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In June 2019, Russia started the third stage of the capital amnesty, which will last until 29 February 2020.

The main condition for the current amnesty was the return of the declared assets to their homeland. It should be noted that not all assets are subject to repatriation, but only funds deposited in foreign accounts and foreign companies, which are to be redomiciled to the Russian Federation.

Redomiciliation is a mechanism for changing a company’s jurisdiction and transferring a company from one country to another. The result of the change of the legal address is the termination of the existence of an entity in the country of initial registration and transfer of its structures to another country to carry out further activities in accordance with the current legislation. At the same time, the company retains its status, structure, property and other rights and contractual obligations.

Redomiciliation is a new page not only in the history of capital amnesty but in the history of the Russian law.

The Federal Law “On International Companies”, which regulates the registration of foreign companies in the Russian Federation, was adopted a year ago, in August 2018. In May 2019, the Ministry of Economic Development reported that the number of international companies in the Russian special administrative regions (SAR) reached ten. Eight of them are registered in Oktyabrsky Island in the Kaliningrad region and two of them are registered in Russky Island in Vladivostok.

Given that these companies have been redomiciled before the third stage of the amnesty, therefore, the reason for the “move” was the intention to use the guarantees provided by the Law “On Voluntary Declaration of Assets and Bank Accounts (Deposits) by Individuals and on Amendments to Certain Legislative Acts of the Russian Federation”.

It should be noted that the conditions for redomiciliation provided for by the Russian legislation significantly reduce the number of companies that are entitled to receive a new status.

Thus, a foreign company shall:

1. At the time of the resolution to amend its personal law, but in any case, not later than 1 January 2018, on its own or through its direct or indirect controlled entities determined in accordance with Chapter XI of Federal Law No. 208-FZ “On Joint-Stock Companies” dated 26 December 1995 and Article 45 of Federal Law No. 14-FZ “On Limited Liability Companies” dated 8 February 1998, or through other persons belonging to the same group of persons with a foreign person in accordance with Federal Law No. 135-FZ “On Protection of Competition” dated 26 July 2006, on any of the grounds provided by Article 9 of Federal Law No. 135-FZ “On Protection of Competition” dated 26 July 2006, or through branches or representative offices (other separate subdivisions), carry out business activities in the territory of several countries, including the territory of the Russian Federation.
2. File an application for the conclusion of an agreement on carrying out activities as a member of a special administrative region defined in accordance with the Federal Law “On Special Administrative Regions in the Territories of the Kaliningrad Region and Primorsky Krai”.
3. Assume obligations to make investments in the territory of the Russian Federation, including on the basis of a statement of intent to make investments in the territory of the Russian Federation, special investment contract, concession agreement, agreement on public-private (municipal private) partnership or another agreement.
4. Be registered (established) in the state which is a member or observer of the Financial Action Task Force (FATF) and/or a member of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism of the Council of Europe (Moneyval).

Therefore, beneficiaries of new (established after 1 January 2018) foreign companies, as well as those whose companies are registered in the British Virgin Islands, Marshall Islands or Seychelles, will not be able to benefit from the capital amnesty. Among the popular among Russians jurisdictions, only Hong Kong and Singapore are included in FATF, while Cyprus, Malta, the Isle of Man,

Jersey, Guernsey and Eastern Europe are included in Moneyval.

As for investments in the Russian economy, the legislator has indicated the amount of 50 million rubles. It should be noted that this figure may also become a significant barrier for mid-level entrepreneurs who, perhaps, would like to transfer their business to Russia, but are not ready to make such large investments now.

Investments in the Russian economy may be as follows:

• Capital investments, i. e. investments in capital assets (fixed assets), including costs of new construction, reconstruction and technical re-equipment of existing enterprises, acquisition of machinery, equipment, tools, inventory, design and survey works and other costs;
• Investments in the authorized capital, fund or contributions to the property of business entities that are Russian legal entities engaged in the activities not prohibited by the legislation of the Russian Federation.

The two criteria described above significantly reduce the number of persons that will be able to declare their participation in a controlled foreign company (CFC). However, it should be remembered that the third stage of the amnesty has already been arranged, and if compatriots have not taken advantage of the previous opportunities, it means that they have no big need in it. The current amnesty sets specific goals, namely the return of citizens’ assets to their homeland.

It will be very interesting to analyze the figures at the end of the amnesty period and to establish the amount of filed special declarations and redomiciled companies. However, the second stage is most likely to remain the most effective stage of the capital amnesty. According to the statistics, about 7,200 declarations were filed in the first wave of the amnesty, and about 11,800 declarations were filed in the second one. To be fair, it should be noted that no citizen activity has been currently observed.

