Evolution of the regulatory framework in Russia related to ... changes in … · I. Deoffshorization of Russian economy (2 of 3) Already enforced: – The AML Law No. 134-FZ of July

Evolution of the regulatory framework in Russia related

to individuals

September 19, 2014

Content

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I.  Deoffshorization of Russian economy

II.  Concept of the actual right to receive the income

III.  Concept of tax residence for companies

IV.  CFC rules

V.  New currency regulation of individuals’ foreign bank accounts

VI.  Double citizenship

VII.  Laws in the pipeline

I. Deoffshorization of Russian economy (1 of 3)

President’s request on December, 2013 to the Government on “deoffshorization” of Russian economy:

–  Undistributed profits of offshore companies controlled by Russian entities and individuals be taxed in Russia (CFC rules)

–  No government support is available to offshore companies

–  No contracts to satisfy state and municipal needs be concluded with offshore companies

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Already enforced:

–  The AML Law No. 134-FZ of July 28, 2013 (earlier draft law No. 196666-6) tightens control in various fields: tax, bank law, criminal law, customs control

–  Federal Law No. 79-FZ of May 7, 2013 on control for expenses and assets of public officers

–  New withholding tax rules on distributions to foreign investors since 01.01.2014

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§  In March 2014 the Ministry of Finance of the Russian Federation (the “MinFin”) published a Draft law on proposed amendments to Russian Tax Code

§  Two versions of the Draft Law were actively discussed by Russian business community

§  After public discussion, the 3rd version of the Draft Law is submitted to the Government

§  Key changes:

–  Introduction of a concept of the actual right to receive the income

–  Introduction of a concept of tax residence for companies

–  Taxation of controlled foreign companies (the “CFC”)

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II. Concept of the actual right to receive the income (1 of 2)

§  Introduction of a concept of the “actual right to receive the income” for Double Tax Treaties (the “DTT”) purposes

§  A DTT can be applied if the recipient of the income has actual right to receive the income (i.e. actually benefits from the income and can independently dispose of it)

No actual right to receive the income

No reduced rates (royalty, interest) and exemptions

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ForeignCo Country with DTT

0%

RusCo ForeignCo Country with no DTT

20%

Royalty, Interest

Royalty, Interest

II. Concept of the actual right to receive the income (2 of 2)

§  Special rules for dividends:

–  Another person having actual right to receive the income, can apply a tax treaty if such person is a resident of a country having a double tax treaty with Russia

–  If the person having actual right to receive the income is a Russian tax resident, regular dividend tax rates will apply to such dividends (0% or 9%)

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Russian tax resident

0% or 9%

ForeignCo 1 Country with

DTT 15%

RusCo ForeignCo 2 Country with

DTT 5%

Dividends Dividends Dividends

III. Concept of tax residence for companies (1 of 3)

§  What is NOW

Foreign companies pay taxes in Russia ONLY if they:

–  Conduct commercial activity in Russia

–  Receive income from Russian sources

§  What is PROPOSED:

Foreign companies pay taxes on their WORLDWIDE INCOME if they are recognized as Russian tax residents

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§  Foreign companies pay taxes on their worldwide income if they are effectively managed from Russia:

–  Meetings of the Board of Directors (or other governing body of the company) are held on the territory of the Russian Federation (more then 50% per year).

–  Management of the company is usually performed from Russia (specified in the Draft).

–  Chief officers of the company (persons, who are authorized and responsible for planning, management and control over company’s activity) carry out their activities with regards to the company in Russia.

§  If the above conditions are fulfilled in several countries, additional criteria are applied.

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§  Issues for consideration:

–  Whether a foreign company has a Russian CEO?

–  Whether bank account is managed from Russia?

–  Where is performed accounting and kept documents of the foreign company?

§  Possible solution - substance in respective jurisdiction:

–  Office

–  Qualified employees

–  Resident members of board of directors

–  Management decisions

–  Main bank accounts

–  Bookkeeping

–  Compliance with all tax filing obligations 10

IV. CFC Rules: Definition (1 of 11)

§  CFC = Foreign company / structure (including trust, foundation) controlled by Russian tax residents (companies or individuals)

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IV. CFC Rules: Control (2 of 11)

–  Over a foreign company: direct or indirect interest in a foreign company, jointly with a spouse and/or minor children and other persons (if there are specific relationship between them) > 50 %

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Tax Residents Controlling persons

25% 10% 16% Son 14 y.o.

