February 20, 2018
On February 19, 2018, the President of the Russian Federation signed Federal Laws No. 33-FZ, No. 34-FZ and No. 35-FZ, prolonging tax amnesty and “tax free liquidations” of controlled foreign companies and organizations (“CFC’s”) until March 1, 2019.
The terms of the extended amnesty will allow Russian citizens to inform the authorities of their foreign assets. The authorities will not ask about the source of the money used to buy the assets declared, and will not impose any tax, administrative liability, or criminal liability on the declarant. No taxes will be levied on the declared assets. As before, declarants will not have to repatriate their assets to Russia.
The second stage of the tax amnesty provides for several new conditions. In particular, foreign bank accounts which are closed before the declaration date, can now be declared. There are also amendments which provide clear guidance for tax deductions in case of disposal of assets received by taxpayers from nominal holders. The taxpayers who submitted their special declarations during the first stage of the amnesty can participate again.
Importantly, future income from the use of assets declared under the amnesty will be subject to reporting and tax in Russia.
The new law extends the period during which Russian controlling persons and shareholders can receive liquidation proceeds from their CFCs, free from taxation in Russia. The market value of the assets received at the time of distribution of liquidation proceeds is a tax-deductible basis for purposes of the future sale of these assets.
The terms of prolongation are essentially the same as before, except that now monetary funds received by the taxpayer are also non-taxable. This new provision covers the period from January 1, 2016 until February 28, 2019.
Extended Russian tax amnesty and “tax free liquidations” of CFCs allow you or your clients to withstand the scrutiny of Russian tax authorities and international regulators, as well as to prepare for the world of international transparency. Specifically, there are two areas of developments you need to be aware of.
First, the international implementation of 2012 Standards of Financial Action Task Force, European implementation of the Fourth Anti-Money Laundering Directive, OECD’s Proposed Mandatory Disclosure Rules on CRS Avoidance Arrangements, the establishment of a Global LEI System under Markets in Financial Instruments Regulation means that it becomes impossible for Russian clients to make and keep international investments without being able to explain and document the source of wealth and without being able to show that the wealth was reported and taxed. These measures in combination with increasing international political pressure on Russia, put international structures for Russian clients under ever-increasing scrutiny.
Second, in 2016-2017 Russia has agreed to automatic exchange of information with many countries of the world, with an aim for the Russian tax authorities to obtain information on foreign accounts and structures controlled by Russian tax residents.
Specifically, Federal Law No. 340-FZ entered into force on November 27, 2017, incorporated CRS requirements into Russian law. In December 2017 the OECD published on its dedicated AEOI portal the list of jurisdictions with which Russia will exchange information and when. For example, with Great Britain, Liechtenstein, Singapore, Andorra and Gibraltar, Russia has agreed to exchange information in 2018 for the reporting year 2017; with Switzerland Russia will start exchanging information in 2019 for year 2018.
This means that the Russian tax authorities will automatically receive on an annual basis balances of financial accounts held by Russian tax residents in partner jurisdictions and by passive non-financial entities that are controlled by Russian tax residents, as well as types of income paid or credited to those accounts, including interest income, dividends, income from certain insurance products, and gross proceeds from sale or redemption of financial assets. This information may be used by Russian tax authorities in checking that Russian taxpayers have correctly fulfilled their tax obligations. Hence, the Russian authorities will be able to find out about hidden assets of Russian taxpayers and impose both administrative and criminal liability.
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