Russian investors have gone from Cyprus to virgin Islands :: Finance :: RBC

Cyprus is among countries — leaders on the Russian market of mergers and acquisitions moved to the end of the list — Cyprus company in 2018 bought assets of only $7.8 million Russian businesses prefer Cyprus British virgin Islands

Photo: Andrea Comas / Reuters

Cyprus, since 2009, constantly included in the top three in the volume of transactions on the Russian market of mergers and acquisitions (M&A), in 2018 moved into the three outsiders. Such data results in its study, Thomson Reuters (RBC). In the current year as at the end of August with the participation of Cyprus was signed a total of 48 M&A transactions for acquisition of Russian assets by $7.8 million, while last year their amount was 120 times more — $935 million (75 trades). The most impressive expenditure of Cyprus companies for Russian assets fell in 2012 to $6.7 billion

At the same time the share of the Russian M&A market boosted the British virgin Islands (BVI): company with local roots participated in the transactions with Russian assets for $1.3 billion — three times more than for the whole of 2017. This is the second place among foreign buyers in Russia. The last time the company from the British virgin Islands spent on Russian assets over $1 billion in 2012 — then deal with their participation was estimated at $3.3 billion.

In General, the volume of M&A transactions with Russian assets, according to Thomson Reuters, in 2018, 2% exceeded the volume of transactions for the entire 2017 to almost $5.6 billion compared to the corresponding period last year, the market in value terms increased by 49%.

The lead this year among the countries-buyers of Russian M&A market was captured by the Japan. Her first place with a total of $1.7 billion due to the only transaction — purchase Japanese tobaccoproducing Japan Tobacco in March this year, 100% of the group “Donskoy Tabak”, based in Rostov-na-Donu, for $1.6 billion It should be closed before the end of the year.

It is obvious that a major client had gone from Cyprus, serious investors have moved to other jurisdictions, said chief economist of the consulting company “PF Capital” Evgenie Nadorshin. “Virgin Islands in the minds of many is a more stable environment in which, apparently, and preferred to move large investors,” he adds. According to him, one reason for this is that the tightening by the Central Bank of Cyprus requirements for banks in servicing companies that do not conduct real activity associated with the Cyprus economy.

As previously wrote RBC, in June, the Central Bank of Cyprus sent out to commercial banks Islands circular announcing the new strict requirements to the business relationship with their clients. At the request of the regulator the Cyprus banks are required to identify among its customers the company’s dummy, not leading real activity, to break relations with them and start a new one. Tightening control over the activities of companies in Cyprus began even before the appearance of circular, RBC said lawyers and working in the country for entrepreneurs.

The British virgin Islands have compared to Cyprus several benefits. There is a technical possibility not to disclose information on final beneficiaries of companies registered in the British virgin Islands, says leading lawyer Dmitry Kozlyakov A1. “This cannot be said about Cyprus companies, to establish the actual owners which is much easier, therefore in order to reduce risk, market participants prefer to use a company with BVI,” he says.

Despite the fact that the Russian tax authorities got access to information from Cyprus after signing the agreement on avoidance of double taxation in 1998, in practice it was sensitive only in 2015, after the appearance in Russia of the rules on taxation of controlled foreign companies (CFC), says Kozlyakov.

Tax structuring — the more important question when making decisions on making transactions through Cyprus or BVI, because of the legal features of the first and second jurisdiction borrowed from English law, says senior associate Herbert Smith Freehills Denis Morozov. Another important factor against the use of Cyprus for Russian business is the effect of the sanctions laws of the European Union, which includes Cyprus, and imposed on them restrictions with Russia, Morozov adds.

The bulk of transactions through offshore jurisdictions came at the end of 2017 — beginning of 2018, reminds the managing partner of UK “law and Business” Alexander Pakhomov. Reasons — active structuring of the Russian assets by the beneficiaries due to new legislation on the taxation of CFC’s, de-offshorization and the capital Amnesty. The increase of transactions through offshore could be connected with the outflow of capital from Russia, structured through these countries, the expert concludes.

The list incorporates the study of M&A transactions covers transactions in the process of completing and closed trades, explained in Thomson Reuters.

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