Son 17 y.o. Father

Foreign company CFC

Interest 51%

IV. CFC Rules: Control (3 of 11)

–  Over a foreign structure: influences or can influence a person, which is responsible for management of assets, in respect of distribution of profit or income

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Beneficiaries

Foreign structure CFC Tax Resident

Controlling person

Control Control

Income

IV. CFC Rules: Exception (4 of 11)

Not regarded as CFC §  Companies listed on Russian or foreign stock exchange

included into the list of stock exchanges issued by the Central Bank of the Russian Federation jointly with the MinFin

§  Non-profit organization that does not under its governing laws distribute the profit (income) earned among its shareholders (participants, founders) or other parties

§  Resident in a country included into the “white list” of jurisdictions exchanging tax information approved by the Federal Tax Service and its income/profit is subject to taxation at the effective rate exceeding 15%

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IV. CFC Rules: Exception (5 of 11)

Not regarded as CFC

§  Structure which meets all of the following conditions:

–  it should be irrevocable upon its establishment

–  the rights of the settler may not be transferred upon its establishment to any other party, unless the rights are transferred under inheritance or universal succession procedures

–  the settlor may not, directly or indirectly, receive profit (income) of the structure distributed among all its participants (unit holders, grantors or other parties) or beneficiaries

–  the exemption works UNTIL the structure cannot distribute its profit (income)

§  Some others companies and structures 15

IV. CFC Rules: Notification (6 of 11)

§  Taxpayer shall notify the tax authorities:

–  On participation in CFC

–  On participation in foreign companies (over 25% of share capital) and on being settlor / beneficiary in foreign structures (starting from 2017)

§  Penalty:

–  Non-notification on foreign company / structure - RUR 50 K (approx. EUR 1 K).

–  Non-notification on CFC - RUR 100 K (approx. EUR 2 K).

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IV. CFC Rules: Risks (7 of 11)

§  Tax risks, including:

–  Personal taxation

–  Typical finance structures – thin cap

–  Transfer pricing – more opportunities for tax authorities

§  Attention of Federal Anti - Arust Authority

§  Corporate risks

§  Personal beneficiary's issues – potential availability of information on existing assets

planning of family relationships

(divorce, marriage contracts, etc.)

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IV. CFC Rules: Taxation (8 of 11)

§  Controlling persons are obliged to pay taxes on non-distributed profit of CFC

§  The profit is not taxable unless it exceeds:

–  RUR 50 mln. (approx. EUR 1 mln.) in 2015

–  RUR 30 mln. (approx. EUR 0,6 mln.) in 2016

–  RUR 10 mln. (approx. EUR 0,2 mln.) starting from 2017

§  Taxable profit of CFC is calculated in accordance with the Russian Tax Code and reduced by dividends paid out of that profit

§  The amount of tax on CFC’s profit may be decreased by taxes paid in respect of such profit in Russia and in other countries

§  No penalties should be imposed in case of non-payment tax on CFC’s profit in 2015-2017

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IV. CFC Rules: Will it work? (9 of 11)

§  Availability of information – key condition for applying new rules

§  May be obtained from foreign tax authorities

BUT

§  There is an information that has been already provided to other Russian state authorities and financial institutions:

–  Beneficiary disclosed to the bank;

–  Related parties may be disclosed in explanatory note to the accounts;

–  Related parties may be disclosed in notification of controlled transactions;

–  Actual recipient may be disclosed to Russian depositary for payment of dividends.

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IV. CFC rules. Possible solutions (10 of 11)

§  Change tax residency (be aware of becoming “by accident” in more burdensome jurisdiction)

§  Transfer of control over structures

§  Listing shares

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IV. CFC rules: Conclusions (11 of 11)

§  Potential changes should not limit use of foreign companies, but may increase tax bill

§  Every situation should be reviewed on case by case basis

§  Immediate actions: –  Audit of the structure

–  Liquidation of dormant companies

§  Given all other conditions are equal, it is better to have a company in a treaty country rather than offshore one

§  The company should have proper substance

§  Artificial structures would end up paying more taxes

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V. Currency regulation of individuals’ foreign accounts (1 of 6)

§  Federal Law on Currency regulation No 173-FZ as of Dec.10, 2003

§  New version of Russian Code of Administrative offences: violation of foreign accounts regime is subject to fine (up to 100%)

§  Fine may be applicable within one year after violation

§  Regulation applicable only to Russian currency residents

§  Currency resident ≠ tax resident 1)  Foreigners and stateless persons residing in Russia on the basis

of a residence permit

2)  All Russian citizens except for:

-  Persons permanently residing in a foreign state for at least 1 year based on permit to reside

-  Persons staying in a foreign state for at least 1 year and having a work and/or student visa valid for at least 1 year period or having several such visas cumulative period of validity of which lasts at least one year 22


Basic obligations §  Residents can freely open accounts in foreign banks

BUT:

§  The tax authorities should be notified on opening, closing, changing of account details within 1 month

§  Only specifically mentioned types of funds can be received

§  Spending is possible, but not for Russian purposes

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fine in the amount of RUR 1 000 – 5 000

(approx. EUR 20 – 100) fine up to 100% of the funds

Non-notification Receiving / Spending

Not allowed funds

V. Currency regulation of individuals’ foreign accounts (3 of 6) §  New regulation since August 2, 2014.

§  The following funds may be transferred to ALL foreign accounts:

–  interest on the account balance; –  minimum deposit required for opening a bank account; –  cash; –  salary and other payments received from nonresidents under

employment contracts and related to the employment duties, which the Residents perform outside Russia;

–  currency assets given as a gift by a spouse or close relative; –  funds received from conversion transactions made with assets

available in the account; –  insurance payments from insurers currency nonresidents; –  funds received in accordance with foreign courts’ decisions

(except for decisions of the International Commercial Arbitration Court);

–  social payments (pensions, scholarships, alimony and others); –  funds received as refunds of previously made payments by the

Residents (refunds of mistakenly made transfers and refunds for return of pre-paid goods or services received from non-residents).

