Russian investors move to British Virgin Islands giving up Cyprus

British Virgin Islands
British Virgin Islands

From among the leading countries in the Russian market of mergers and acquisitions Cyprus moved to the end of the M&A list. In 2018 Cypriot companies bought Russian assets worth only $7.8 million.

Since 2009 Cyprus was constantly included in the top three in terms of transactions in the Russian market of mergers and acquisitions, and in 2018 moved to the top three outsiders. Such data is shown in results of study by Thomson Reuters. This year, as of the end of August, only 48 M&A transactions were concluded for the acquisition of Russian assets with the participation of Cyprus, while last year their amount was 120 times more — $935 million (75 transactions). The most impressive expenditure of Cyprus companies for Russian assets were in 2012 at $6.7 billion.

At the same time, The British Virgin Islands (BVI) increased its share in the Russian M&A market: companies with local registration participated in transactions with Russian assets by $1.3 billion — three times more than in the entire 2017 year. This is the second place among foreign buyers in Russia. The last time companies from the British Virgin Islands spent more than $1 billion on Russian assets in 2012 – then transactions with their participation were estimated at $3.3 billion.

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

Leadership among the countries-buyers in the Russian M&A market this year was captured by Japan. Its first place with the amount of $1.7 billion is explained by the only transaction – the purchase by Japanese tobacco producer Japan Tobacco in March this year 100% of the “Donskoy Tobacco” group based in Rostov-on-don for $1.6 billion.

It is obvious that companies left Cyprus – serious investors moved to other jurisdictions and the Virgin Islands is in the minds of many as a more stable environment. One of the reasons for this is the tightening requirements of the Central Bank of Cyprus for banks servicing companies that do not conduct real activities related to the Cypriot economy.

The Central Bank of Cyprus sent a circular to the commercial banks of the island, announcing new stringent requirements for business relations with client companies. At the request of the regulator, Cypriot banks must identify among their customers dummy companies that do not conduct real activity, break off relations with them and do not enter into new ones. Tightening control over the activities of companies in Cyprus began before the circular.

The British Virgin Islands has several advantages over Cyprus. There is a technical possibility not to disclose information about the final beneficiaries of companies registered in The British Virgin Islands. This can not be said about the Cypriot companies, to establish the actual owners of which is much easier, so in order to reduce risks, market participants prefer to use BVI companies.

Despite the fact that the Russian tax authorities have access to information from Cyprus after the signing of the Avoidance of Double Taxation Treaty in 1998, in practice it has become sensitive only since 2015, after the emergence  of the rules on taxation of controlled foreign companies (CFC) in Russia.

Tax structuring is a more important issue when making decisions on transactions through Cyprus or BVI, because the legal peculiarities of both the first and second jurisdiction were borrowed from English law. Another significant factor against the use of Cyprus by Russian business is the action of the sanctions legislation of the European Union, which includes Cyprus, and the restrictions imposed on them by Russia.

The main volume of transactions through offshore jurisdictions occurred at the end of 2017-the beginning of 2018. 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 in transactions through offshore could be due to the outflow of capital from Russia, structured through these countries.

The list of M&A transactions recorded in the Thomson Reuters study covers transactions in the process of completion and closed transactions.

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