But what about taxes?

It is well known that the amnesty does not only exempt from criminal and administrative liabilities but also restricts the ability of tax authorities to collect taxes.

Thus, according to Article 45 of the Tax Code, the tax is not collected in case of non-payment or incomplete payment of tax by the declarant recognized as such in accordance with the Federal Law “On Voluntary Declaration of Assets and Bank Accounts (Deposits) by Individuals and on Amendments to Certain Legislative Acts of the Russian Federation”, and/or by another person, information about which is contained in a special declaration filed in accordance with the said Federal Law.

No tax collection shall be made subject to one of the following conditions:

1. If a declarant has been obliged to pay such tax as a result of transactions made before 1 January 2015, related to the acquisition, use or disposal of the property of controlled foreign companies, the information on which is contained in a special declaration filed within the period from 1 July 2015 to 30 June 2016, or related to the opening of and crediting funds to the accounts, the information on which is contained in such special declaration, i.e. a special declaration was filed during the first stage of the amnesty.
2. If a declarant and/or another person have been obliged to pay such tax before 1 January 2018, and such person has taken advantage of the second stage of the amnesty, but this provision did not apply to the obligation to pay taxes payable in respect of the profit and/or property of controlled foreign companies.
3. If a declarant and/or another person has been obliged to pay such tax before 1 January 2019 and such person intends to benefit from the third stage of the amnesty, while the CFC’s profit is still not exempt from taxation.

The last note seems a little strange against the fact that a declarant should not have any CFC at the time of filing a special declaration.

Thus, if as of 31 December 2019, a declarant will no longer be a controlling person of a foreign company, then this person will no longer be subject to the obligation to submit a notification on CFC and, as a result, to include retained earnings of CFC into the tax base in 2019. This clause most likely serves as an incentive for doubtful citizens who are in no hurry to leave CFC and plan to redomicile a foreign company at the end of the amnesty period, having managed to complete everything in the first two months of 2020.

It is interesting that at the end of 2018, when no one believed in the third stage of the amnesty, the Ministry of Finance issued a letter that shed light on one of the most controversial issues of both stages of the amnesty.

The issue concerned the period for which it was possible not to pay taxes if a special declaration was already submitted. The Tax Code states that no taxes are subject to collection if the obligation to pay them has arisen before 1 January. Then when does this obligation actually arise? Opinions of legal experts were divided. Some believed that the obligation arose directly at the moment of income receipt, i.e. before 1 January, and therefore, there was no need to pay taxes. Others believed that the obligation arose from the moment of filing a tax return and it was necessary to fulfil this obligation before 15 July of the year following the reporting period, and in this case, despite a special declaration, taxes for the year preceding the year of submission were to be paid.

In its letter No. 03-04-05/93986 dated 24.12.2018, the Ministry of Finance indicated that the obligation to pay personal income tax was imposed on a taxpayer from the moment of receipt of such income. Therefore, when filling a special declaration in 2019, taxes on income received in 2018 are not subject to collection, as they have been received before 1 January 2019.

It should also be noted that an amendment to the article on exemption of certain types of income from taxation was made together with the announcement of the third stage of the amnesty. This article was supplemented by clause 75, according to which income in the form of profit of a controlled foreign company taken into account when determining the tax base in 2019 for a taxpayer who is a controlling person of such a controlled foreign company, is not subject to taxation.

Such income is exempt from taxation if a taxpayer has not been recognized as a tax resident of the Russian Federation following the results of the tax period of 2018.

Apparently, the legislator tried to return not only the capital but taxpayers themselves to Russia.

It is known that anti-offshore reforms resulted in many of our compatriots deciding that they could afford to reside outside the homeland for the most part of the calendar year and to take profits of foreign companies away from the control of the Russian tax authorities (tax non-residents are known to pay taxes only on the income received in the Russian Federation, while foreign companies unless they are recognized as tax residents of Russia, do not belong to such sources). This amendment allows those who lost their tax residency in 2018 to regain their tax residency in the Russian Federation in 2019 in order not to pay taxes on the retained earnings of the CFC in 2019, and again not to pay taxes related to the activities of a foreign company in 2020.

It seems that the actions of the authorities are quite understandable and logical, but we will see whether they yield any results in the spring of 2020.

Tatiana Frolova

Leading Lawyer

Korpus Prava Private Wealth