of directors and/or shareholders of the company, a nominee service is often used, which, however, does not exempt the company from disclosing its ultimate beneficial owners
1) to banks servicing the company’s accounts;
2) in the event of the creation of a centralized register of beneficiaries (controlling persons) in the relevant jurisdiction;
3) to the tax authorities of the country of residence of the beneficiaries in accordance with local regulations on CFCs, if any;
In some cases, offshore private funds or trusts can be effective instruments for ensuring confidentiality;
Participation of a Russian resident in foreign companies or exercise of control over them without appropriate notification of the tax authorities is a tax offense and entails fines provided for by the Tax Code of the Russian Federation. Such notification is the responsibility of tax residents of the Russian Federation since January 1, 2015. At the same time, information sent by a resident to the tax authority constitutes a tax secret;
Exemption from liability for tax offenses related to the disclosure of information on controlled foreign companies (including failure to notify of participation in them or control over them) is provided for by Federal Law No. 140-FZ of June 8, 2015 (the “Law on Capital Amnesty”). This law provides for special guarantees of maintaining the confidentiality of information on foreign assets and accounts declared in accordance with it by the Federal Tax Service of Russia.
The article was prepared by lawyers and experts of the “GeoBuro” company 15/08/2024.