New Year – New Rules

2019 has become a certain turning point for the currency legislation, as the rules of the game changed twice. Undoubtedly, this was facilitated by the initiation of the automatic information exchange, which started working and, apparently, provided the regulatory authorities with the desired information, just as intended.

Everyone knows that five years ago our compatriots who received income outside Russia had no idea that they had to pay any taxes on such income back home. The logic was simple: no one would ever know about such income. Foreign accounts were not declared, and there was no need to file any reports on them. It was also rather complicated for the tax authorities to get statements on foreign accounts of our citizens from foreign colleagues. Sometimes they had to go to court and prove that a tax resident of the Russian Federation evaded paying taxes while receiving income to a foreign account.

The first innovation that completely changed the current practice was the introduction of liability for illegal currency transactions in the form of a fine amounting to 75 to 100 % of the amount of the currency transaction.

It should be noted that at the time of the introduction of this provision, almost all currency transactions, even the receipt of interest on deposits, were considered illegal operations, since they were not provided for by the law on currency regulation.

Later legislative practice went down the road of concessions. At first, legislators allowed a minimum set of income that could still be received on foreign accounts, and over time, the list grew, but such popular types of income as return on sales of securities were still excluded from it.

A couple of years ago, return on sales of securities was included in the permitted list, but with significant restrictions and omissions, which admittedly are typical of the law on currency regulation in general.

It became possible to receive return on sales of securities that passed the listing procedure on exchanges, the list of which was determined by the Central Bank.

However, it immediately revealed a few problems. First of all, the issue of bond redemption remained unclear. In fact, redemption is not a sale and therefore, if the law is to be interpreted literally, one shall be able to sell and receive return on sales of shares and bonds, but shall not be able to receive income from redemption.

Some experts suggest that bond redemption is the receipt of payments on them, which are allowed along with coupons and dividends, but then the Law does not explicitly mention redemption, and the price of error is very high.

The next problem associated with the receipt of return on sales of securities is listing itself. Obviously, shares are usually listed, which is not the case with bonds, let alone notes. In other words, the currency law has left the market of non-negotiable securities unaddressed, which has become another blow for people who invest in foreign markets.

The list of exchanges currently includes more than sixty exchanges, including the most popular exchanges in the world. But prior to 2019, the story of the list was quite tragic.

For example, the list of exchanges, listing on which ensured compliance with the currency legislation, included the so-called German exchange. Everything seems alright, but the strange thing is that this exchange is non-existent. There are Frankfurt, Berlin and Stuttgart exchanges, which together make up the German exchange, but there is no separate German exchange.

It was logical to assume that the Frankfurt, Berlin, and Stuttgart exchanges were all included in the permitted list under one common name. But that was not the case. The Central Bank thought differently, and the three German exchanges were not among the exchanges that needed listing, since they were not expressly included in the approved list. Thus, the German exchanges in general remained above the law.

At the moment, all three German exchanges are included in the coveted list.

The currency legislation divides not only currency transactions into legal and illegal ones. There is also a division by banks, or rather by their location.

Thus, regardless of the bank location, accounts may receive:

• Interest on the balance of funds on such accounts (in deposits);
• Funds in the currency of the Russian Federation under foreign trade agreements (contracts) concluded by such residents with non-residents.

The following funds received from non-residents may be credited to accounts:

• Paid in the form of wages and other payments related to the performance by resident individuals of their labour obligations under labour agreements (contracts) concluded by them with non-residents outside the Russian Federation;
• Paid in accordance with court decisions of foreign countries, except for international commercial arbitration decisions;
• Paid in the form of pensions, scholarships, alimony and other social benefits;
• In the form of insurance payments made by non-resident insurers;
• Paid as a refund of previously paid funds by resident individuals, including the repayment of erroneously transferred funds, the refund for the goods returned by a resident individual to a non-resident, which were previously bought from this non-resident, for the service paid to such a non-resident;
• Paid in accordance with the requirements of the legislation of a foreign country, bypassing accounts in authorized banks, in the form of return on sales of precious metals accounted for on the accounts of residents opened with banks located outside the Russian Federation.

A separate list was set for accounts opened with banks located in the territories of member states of the international organizations OECD and FATF.

