Russian tax law aims to coax businesses back home Russia has moved to flush its companies and wealthy citizens out of foreign refuges by passing new legislation that tightens reporting requirements for offshore income and subjects it to taxation. The government had long been considering plans to combat the rampant use of tax structures in foreign jurisdictions. That campaign has taken on new urgency as western sanctions, falling oil prices and a plummeting currency drive capital flight to new heights and drain state coffers. Russian investors have been reluctant to organise their businesses under Russian law because it has been used by the government to forcefully expropriate their assets. The September arrest of Vladimir Yevtushenkov, one of Russia's richest men - and a subsequent court ruling forcing his Sistema Group to hand its Bashneft oil company back to the state - have triggered warnings both from tycoons and reform-minded government officials that the country's investment climate was being undermined. The latest changes to the tax code - known as the "de-offshorization law" - could have the consequence of making Russian businesses more vulnerable to pressure from the Kremlin by forcing their activities back under national law. Under amendments passed by the Duma on Tuesday, Russian citizens and companies will have to pay taxes in Russia on retained earnings of foreign-registered entities they control. From 2017, concealing offshore assets from the Russian authorities will be illegal. The new law defines a foreign entity as Russian-controlled if at least 25 per cent of it is held by a Russian company or individual. For individuals, a two-year grace period applies during which the threshold will be set at 50 per cent. In cases where more than half of an offshore entity is jointly owned by several Russian individuals or institutions, those who hold more than 10 per cent will be considered controlling shareholders and thus be taxed. There are no precise data on how many Russians have stashed money abroad and how large a percentage of the country's corporate sector is structured around offshore entities, but the practice has enabled massive capital flight. Last week, the Central Bank warned that private sector net capital outflows were expected to hit $128bn this year, more than double the amount seen in 2013. Yaroslav Lissovolik, chief economist at Deutsche Bank in Moscow, said the law could significantly constrain capital flight once Russia could exchange data with other relevant tax authorities, through international agreements and the ratification of OECD conventions. But he said the current tensions with the west would complicate implementation. Other experts were more sceptical. "In our view, it is rather unlikely that it will have a major effect," said Nikolay Baranov, a partner at Noerr, the international law firm in Moscow, who argued that such structures were often driven less by tax considerations than a desire for secrecy. He added: "Many capital outflows structures, which are illegal in most cases . . . will remain in force." Russian businessmen could also dodge the law by moving their tax residence status out of the country to places such as the UK and Cyprus. "Britain is most likely to profit by gaining business as more Russians might be prompted to come and live here," said Mark Davies, a tax consultant in the UK who advises wealthy clients from Russia. This might be the case especially as Britain offers value for money on the entrepreneur visa and the UK's tax system allows foreigners to choose an alternative basis of tax so that offshore companies can continue to be held tax efficiently. Mr Baranov said Russian corporate groups were now likely to either simplify or eliminate their foreign structures, but they would not completely disappear. The changes will take effect from January 2015 once confirmed by the Federation Council and signed by Vladimir Putin, Russia's president.