September 24, 2018

Russian Wealth and Tax: Where We Are Today, and What’s Next, Part 1

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Russian clients have never been more international. Today, families frequently have dealings – through residence, birth, marriage or investments – with multiple countries, and multiple systems of law. At the same time, compliance burden and Anti-Money Laundering (AML) regulations, as well as the domino effect of the US sanctions, make it increasingly harder for honest tax-paying Russian businessmen to keep their money and investments abroad.

With the fall of ’18 at our doorstep, it is important to review the situation and see what needs to be done in the next several months and beyond. To this end we have prepared an overview of current trends, best practices and recommendations from the Boltenko Law team.

Our note is divided into 2 parts – first, news from home (Russia), and second, news from abroad. Today’s note covers Russian news. News from outside of Russia will be the topic of our next e-shot, which will be sent in 2 weeks.

What is Happening – Russia

Tax Amnesty

The latest round of Russian tax amnesty has proven to be popular with Russian taxpayers, largely due to certainty around Automatic Exchange of Information (AEOI) and the introduction of further US sanctions. If you are considering using the amnesty, make sure you act quickly, as the final date for the submission of amnesty declaration is 28th of February 2019. Please note that submitting the declaration does not offer indemnity from all of the potential charges. Specifically, it will not protect you against criminal charges under fraud and AML articles of the Russian Criminal Code. Also, for Controlled Foreign Company (CFC) legislation purposes, even if you use amnesty, you have to declare your assets and probably pay tax for previous periods.

Please do not forget that the tax–free liquidation rules are an excellent way of increasing the tax-deductible base of your assets and can be an effective tool to be used in tandem with the amnesty. Our team can help you make the right decisions on the use of Russian amnesty and tax-free liquidation.

AEOI and Common Reporting Standards (CRS)

Russia has agreed to receive information from more than 80 countries. The first information exchange is due in September 2018, for the year 2017. Russian Tax Authorities (RTA) plan to compare the reported wealth accumulated abroad to the amount of taxes paid in Russia by Russian taxpayers, and in case of discrepancies one probably should expect a tax audit. Although technically only three prior years can be audited, interaction of rules in the Russian Criminal and Tax Codes might allow the tax authorities to go back way longer and audit up to 10 previous years. Please talk to the Boltenko Law team if you would like to understand better what and when is going to be reported, and what you can do best in your situation.

Application of Double Tax Treaties (DTT)

The last 3 years saw a dramatic shift in the practice of application of DTTs by the RTA from paper-based to substance-based approach. Historically, in order to benefit from low withholding tax rates for passive Russian income (e.g. 5% on dividends and 0% on interest, and royalties), it was enough to obtain a certificate of tax residence of the recipient of income (e.g. in Cyprus). After introductions into the Russian Tax Code (RTC) of (a) the concept of “beneficial ownership” as a condition for treaty application and also of (b) imposing from January 2017 an obligation on the Russian payee company (i.e. a tax agent) to obtain confirmation of beneficial ownership of the recipient, the RTAs, and later courts, forbid application of the double tax treaties. In short, if a group of companies represents purely Russian business, there is a high risk that application of lower double tax treaty rates to dividends, interest or royalty will be questioned.

Moreover, the Russian Ministry of Finance has recently issued the long-awaited amendments to the draft law on the ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (Convention). The main goal of the Convention is to combat international tax avoidance, including double non-taxation. The effect of the draft law is that it will amend 71 double tax treaties concluded by Russia. In order for the amendments to come into force, the Convention should be ratified by both Russia and the respective partner state.

From a practical perspective, the Convention brings even more complexity to the interpretation on how the Russian DTTs can be used in the future. It also probably gives even more ammunition to the RTA to scrutinise dividend and interest payments abroad.

Boltenko Law recommends clients who rely on application of DTTs to run a health check before paying any dividends, interest or royalty payments abroad. Also, the historically popular ways of maximising tax efficiencies of the structures by introducing holding, financing and IP companies abroad are often outdated, and the role of such companies in the structures needs to be reconsidered. We can review your international structures and suggest an effective and tax compliant path forward.

Russian Offshores

Two new Russian offshore zones were introduced this summer. Essentially, if you re-domicile your foreign company to Russian offshores, you can enjoy no corporate tax on received dividends and capital gains; 5% withholding tax will apply to dividends paid. To qualify you need to meet a low 15 % participation threshold. It is expected that 2 types of companies will use the new zones – i.e. offshore companies under the US sanctions (as they have little choice otherwise) and companies with simple set up and history. The expert community criticised the law for breaching international conventions (BEPS Action 5 and fairness rules).

It is worth to mention here that Russia has had internal special tax-free zones before: they neither helped to develop the host region (e.g. Kalmykia and Ingushetia), nor added substantial protection to their users (Yukos case is a good example). In our experience, most of our clients continue to keep money and assets outside of Russia to mitigate political risks and economic uncertainty.

Inheritance funds

Russia has introduced a new revolutionary concept of inheritance funds to the Russian Civil Code. The law aims to bring a Russian local wealth planning solution to the aging population. In the absence of any practice and regulations of the managers of such funds, Boltenko Law does not see the Russian inheritance fund presently to be a viable alternative to Anglo-Saxon trusts or foreign family foundations.

What Needs to Be Done
  • Consider using Russian tax amnesty and tax step-up in basis (tax free liquidation)
  • Arrange for a compliance file for every tax year, which states what you have and what taxes you pay and if little in tax, why
  • Check what your bank/corporate provider/trustee is going to report for CRS purposes
  • Review and simplify foreign structures – get rid of what is not necessary
  • Review the terms of your wealth planning vehicles – who is in control? Can you fire your trustees? Who get distributions, and how?
  • Consider moving abroad
  • Make sure your document nominee arrangements
What Boltenko Law Can Do for You
  • Identify risks, both Russian and international, for your ownership arrangements for any type of asset in any location
  • Outline structuring ownership options available for you going forward
  • Devise a compliant strategy of owning both Russian and foreign assets in the future
  • Help put together compliance strategy, procedures and corresponding files
  • Prepare a step plan for restructuring, and assist in its implementation
  • Provide ad hoc advice on ongoing trends, and how they affect your wealth structures
  • Put together the best team of lawyers, bankers and various providers for you in most jurisdictions of the world
  • Act as a trustee in your foreign structures.
What’s Next?

Boltenko Law can help. We take the first introductory call or a meeting on no commitment basis, further work will be done on the agreed contractual terms. We are based in Zurich, and regularly travel to Moscow, London, Geneva and Cyprus, and can meet you or your clients there.

We will continue discussing ongoing issues in our future e-shots, and at our flagship annual event: the Russian Wealth Advisors Forum, which will take place on 30-31January 2019 in Zurich, Switzerland. You can find more information here on the website.

If you have any questions, please contact us.