More and more rich Russians started to declare their foreign accounts

Russian money abroad
Russian &A

The proportion of wealthy Russians (with assets of $1 million and above) who informed the tax authorities about their foreign accounts has grown in comparison with last year four times — up to 40% of total number, says 2017 Tranio and Adam Smith study. The experts interviewed 60 specialists in the sphere of private banking, lawyers and tax advisors working with owners of large capitals from Russia.  Since May of last year the share of the richest Russian citizens who filed a tax return, have quadrupled — from 10 to 40%.

What explains these dynamics?

As noted in the study, the increase in the share of Russians who filed the declaration on foreign bank accounts due to the country’s accession to the agreement on the automatic exchange of financial information between countries in may 2016. Thanks to this document in 2018 the Russian tax authorities will automatically receive data on the foreign accounts of Russian tax residents. The mood of the rich citizens is also affected by the changes in the Russian legislation. In particular, amendments to Federal Law No. 173-FZ “On currency regulation and currency control” (article 12, part 7), obliging tax residents to provide information about their foreign accounts and deposits. Also last year there were stricter administrative and criminal liabilities for concealment of the foreign accounts, the study authors added.

Russians who file returns on foreign assets are usually opening new bank accounts with a clean transaction history, so it is difficlut to trace where money came from. In most cases the Russians first transfer money to the account in a Russian bank, and then transfer money to the new foreign accounts, thereby clearing the entire chain for old transactions, which may have included questionable transactions. Thus, the amount of foreign capital is known to the state and the new accounts are not empty, yet they do not have any transaction history and the relationship between the old and the new foreign account could not be traced.

Russia’s accession to the agreement on the exchange of tax information means that in 2018 information on some of the classic financial instruments of Russians abroad including accounts and deposits will be  received by tax authorities automatically. Russian citizens who file reports on foreign accounts or close them are those who choose to live in Russia and do business in this jurisdiction — the rest change tax residency to antoher country.

Where money are hidden?

According to Tranio and Adam Smith Conferences, the remaining 60% of the affluent clients who do not wish to declare bank accounts abroad really solve the problem is by changing tax residency. 78% of private bankers and tax consultants reported about such trends among its customers. Of these, 33% of respondents said that wealthy Russians actually are tax residents of other countries, 27% — that they nominally changed residency using foreign programs of residence by investment receiving residence permits or citizenship, while 18% of respondents indicated that their clients use both of these options.

By law, a Russian citizen loses the status of Russian tax resident if they spend in Russia less than 183 days in a year. To change the tax jurisdiction the Russians often choose Cyprus and UK, according to a study Tranio and Adam Smith Conferences. Also among wealthy clients popular are Monaco, Malta and Switzerland. The huge demand for Cyprus is associated with the simplicity of its investment program. For €2 million investment they can get a passport for all family members in three months. For many the citizenship of Cyprus also becomes a convenient way to get to the UK because this country does not extradite fugitive oligarchs and their capital. On 14th of July 2017 Cyprus has adopted changes to the tax legislation under which it is enough to spend 60 days on site to get the status of a tax resident. Cyprus can only communicate at the request and risk gof holders of foreign accounts there is low, because Cyprus is not interested to  extradite tax residents to Russia. And Britain at the time of signing of the agreement on the exchange of financial information did not include Russia in its compulsory list.

Also the Russians do not want to “Shine” their accounts transferred the capital to nominee owners — this was reported by 35% of respondents among private bankers and tax consultants. Those “nominees” are most often relatives, friends and other loved ones, said 55% of survey participants. Almost as popular are trusts – their use confirmed 48% of the respondents.

About one-third of professionals surveyed (33%) indicated that the wealthy Russians permanently closed their foreign accounts and transferred the capital to Russia. Another 17% of respondents recorded a tendency to transfer the capital of rich Russians in a jurisdiction that had not acceded to the agreement on the automatic exchange of financial information. According to the study, the most popular of these jurisdictions were the United Arab Emirates and Singapore which at the time of the survey have not yet signed the agreement. On the transfer of clients’ funds in these countries reported 38 and 35% of respondents respectively. Also, many wealthy Russians transfer money to the United States, as evidenced by 28% of respondents.

How Russians deal with CFC?

According to the law on controlled foreign companies (CFC) effective from 1 January 2015, the Russians are obliged to declare their foreign business and to pay taxes on its income in Russia. However, by estimations of participants of the survey, no more than 50% of wealthy customers have informed the tax authorities about the presence of the business overseas in 2017. Of those who are not going to inform the tax office about the shares in foreign companies transferred their CFC in the name of the nominee or brought them under criteria of formal control, stated respectively 43% and 47% of the respondents.

One of these criteria, for example, to declare their CFC should only be a tax resident of Russia who own more than 25% of the shares of a foreign company. To work around this criterion, the beneficial owner may refuse the Russian tax residency, or retain less than 25% of the shares. In fact, people get rid of control in these structures in order to formally not to fall under the CFC legislation. It is noted in the study that the Supervisory role of the Russians in the CFC in this case would be recorded in the internal agreements of the company (such as shareholder agreement) which will not be reported to the tax authorities.

Also in accordance with the law on CFC Russians have to pay taxes on the CFC’s profits (at the rate of 20% for legal entities and 13% for natural persons — owners of a share of 50%) only if they exceed certain limits: RUB 50 million in 2015, RUB 30 mln in 2016 and RUB 10 million by the end of 2017. Thus, if the profit is not generated CFC do not have to to pay taxes in Russia.

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