Hard Currency Sales By Representative Offices
2. It has been generally accepted practice that foreign legal entities (FLEs) maintaining representative offices are allowed to make sales in Russia for hard currency, on the condition that the payments are made by bank transfer. FLEs are thus allowed to sell goods that have already been imported through a customs broker or another Russian entity. In addition to this, representative offices can sell their own assets, subject to payment of import duties, VAT and excise duties if the applicable customs regime changes. In such case, the import documents do not mention the final purchaser of the goods as being the recipient.
3. Sales in Russia should be distinguished from import operations, under which a good is imported by a Russian customer. The key currency control document for import operations is the Customs Freight Declaration, in which the recipient of the goods is indicated. Under the import passport system, only this recipient is entitled to make the foreign currency payment for the goods imported, to the foreign legal entity. Although this regime does not apply to sales in Russia, banks now tend to focus on the Customs Freight Declaration for currency control purposes and refuse to make a transfer where currency control requirements have not been complied with.
Legal Basis Of Licence Requirement
4. The Law "On currency regulation and currency control" of 9 Octobert 1992 No. 3615-1 distinguishes two types of currency transactions: current transactions which can be carried out without any limitations and transactions connected with the movement of capital (hereinafter: capital transactions) which are carried out according to the "order" established by the Central Bank. Sales for foreign currency on the territory of the Russian Federation are categorised as a capital transaction. This 'order' of the Central Bank may be implied by Central Bank regulations or should be in the form of a specific decision:
- on the basis of a document issued by the Central Bank, certain categories of capital transactions may be carried out without requiring a licence for every transaction. This is the case, for example, for capital transactions mentioned in Regulation 39 of 24 April 1996 of the Central Bank;
- if the Central Bank has not specifically allowed a certain category of capital transactions, prior approval (licence) must be obtained for each transaction from the Central Bank to legally carry out the transaction.
5. Section II subparagraph 1 of the Letter of the State Bank of the USSR (the predecessor of the Central Bank, hereinafter referred to as 'the Central Bank') of 24 May 1991 (with subsequent amendments) No. 352 stipulates that settlements between residents and non-residents may be made in roubles and in hard currency, in the order established by the Central Bank. The provision was formulated in this way after the Currency Law entered into force, and therefore it has been assumed that this implies approval by the Central Bank for such transactions, on condition that the payments in hard currency are made via a bank transfer, and not in cash.
6. In section II subparagraph 4 of the same letter it is stated, however, that all capital operations require a licence of the Central Bank. It is on this basis that the Central Bank is requiring a licence for every transfer in hard currency for sales made by a representative office. Such a literal interpretation of this provision does not seem consistent with the system of currency legislation, as there are several capital operations which can legally be carried out without a Central Bank licence for every single transaction, on the basis of regulations issued by the Central Bank itself.
Exposure To Penalties In The Absence Of A Central Bank Licence
7. If hard currency sales in Russia are indeed considered to be capital transactions and the payor has not obtained a licence from the Central Bank, the currency control authorities can impose a penalty in the amount of the transaction on the payor, the recipient and on the payor's bank which has made the transfer. It has been reported that this policy is being applied retroactively: banks that have in the past made transfers in hard currency from Russian legal entities to foreign legal entities are currently being penalised if they cannot provide a Central Bank licence for each separate transaction.
8. There are currently three different authorities which have the authority to carry out currency control audits and impose penalties: the Directorate for Currency Control and Currency Regulation (a department of the Central Bank or one of its territorial branches), the Federal Directorate for Export Control (under the Government of the Russian Federation) and the State Customs Committee (which has the status of a Ministry). All three authorities have extensive investigative powers.
Impact For Transfers Already Made
9. The practical impact of the policy on existing operations is limited, as representative offices can still receive payments in roubles and have recently been allowed to convert rouble proceeds into hard currency and transfer such amounts abroad. The risk lies in past operations, as the Central Bank does not apply the policy starting from a particular date but takes the view that a licence has always been required for hard currency sales inside Russia.
Purpose Versus Effect
10. As mentioned above, currency control has recently been tightened with regard to payments for imports (Instruction No. 30 of the Central Bank of 26 July 1995), which must now be documented with an import passport in order to ensure that goods are received in return for currency leaving the country. Apparently, the 'scheme' that is targeted now is the one under which several payments are made to a foreign legal entity's Russian bank account for one delivery of goods (or even for a ficititious delivery), after which the money is transferred and 'redistributed' abroad. At the moment, however, the new policy does not seem to distinguish between capital flight and bona fide sales by a representative office.
Conclusion
11. In the absence of any written confirmation from the Central Bank on this issue, a prudent approach may be to stop sales in hard currency and to try and reverse currency payments already made. We are currently seeking clarification with the Central Bank and will keep clients informed on the results of our enquiries.
12. If you feel any of the issues discussed above affects your business, please address your usual contact with the tax department of Coopers & Lybrand in the Moscow or St Petersburg office.
For further information contact Bauke van der Meer on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: Click Contact Link or enter a text search 'Coopers & Lybrand' and 'Business Monitor'
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.