This list included the most popular currency transactions. Thus, the following funds received from non-residents could be credited to foreign accounts:

• Amounts of income from leasing (subleasing) to non-residents of real estate and other property of an individual who is a resident located outside the Russian Federation;
• Funds paid in the form of accumulated interest (coupon) income, the payment of which is provided for by the terms of the issue of foreign securities belonging to a resident individual, and other income from foreign securities (dividends, payments on bonds, bills, payments upon the decrease of the authorized capital of the issuer of a foreign security);
• Funds received by a resident individual upon alienation of foreign securities that have passed the listing procedure on the Russian exchange or on a foreign exchange that is included in the list approved by the Central Bank of the Russian Federation;
• Funds paid to a resident individual in the form of income received from the transfer of funds and/or securities to trust management of a non-resident trustee, as well as the repayment of the amount of funds previously transferred by such an individual to trust management of a non-resident trustee;
• Funds received by a resident individual from a non-resident from the sale by a resident individual to a non-resident under a sale and purchase agreement of a vehicle owned by a resident individual outside the Russian Federation;
• Funds received by a resident individual from a non-resident from the sale of real estate by a resident individual to a non-resident under a sale and purchase agreement of real estate owned by a resident individual outside the Russian Federation.

Thus, the list of allowed transactions has become quite extensive, so that with due attention prevent any violation of the currency legislation.

However, given that the currency law is written in a way that is quite difficult for comprehension, the Ministry of Finance in its letter explained that if no notifications about the account are given to the tax inspectorate, then any operations on such an account shall be considered illegal.

According to the currency legislation, a notification on an account opened with a bank located outside the Russian Federation should be given to the tax authority within one month from the date of opening. Furthermore, every year until June 1, it is required to submit a report on the account activity for the previous year.

Therefore, if an individual receives income to a foreign account that is allowed by the law, but fails to provide reports on such an account, all operations on such an account shall be deemed illegal.

In this case, the logic of lawmakers is clear. Expansion of possibilities to receive income to foreign accounts requires a mechanism to monitor such income in terms of tax payments. It should be noted that there is no direct correlation between the report on the foreign account activity and the tax return. However, in case of a significant turnover on a foreign account and absence of tax return 3 NDFL (personal income tax), the tax authorities may request foreign account statements in order to make sure that an individual received no income on which he had to pay, but did not pay taxes.

The automatic exchange of tax information, which was launched in 2018, made its further adjustments to the law on currency regulation.

If we rely on the fact that all restrictions related to the receipt of income to foreign accounts were connected with a lack of transparency of such income, then automatic exchange solved this problem, and therefore, the requirements for citizens stipulated by the currency law became less stern.

The first positive innovation was announced by the legislator in August 2019.

It was the time when amendments regarding filing of reports were made to the Law. Thus, individuals whose accounts were opened with banks located in the territories of the OECD and FATF states, and whose turnover on such accounts did not exceed 600,000 rubles, were exempted from filing reports.

Furthermore, since 2020, funds received from non-residents may be transferred to accounts with such banks without any restrictions.

An additional condition was that a member state of the OECD and FATF should participate in the automatic exchange of financial information with the Russian Federation.

It would seem that everyone was waiting for this. But by the end of the year, the currency law was amended once again, and that is how it met 2020.

For the first time, the legislator recalled our former Union republics, which are now partners in the Eurasian Economic Union.

Indeed, it was rather weird to build close economic relations with Kazakhstan, Armenia, Belarus and Kyrgyzstan, while at the same time have restrictions on the use of personal accounts of Russian citizens with banks in these countries.

Thus, the EEU member states replaced the OECD and FATF member states.

Now, the OECD and FATF membership of the state is not determinative when deciding on the possibility of crediting certain income to accounts with banks located in the territory of foreign countries.

The main criterion now is the participation of the state in the automatic exchange of information in accordance with the Multilateral Agreement of the Competent Authorities on the Automatic Exchange of Financial Information dated October 29, 2014 or any other international agreement concluded with the Russian Federation that provides for the automatic exchange of financial information, which seems quite fair.

For example, Cyprus, which is so much beloved by our compatriots, is not a member of the OECD and FATF, but it participates in the automatic exchange of information with Russia, and under the old rules it was impossible to receive dividends to a Cyprus bank account.

Now membership of a particular country in any organization is unimportant; if it participates in the automatic exchange of financial information with our country, there no restrictions for the receipt of income from non-residents to bank accounts in such a country.

Tatiana Frolova

Leading Lawyer

Korpus Prava Private Wealth