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The following funds may be transferred to accounts in banks of states being members of OECD or FATF:

–  grants; –  income received from non-residents for rent of real

estate or other property located outside Russia; –  accumulated coupon interest the payment of which is

foreseen by the terms of issue of foreign securities owned by Resident;

–  other income gained on foreign securities:

•  dividends; •  payments on bonds and bills; •  payments upon reduction of the charter capital of a

foreign security issuer.

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Still must be transferred to Russian bank account:

§  Proceeds from the sale of securities both of Russian and foreign companies.

§  Dividends and interest on Russian securities.

§  And others not specifically mentioned as allowed.

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§  No established practice of holding residents liable

§  Effective application requires information on cash flow on bank accounts

§  Starting from January 1st, 2015 resident individuals must report to Russian tax authorities on transfer of funds via their foreign bank accounts and provide supporting bank documents (fines for violation should be introduced).

§  Starting from January 1st, 2015 foreign finance organizations must notify Russian tax authorities on accounts of Russian residents.

§  Procedure and liability is not established yet.

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VI. Double citizenship: what document should be reported about (1 of 4)

A Russian citizen is obliged to report the Russian state authorities on having one of the following documents:

þ  Passport of a foreign citizen

þ  Foreign residence permit

þ  Any other document confirming the right of permanent residence in accordance with the foreign legislation

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•  ! The Russian citizen shall determine by himself / herself whether his/her document shall be notified about

•  Criteria – document shall provide the right on permanent not temporary residence abroad.

•  Whether a document proves permanent residence shall be determined in accordance with the applicable foreign legislation.

VI. Double citizenship: duty to report is not applicable for the persons permanently residing abroad (2 of 4)

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Notification is required

Notification is NOT required

Russia

Russia

Foreign country

Foreign country

þ Registration in Russia

NO Registration in Russia

Sojournment (temporary stay) abroad: þ  Educational purposes þ  Working visa þ  Any other purpose

AND / OR

• Actual permanent residence in foreign country • Document evidencing permanent residence abroad: þ  To be determined in accordance

with the foreign legislation þ  Registration with RF consular

authorities abroad

AND

VI. Double citizenship: procedure (3 of 4)

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Regional office of the RF Federal Migration Service

1. Application

by post of Russia (international mail is not acceptable)

by personal visit (PoAs are not acceptable)

2. Documents ! Parents are obliged to file the Application on behalf of minor children.

þ  Application þ  Russian passport (original and copy) þ  Copy of the document to report about (translation and notary certification are

not required) þ  For minors additionally: birth certificate with citizenship stamp (on absence

of the passport) (original and copy)

3. Term þ  For persons already having double citizenship:

Ø  General term – not later than October 04, 2014 Ø  If currently abroad – during the next first visit to Russia

þ Within 60 days upon acquisition of another citizenship

VI. Double citizenship: liability (4 of 4)

Administrative liability Criminal liability

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þ  violation of the procedure of the notification: −  late filing −  provision of incomplete

information −  provision of deliberately

false information

þ failure to file a notification

compulsory works for the term of up to 400 hours

fine in the amount up to RUR 200 000

(approx. EUR 4K)

fine in the amount of wages or other income of the convicted person for the period up to 1

year

OR

OR fine in the amount of RUR 500 – 1000

(approx. EUR 10-20 )

VII. Laws in pipeline

§  Introduction of GAAR (submitted to the State Duma in May 23, 2014)

§  Ratification of Convention on Mutual Administrative Assistance in Tax Matters (submitted to the State Duma in June 6, 2014)

§  Russian tax authorities may be able to take part in tax audits in foreign countries and vice versa

§  Exchange of information with offshore and low-tax jurisdictions (form of the tax information exchange agreement approved by the Government Decree as of August 14, 2014)

§  Disclosure upon registration of new legal entities controlling persons of their foreign founders, except of listing companies (submitted to the State Duma in September 8, 2014)

§  Russian legislation is in line with FATF recommendations, increasing of a transparency of companies’ structures

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Thank you!

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***

Please note that all information was taken from open sources. This presentation is not a consultation. We recommend you to apply for legal advice to the Senior Partner of ALRUD Law Firm Maxim Alekseyev [email protected] in each particular case. The author of this presentation assumes no responsibility for the consequences of decisions taken on the basis of this information.