Tax havens vs offshores: where is Eurasia heading?

The modern world economy resembles a complex system of communicating vessels. Capital is constantly looking for the most favorable conditions for its growth and preservation. In this context, the terms “offshore” and “tax haven” often sound like synonyms, although there are significant differences between them. By understanding these differences, you can see which way business is moving in Eurasia, and which jurisdictions are becoming new centers of attraction.

Defining the terms  

To speak the same language, it is necessary to clearly distinguish the concepts. An offshore company in the broadest sense is any company registered outside the country where its owner runs the main business. The reasons for this may be different: access to international markets, asset protection, or a desire to maintain confidentiality. Reducing the fiscal burden is not always the main goal.

Tax havens is a narrower concept. We are talking about countries or territories that purposefully create attractive fiscal conditions for foreign capital. The main incentive for registering a company in such a jurisdiction is precisely the reduction or complete absence of corporate taxes.

Thus, any tax haven is an offshore zone, but not every offshore is a tax haven. 

Relevance for the Eurasian space 

For businesses from Eurasian countries, the issue of choosing a jurisdiction has always been acute. Historically, companies from the CIS countries have actively used classic offshore schemes to structure their assets. However, the world is changing. The global transparency movement, initiated by international organizations, has radically changed the rules of the game.

Today we are witnessing two opposite trends. On the one hand, businesses are still looking for ways to effectively manage their finances. On the other hand, the governments of the countries, including the EAEU members, are strengthening capital controls and countering tax evasion. This process is called deoffshorization. As a result, entrepreneurs are forced to look for new, more complex and respectable solutions, abandoning old and risky schemes. 

Current situation and new centers of attraction

Classic offshores such as the British Virgin Islands or Belize are gradually losing their appeal. The reason for this is the enormous pressure from the international community and inclusion in the “gray” and “black” lists. It has become extremely difficult for a company from such a jurisdiction to open a bank account.

In their place come the so-called “midshores” – jurisdictions with low, but not zero taxes and stricter business requirements. These are, for example, the UAE, Hong Kong, Singapore. They have a favorable tax regime, but at the same time, companies are required to confirm their real economic presence (substance) – the availability of an office, employees, as well as the fact of doing real business.

Meanwhile, some Eurasian countries are developing their own alternatives. An example is the special administrative regions in Russia or the Astana International Financial Center in Kazakhstan.

Weighing the advantages and risks

The use of foreign jurisdictions continues to bring both certain benefits and serious threats to business.

Benefits: 

Between these points, it is worth clarifying that modern tax optimization is not an aggressive avoidance of fiscal obligations, but the building of a transparent and economically sound business structure.

Risks:

• - Reputational losses. Affiliation with a jurisdiction from the “black lists” can cause serious damage to a company’s image.
• - Banking difficulties. Banks around the world carry out strict compliance checks, which can lead to the refusal to open an account or the freezing of transactions.
• - Enhanced control. Tax authorities of the home country pay great attention to the companies that have foreign structures.

Global trends and their impact

Two structures play a major role in the transformation of the international tax landscape. For example, the Organization for Economic Cooperation and Development (OECD) has developed and implemented the BEPS (Base Erosion and Profit Shifting) plan. Its goal is to combat the erosion of the tax base and the loss of profits. Another powerful tool is the Common Reporting Standard (CRS), through which tax authorities in various countries share data on non-resident accounts.

At the same time, the Financial Action Task Force (FATF) establishes global regulations in the field of countering illegal financial transactions. The combination of these measures makes doing business through anonymous “dummy companies” almost impossible. The world has become more transparent, and this is an irreversible process.

Where is Eurasia heading?

Eurasian business is adapting to the new reality. The vector of movement is shifting from anonymity to respectability. Instead of classic offshore zones, representatives of the business environment are increasingly choosing jurisdictions with clear operating rules and a good reputation. The main thing is not zero tax rates, but the availability of a stable legal environment and the opportunity to prove the company’s real economic presence.

Against this background, completely new phenomena are emerging. For example, crypto-offshores, the territories that create favorable legislation for cryptocurrency projects. Such jurisdictions attract startups and companies from the field of blockchain technologies. In general, Eurasian business is learning to work in a transparent environment, rebuilding its structures in accordance with the international requirements.

To summarize all the aforementioned, only the jurisdictions that have managed to find a balance between an attractive tax regime and compliance with the international transparency standards benefit in the current conditions. These are the UAE, Hong Kong, Singapore, as well as the growing domestic financial centers in the countries of Eurasia. Classic island offshores are losing ground, unable or unwilling to adapt to the new era of global financial openness. The era of simple decisions has passed, and the time has come for balanced and strategic steps.