May 26, 2021

Trends Spring 2021: Russian Wealth Home and Abroad

Trends Spring 2021: Russian Wealth Home and Abroad

Here is our quarterly update on major trends affecting international wealth of Russian elite.

RUSSIA

Taxation of individuals – potential increase. Several measures are currently being discussed by the Russian lawmakers. (1) Introduction of upper rates of personal income tax up to 35%. (2) Introduction of higher property tax on luxury, such as expensive houses, cars, yachts, and jets. (3) Hardening criminal responsibility for tax crime. All proposals are at early stages and it is unclear if any of them will be introduced and if so, when.

Early results of CRS and AEOI. The Russian Federal Tax Service (FTS) has been receiving tax information from more than 70 countries for 2017, 2018 and 2019 reporting periods so far. It transpired from the exchange that the Russians had 700 thousand financial accounts around the world, and the balances on them exceed USD180 billion. The received information is being processed by specialized computer software “Nalog-3”, and the first tax audit pursuant to its findings were initiated by the tax authorities in December 2020. Many more audits are expected in 2021. The focus of audits is undeclared foreign income and the use of controlled foreign companies.

Introduction of special tax inspection for HNWI. From February 1, 2021 Russian tax authorities have established new specialized tax unit to work with VIP-taxpayers. It will focus on individuals with annual income above 500 Mln rubles, and individuals with controlled foreign companies, investments and accounts abroad.

Increase of taxation of companies. President Putin in his April speech announced that taxation of Russian companies should be increased. There is no specific legislative proposal yet.

Denunciation of DTT Russia – the Netherlands. In 2020 Russia initiated renegotiations of Double tax Treaties (DTTs) with many foreign states. Treaties with Cyprus, Malta and Luxembourg were successfully renegotiated. The negotiations with the Dutch have failed and the DTT with Netherlands is cancelled (as approved by the Russian Duma on the 12th of May), likely with the effect from January 1, 2022. It means that investing into Russia through a company in the Netherlands will become unattractive for both foreign investors and Russian foreign holdings. DTTs with Singapore, Hong-Kong and Switzerland are the next to be re-negotiated.

INTERNATIONAL

New Russian sanctions. On April 15, 2021, the United States announced a significant expansion of sanctions on Russia, including new restrictions on the ability of U.S. financial institutions to deal in Russian sovereign debt and the designation of more than 40 individuals and entities. The Biden administration imposed sectoral sanctions on some of Russia’s most economically consequential institutions—including the country’s central bank, finance ministry, and sovereign wealth fund.

IMF calls for increased taxation of the rich. IMF recommended governments levying higher taxes on the income or wealth of the rich to help pay for the enormous cost of tackling the Covid-19 pandemic. Specific suggestions include higher taxes on property, capital gains and inheritance or a surcharge on personal tax or corporate income tax.

Global minimum effective tax rate. OECD’s set out in October “pillar one” and “pillar two” blueprints for global tax reforms. It includes proposals for a minimum global tax rate and allocating taxing rights based on where companies make their money. The proposal gain momentum recently with the Biden administration wanting to raise the U.S. corporate tax rate to 28%, and corresponding proposal of a global minimum tax of 21%. Sealing a deal between 139 countries negotiating tax reforms at the OECD will not be easy. The OECD is aiming for an agreement by mid-2021.

Open Registrars of Companies and Trusts. The 5AMLD requires countries to set up registrars of companies and trusts and gradually open them to public. Cyprus and Lichtenstein have made further progress on this recently. In Cyprus it is expected that the registry of companies will be open to general public from April 2022, but the register of trusts will only be open to a limited number of parties. Lichtenstein might make information about some of its secretive structures available to public from October 1, 2021.

UK and the U.S. – no substantial increase of taxation of the wealthy so far. In the UK, a widely discussed wealth tax and an increased rate of capital gains tax have not been introduced. In the U.S., the estate tax exemption was expected to be lowered to 3.5m, but the high level of USD11.7m per spouse exemption will probably remain in place until 2025. Non-US citizens holding US shares directly will still only get a 60,000 USD exemption.

WHAT’S NEXT?

Boltenko Law can help. We will be happy to advise you on the effect of changes on your overall tax burden and propose available solutions.

We take the first introductory call or video meeting on no commitment basis; further work will be done on the agreed contractual terms.

Please contact Olga Boltenko (olga.boltenko@boltenkolaw.com and +41 79 900 2526) or Evgenia Martin (evgenia.martin@boltenkolaw.com and +41 79 126 3195) for further advice.