All Quiet on the Western Front!?

The foreign exchange legislation of the Russian Federation has always been strict and imperative, but up until 2014 no one really cared about compliance with it. After amendments to the administrative code of the Russian Federation were introduced specifying that any fine for an illegal foreign exchange transaction equals to the amount of this transaction, many fellow citizens, particularly the ones living abroad, were put under threat of losing all their bank assets.

The issue of reforming the foreign exchange legislation was discussed not only in the Russian Federation. Upon signing bilateral agreements as part of automatic tax data exchange, certain countries noted that Russian foreign exchange legislation was too strict in terms of sanctions for its violation.

In autumn, potential changes began to shape up, and by the end of the year the State Duma received the draft law On Amendments to the Federal Law on Foreign Exchange Regulation.

The key interest of these amendments was the status of the foreign exchange resident and the expanded list of authorized foreign exchange transactions.

The legislator has lived up to expectations. Prior to amendments, foreign exchange residents of the Russian Federation were all citizens of the Russian Federation and foreign citizens permanently residing in the Russian Federation with the residence permit (one year and more). The exceptions were citizens of the Russian Federation who continuously resided abroad for at least 1 year.  The condition of continuity was breached as soon as the resident entered the territory of Russia even for one day.

Pursuant to the introduced amendments, foreign exchange residents shall be all citizens of the Russian Federation, however, certain exceptions were made for citizens residing outside Russia for more than 183 days in a calendar year.

Thus, citizens of the Russian Federation residing outside Russia for more than 183 days in a calendar year shall be exempted from the obligation to file notices on opening an account at the bank outside the Russian Federation, and they shall not report on the activity of such accounts.

Therefore, foreign exchange residence in its simplified form is defined by the rules of tax residence. Citizens of the Russian Federation will be able to determine their category of foreign exchange residence only in the second half of the year, provided they resided abroad during the first half of the year.

In order to avoid any unpleasant surprises the legislator introduced the following exception: if a resident individual fails to file a notice on opening an account and fails to file a report on the activity of the account at the bank outside the Russian Federation, and his/her period of stay outside Russia for the past calendar year amounts to 183 days and less, he/she shall:

  • Notify tax authorities where he/she is registered on opening (closing, detail changing) of his/her foreign currency accounts (deposits) and/or Russian currency accounts (deposits) at the banks outside the Russian Federation until June 1 of the calendar year following  such past calendar year;
  • File reports on the activity of accounts (deposits) at the banks outside the Russian Federation to tax authorities where he/she is registered.

An additional bonus for foreign exchange residents residing outside the Russian Federation for more than 183 days is elimination of foreign exchange transactions made between such residents outside the Russian Federation from the list of banned transactions.

Therefore, the foreign exchange legislation now includes two categories of residents:

  • Ordinary foreign exchange residents, i.e. citizens of the Russian Federation residing in Russia for most part of the year;
  • ‘Light’ foreign exchange residents, i.e. citizens of the Russian Federation, who will not qualify as tax residents by the end of the calendar year.

However, one should remember that the list of income foreign exchange residents are allowed to get on their accounts at the banks outside the Russian Federation are identical for ordinary and ‘light’ residents.

The list of authorized transactions now includes two types of income allowable for foreign accounts. Thus, no violation of the foreign exchange legislation shall ensue from depositing:

  • Monetary funds received by a resident individual from a non-resident after selling a vehicle owned by a resident individual outside the Russian Federation by a resident individual to a non-resident under a sale and purchase agreement;
  • Monetary funds received by a resident individual from a non-resident after selling real estate owned by a resident individual outside the Russian Federation by a resident individual to a non-resident under a real estate sale and purchase agreement, provided such real estate is registered (located) on the territory of a foreign ОECD or FATF member country, and such country has joined the multilateral Agreement of Competent Authorities on the Automatic Exchange of Financial Information dated 29.10.2014, or has entered into a different international agreement with the Russian Federation, which provides for the automatic exchange of financial information, and the account (deposit) of a resident individual is opened at the bank located in the territory of this foreign country.

Besides, foreign exchange residents are entitled to get the amounts of taxes compensated by the competent authorities of such resident’s countries of stay to their foreign accounts.

Now foreign exchange residents are entitled to conduct foreign exchange transactions using funds credited to foreign accounts (deposits) without limitations pursuant to the foreign exchange legislation. Prior to amendments, it was applicable only to funds non-related to the property transfer or service provision in the territory of the Russian Federation.

The new revised law specifies that residents shall be entitled to credit their foreign accounts (deposits) with the funds from their accounts (deposits) at authorized banks or other foreign accounts (deposits).

The new revised law determines tax authorities for filing notices and other foreign exchange regulation documents.

Thus, for individuals it shall be the tax authority at the place of residence (place of stay in the absence of the place of residence in the territory of the Russian Federation), and in case a resident individual has no place of residence (place of stay) in the territory of the Russian Federation – the tax authority at the location of the real estate owned by him/her (in case of several real estate facilities – the tax authority at the location of one of real estate facilities owned by him/her at the resident’s choice).

In case a resident individual has no place of residence (place of stay), real estate in the territory of the Russian Federation, notices on opening (closing) accounts (deposits) and changing details of accounts (deposits) at the banks outside the Russian Federation shall be filed to the tax authority determined by the federal executive authority responsible for tax and levy control and supervision.

The obligation to file a notice to the tax authority on opening an account (deposit) upon the first transfer of monetary funds to an account at the bank outside the Russian Federation with the mark of notice acceptance has been canceled for foreign exchange resident individuals.

For the purposes of foreign exchange regulation, banks acting as foreign exchange agents instead of documents confirming permanent residence of individual citizens of the Russian Federation in the foreign country under its jurisdiction shall request documents confirming facts of stay outside the Russian Federation, and documents confirming entering and/or leaving the Russian Federation.

The law shall come into force on January 1, 2018. The simplified foreign exchange regulation regime shall apply to ‘light’ foreign exchange residents following the results of 2017.

The law was adopted at the end of December and became a long-awaited present to thousands of Russian citizens residing abroad. However, it is time and law application practice by regulatory authorities that will show whether the new revised foreign exchange law facilitates compliance with requirements and restrictions of the foreign exchange legislation.

Tatiana Frolova

Leading Lawyer

Korpus Prava Private Wealth

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