Russian Federation: Compliant Tax Structuring For The Russian Elite: Global Transparency And Domestic Law Changes

Last Updated: 7 April 2016
Article by Olga Boltenko

The age of global tax transparency is upon us. Clients have to be prepared for the fact that their international private and corporate arrangements will not remain confidential, for one reason or another. This poses the question of what to do?  

This brief article explains the recent legislative changes, which pose a threat to the status quo of some structures, and also proposes steps forward. Ensuring the right balance between maintaining the confidentiality of wealth structures, and complying with global transparency standards, has become the number one priority, and requires immediate attention.

Tax transparency  

Russia will participate in the global automatic information exchange programme and has committed to implement the Common Reporting Standard (CRS) and undertake the first exchange of information in 2018.

The basic legal document devoted to mutual tax cooperation between jurisdictions is the Convention on Mutual Administrative Assistance in Tax Matters that is in force for Russia and more than 90 other countries, including offshore jurisdictions like BVI, Cayman Islands and Belize. As of now, this Convention, together with double tax treaties, constitutes the basis for the Russian tax authorities to obtain information on request (as per the letter of the Russian tax services of 22 December 2015 № OA-4-17/22482@).

In order to receive international tax information automatically, Russia still has to join the automatic exchange legal framework, i.e. to sign the CRS Multilateral Competent Authority Agreement or other bilateral agreements. Under CRS, foreign bank accounts (balances and income) or all assets of foreign companies or trusts controlled by Russian resident individuals will be reported to the Russian authorities by the states responsible for the reporting. It is expected that reporting under CRS to Russia will start in 2018. However, it is important that, depending on their jurisdiction, banks, other financial institution and service providers already have an obligation to obtain information on their clients (including tax residence) for the period of 2016.

Voluntary disclosure prolongation until 30 June 2016

At the end of 2015 the President of Russia proposed extending the voluntary disclosure program and amending its conditions in order to make it more attractive. The program has been extended until 30 June 2016 (the Law of 29 December 2015 #401-FZ). A number of important amendments have recently been approved by the Parliament and are waiting for the Presidents sign off, including the abolishment of assets repatriation requirement, prolongation of guaranteed period for disclosed foreign bank accounts until the date of declaration and extension of the program's guaranties on the assets of CFCs. 

Further changes to CFC rules – trusts/foundations in focus

The law of 15 February 2016 #32-FZ (hereinafter, 'the Law') introduced several important amendments that clarify CFC tax and reporting consequences for trusts and other non-corporate structures.

  • First, beneficiaries and other controlling persons of the structure, except for the settlor, do not have an obligation to notify the tax authorities about participation in foreign non-corporate structures.
  • Second, assets received by a structure from the settlor or his/her immediate relatives or other controlled company (subject to certain conditions) should not be included in the CFC's income.
  • Thirdly, income received by beneficiaries of non-corporate structures within the amount of assets transferred to the structure by the settlor or other persons as noted above, should not be taxed under certain conditions.

These changes are positive signs and improve the tax position of the trusts and other non-corporate structures used by Russian families. Most of all, they bring the best international practices to wealth planning for Russians, and help to clarify issues surrounding the tax position in Russia as it was just a few months ago.  

As expected, the Law also introduces amendments aimed at simplifying the calculation of CFC profits. The most important change is that CFC tax can now be determined based on the financial reporting prepared in accordance with domestic reporting standards or, in the absence of such local standards, in accordance with international reporting standards irrespective of the jurisdiction where the CFC is registered. However, in the event that the CFC is not registered in a tax treaty jurisdiction (e.g. in BVI), financial reporting should be audited.

It is also important for a number of clients to bear in mind that there is still a possibility to liquidate foreign companies and structures without incurring tax consequences. The deadline for liquidation has been extended to 1 January 2018.

Currency control

Russian residents are very limited in relation to operations on their accounts in foreign banks due to the strict provisions of the Russian currency control regulations and new reporting obligations. As a result of the recent campaign on relaxation of the currency control rules, the Government introduced the new law of 28 November 2015 #350-FZ, under which the scope of permitted transactions was extended to include two additional transactions on personal accounts opened in banks located in FATF member states:

  • proceeds from the disposal of foreign listed securities can be credited directly to foreign bank accounts (in effect only starting from the 1 January 2018).
  • income received from investments under foreign discretionary management can already be credited to foreign bank account from 2016 onwards.

Although the definition of 'discretionary management', as well as the wording of the new provision, are subject to interpretation, this is a positive development and is currently being considered by a number of clients with large investment portfolios held with foreign banks.

What we can do to help you

Our clients are starting to talk to us about the impact of CRS on their structures, in order to be able to prepare themselves and avoid surprises.

Trustees of a foreign trust (or a foundation) with Russian resident settlors, beneficiaries or controlling persons, or directors of a foreign company holding Russian assets or controlled by Russian persons are required to re-assess their position and the risks associated with the structures/companies they manage in the context of the new changes and should also seek appropriate advice.

We are currently advising clients on the following:

  • existing structures controlled by Russian tax residents - identifying the reporting institution and scope of CRS reporting, supporting voluntary disclosure and restructuring (where relevant)
  • new structures –analysing and comparing the alternative scope of CRS disclosure and integrated advice in the context of Russian CFC
  • reviewing trust and foundation structures and advising on restrictions and planning opportunities in order to comply with the CFC law or minimize the tax and reporting exposure for individuals connected to the structures
  • reviewing corporate structures (holding, financing and trading) and proposing changes to the structures to ensure compliance with the law
  • comparing alternative jurisdictions of tax residence from the tax and immigration standpoint, considering relocation to the UK and a number of other jurisdictions, as well as providing pre-immigration tax planning advice
  • developing guidelines for corporate groups to ensure that they are managed and controlled in a tax efficient manner
  • liquidating existing companies and non-corporate structures
  • on the merits and issues of the amnesty and currency and control legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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