Offshore for the real estate market – how and why
Recent changes in Russian legislation prohibiting civil servants from holding bank accounts and owning real estate abroad , as well as restricting transfers on foreign accounts only through Russian banks, will push those Russians who have already used offshore services to finally transfer all their assets into them, and who have not had any offshore experience, acquire one and open their own offshore.
We often use the word “offshore”, but, as it turns out, not everyone knows what stands behind it – how the offshore scheme works, what it is for, and what are the benefits from it. In this article, we will try to look at the topic of offshore companies from a “technical” point of view, without going into arguments about how the withdrawal of many Russians and their funds offshore affects the economy of a country. The main task for us is to understand what an offshore company is, the basic principles of its work and what it gives to those who open it. Good or bad? Everyone makes this decision for himself.
What is offshore in the literal meaning of the word “
Offshore” is a company that is registered in one of the many offshore zones in the world. Offshore zones of the British Virgin and Cayman Islands are most popular among Russians. A complete list of offshore companies around the world can be easily found by typing the phrase “open offshore” in a search engine, and by clicking on the first site, you can view the entire list.
The Russian authorities are far from being the first to take measures against the withdrawal of funds and assets of citizens to offshore, therefore, they have been ready for everything for a long time, because the registration of offshore companies and ensuring their activities is the main income of such countries. So, changes in the Russian legislation, unless they increase the flow of customers, otherwise nothing will change.
It is necessary to understand everything in order. At the first stage, an ordinary registration of a company takes place in an offshore jurisdiction, there is nothing unusual here. Then, the newly formed company issues securities, shares, and this is where the most interesting begins. Since, for various reasons, the foreign owner of the company cannot be the holder of these shares (this is why he opens an offshore company), 100% of the shares of the new company are transferred to a special trust that holds them in the name of this foreign citizen. Offshore services such as trust are well developed. A trust is a special form of relationship between legal entities, the main purpose of which is to hold securities (shares) of an offshore in the name of the beneficiary, the actual owner of this offshore. The focus of such a scheme is that the name of this owner, for which the trust holds shares, it is known only to those who are directly related to the trust, i.e. this is classified information. It’s impossible to find out the name of the real owner of the offshore to a third party – neither the trust nor the offshore provide such information.
Any company should have a director, and offshore in this regard is no exception, with the only difference that the director is exclusively nominal, and this is a legal entity that is the CEO of thousands more such companies.
The question arises – how does the real owner fit into this whole scheme and how does he manage all of this? A general power of attorney has issued annually to the actual owner, which gives him the right to manage the company’s accounts and manage its funds. An interesting detail: such a power of attorney can be issued not only to the owner but also to other people, for example, his relatives, family members, etc. Thus, the owner of an offshore company is absolutely not constrained in terms of managing their funds. Legally, such a holder of power of attorney does not own either the company or its assets – money, shares, real estate, etc., it only manages these assets by proxy, so it cannot be charged under the new law.
To open such a company is very inexpensive – only $ 2000, service – another $ 1000 per year. And no taxes, no restrictions on the use of the property. In the case of verification, it is simply impossible to find out who the owner of offshore assets is (in our case of real estate), because in the register of enterprises offshore securities are recorded for trust, the nominal director is a legal entity, to whom this year the general power of attorney was issued, find out there is no possibility.
Today, approximately 50% of transactions with foreign real estate are made with the help of offshore companies. The fact is that it is not difficult to transfer real estate to offshore and it will cost mere pennies. The owner of the property has the right to dispose of it at its discretion, he can “resell” its offshore for only $ 100. And a month later, when the transaction will be executed, this property will not legally be considered the property of this person. To withdraw the property from offshore is also easy and cheap.
To open a company in an offshore, you do not have to be a financial guru, you do not need to have an economic or legal education, even to know the language – in Russia, there are a huge number of companies that provide services for opening and servicing offshore companies. By the number of such firms, one can judge the popularity of offshore services among Russians, and the new legislation will give a strong impetus to the further development of such a business.
It has already been said about a new ban for officials and civil servants to have a property or an account in a foreign bank, and innovations in the law oblige citizens of the Russian Federation (not only officials) to conduct operations with foreign accounts only through Russian financial institutions. And these institutions will certainly take advantage of this and raise the rates on transactions with accounts abroad, but if the account is registered for an offshore company in one of the numerous banks, for example, in the Baltic States, then this allows us to bypass the new ban. Modern technologies allow the account holder to have access to their funds 24 hours a day, almost anywhere in the world – you only need a bank card or a phone at hand to contact the bank’s concierge service.
Speaking of offshore, it is impossible to bypass the topic of events in Cyprus. Most Russians considered Cyprus an offshore zone, even after the country had essentially ceased to be so. An offshore zone is a special economic zone in which companies do not pay any taxes on any income — capital gains, dividends, and so on. Vivid examples of such zones are the British Virgin Islands, Cayman Islands, Belize, and many others.
In Cyprus, as well as in other offshore companies, they opened companies, but for a completely different reason than in the case of Belize or the Cayman Islands.
During the current discussions of changes in the legislation of Cyprus, it turned out that a third of the deposits placed in local banks belong to Russian citizens. But the specific amounts were not disclosed – out of 100 deposits in Cyprus, approximately 30 belong to the Russians, but how much money exactly lies on these accounts is unknown. Most likely, in terms of money, about half of the money placed in Cyprus belongs to the Russians. The most interesting thing is that the bulk of this money belongs to large Russian companies, and it is likely that even some corporations with state participation placed funds there.
What is the secret of such popularity of Cyprus? First of all, Cyprus has a very good judicial system. Cyprus is a former British colony, and the colonialists managed very well to debug this particular public institution. In Russia, big business does not want to sue because of the high level of corruption. Therefore, companies opened in Cyprus, but in Russia, it was just a representative office or a branch of the company, thus it was easier for entrepreneurs to defend their rights. If the business was originally created for sale, then the presence of residence in Cyprus was almost one of the main requirements, especially if negotiations were conducted with Western investors.
The current situation will provoke a powerful cash outflow, as well as the mass exodus of companies from Cyprus. The banking system of this state, most likely, has been irrevocably undermined.
Do not forget about the fact that Cyprus is a member of the European Union, and the EU authorities would hardly have allowed the presence of an offshore from the blacklist. Therefore, Cyprus has long ceased to be offshore in its negative understanding. Cyprus taxes were a long time, from 10% to 15%.