Financial market organizations, what are you?

Since 2020, currency individual residents of the Russian Federation are required to submit notices to the tax authorities on opening (closing, changing details) accounts opened not only with foreign banks, but also with other financial institutions.

According to the Law “On Currency Regulation and Currency Control”, other financial market organizations are organizations that in accordance with the personal law are entitled to provide services related to attracting funds from residents and allocating funds or other financial assets for holding, management, investment and/or execution of other transactions in the interests of a resident or directly or indirectly at the expense of a resident.

The wording is rather vague and, unfortunately, the law provides no public list of such organizations. However, the general meaning and the legislator’s logic are quite clear.

Huge assets are accumulated on brokerage and investment accounts of citizens. Information thereon is received by the tax authorities via automatic exchange of tax information. It was a logical move to oblige citizens to disclose such information in their cash flow statements and statements on the flow of other assets on foreign accounts.

The ultimate question is which financial organizations are subject to the law on currency regulation and control.

Let us come back to the automatic exchange of information.

The Tax Code contains a list of financial market organizations that are required to disclose information on their clients via automatic exchange of tax information. Such organizations include:

  • Credit institution;
  • Voluntary life insurer;
  • Professional participant in the securities market engaged in brokerage and/or securities management and/or depository activities;
  • Manager under the property trust management agreement;
  • Non-state pension fund;
  • Equity investment fund;
  • Managing company of the investment fund;
  • Mutual fund or non-state pension fund;
  • Central counterparty;
  • Depository;
  • Managing partner of an investment partnership;
  • Other non-corporate organization or structure that accepts funds or other financial assets from clients for holding, management, investment and/or execution of other transactions in the interests of the client or directly or indirectly at the client’s expense.

According to the Information of the Federal Tax Service dated April 19, 2019 containing “List of certain types of organizations classifiable as financial market organizations for the purposes of implementing Chapter 20.1 of the Tax Code of the Russian Federation” financial market organizations also include:

  • Credit consumer co-operative;
  • Agricultural credit consumer co-operative;
  • Housing savings co-operative;
  • Microfinance organization.

This information letter has a note stating that “This list represents the opinion of the Federal Tax Service of Russia approved by the Ministry of Finance of Russia and the Bank of Russia. The list is not exhaustive and will be supplemented; it does not constitute a regulatory legal act, is issued for informational purposes only and does not prevent organizations from following the legislation of the Russian Federation within the meaning that differs from the opinion contained herein.”

Despite the note, it is worth being considered as a guide to action. In other words, if a currency resident of the Russian Federation joins a housing savings co-operative (or its equivalent) in the foreign territory, he/she is obliged to report thereon to the tax authority.

The main question remains, how to do this.

Notices on accounts have a number of fields to be filled in. For example, one of the mandatory fields is “Account Currency Code”, “Account Number”. Normally, brokerage accounts have no specific currency, and securities held on such accounts may be denominated in different currencies and their total value is not converted into one chosen currency.

As for investment insurance, such policies usually contain the number of the agreement itself, but such a policy has no separate account number.

It seems that these contradictions should be somehow considered by the legislator and the notice on opening (closing) an account (deposit) with a bank or another financial market organization located outside the Russian Federation should be modified taking into account that for different types of relations with financial market organizations not all information appearing in the established form should be specified.

The same applies to the cash and assets flow statement.

Currency residents will have to submit their first statements for 2020 in 2021. Although it is already relatively clear how to record a portfolio of securities in the statements, it is still not clear how to record, for example, an investment life insurance policy.

However, one thing is getting obvious. Conclusion of any agreement with a foreign organization to or from which a currency resident of the Russian Federation transfers or receives any asset entails the obligation to report this transaction to the tax authorities at the taxpayer’s place of registration.

For quite some time now, citizens of the Russian Federation have been using such a financial service as investment life insurance. This option is also offered by our insurance companies, but many still buy policies from foreign insurers.

Investment insurance means that the insurance company uses the part of the funds that the client transfers to the insurer as premiums for investment purposes.

The client chooses a strategy and then upon the termination of the insurance policy he/she receives a guaranteed payment and remuneration on the investment.

Therefore, the insurer indirectly uses clients’ funds to generate a profit, which directly turns its activities into the activities of the financial market organization. Accordingly, when purchasing an investment life insurance policy from a foreign insurance company, a currency resident of the Russian Federation should file a relevant notice.

It should be pointed out that the obligation to file notices on opening accounts with banks and other financial market organizations applies only to currency residents who have resided in the Russian Federation for more than 183 days. If a Russian citizen spends more than six months outside the Russian Federation, he/she is not required to file notices and cash flow statements for accounts opened with banks and other financial institutions.

Alexey Oskin

Deputy Director

Tax and Legal Practice

Korpus Prava (Russia)

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