Amended Federal Law on Currency Regulation and Currency Control
Legal Update No 707
Bryan Cave Leighton Paisner LLP (formerly Goltsblat BLP in Russia) advises that, on 2 August 2019, Federal Law No. 265-FZ1 was published relaxing restrictions on currency transactions by residents using accounts and deposits with banks located outside the Russian Federation and pertaining also to cash repatriation (the Law).
Certain provisions of the Law have been in effect since 2 August 2019, while some of these apply retroactively to legal relations arising after 1 August 2016.
The main part of the Law comes into force on 1 January 2020, yet certain provisions on repatriation of currency revenues will take effect in steps between 1 January 2020 and 1 January 2024.
Below is an overview of the Law’s provisions we believe to be the most significant.
Provisions in effect from 2 August 2019
Currency transactions outside the Russian Federation are permitted under educational services contracts between resident individuals staying abroad for more than 183 days in aggregate during a calendar year and Russian state higher education providers and their foreign branches. This provision applies retroactively to legal relations arising after 1 August 2016.
At the same time, such education providers and their foreign branches may, if the educational service is provided outside Russia, refrain from using bank accounts with authorised banks for the above currency transactions, as well as currency transactions under educational services contracts with non-resident individuals. Again, these provisions apply retroactively to educational services and relevant legal relations arising after 1 August 2016. In the above cases, the funds may be credited to education providers’ accounts with foreign banks and, if the funds come from non-resident individuals, the requirement for currency revenue repatriation to accounts in Russian banks does not apply.
Provisions taking effect on 1 January 2020
The list of currency transactions permitted between residents has been supplemented to include currency transfers by resident individuals from their accounts (deposits) with authorised banks to foreign bank accounts (deposits) of resident individuals staying abroad for over 183 days in aggregate during a calendar year who are sole traders under the law of the host country. The transfers may be made in payment for goods supplied, services rendered or information and intellectual products (including exclusive rights to IP) transferred to resident individuals. The transfers are exempt from the restriction on the maximum payment per transaction day.
The legal effect of the currency legislation extends to foreign bank accounts (deposits) and equally to accounts (deposits) maintained by residents with other financial market participants (FMPs) located outside Russia.
The Law describes FMPs as organisations entitled, under their personal law, to provide services implying acceptance of cash from residents and placement of cash or other financial assets for keeping, managing, investing and (or) making other transactions to the benefit of the resident or directly or indirectly at the resident’s expense. The FMP description in the Law thus virtually reiterates the definition of these organisations in clause 2, article 142.1 of the Russian Tax Code (the Tax Code). The borrowing from the tax law was made when the draft Law was considered by the State Duma at the proposal of the Legal Department of the State Duma Office. As the draft Law was examined, note was made of the different approaches to defining “financial market participant” coexisting in the Russian legal framework. The Tax Code wording was selected for inclusion in the draft Law. Given that the tax law rule was incorporated in the Law, we believe it possible also to rely on the illustrative list of FMPs in clause 2, article 142.1 of the Tax Code for the purposes of applying the corresponding currency law provision. Consequently, the discussed provisions of the Law may apply, in particular, to accounts opened by residents with foreign securities market participants providing brokerage services.
Even so, it appears that the Law fails to resolve entirely the persisting problem of distinguishing between bank accounts and accounts with FMPs, e.g., whether a broker account with a foreign bank carrying the resident’s cash should be classed as a bank account or an FMP account. In the case concerned, another ambiguity in applying the Law is that, unlike funds in bank accounts and deposits, cash on accounts (deposits) with FMPs located abroad is formally attributable to neither Russian currency nor any category of currency asset listed in part 1, article 1 of the Federal Law on Currency Regulation and Currency Control. This also clouds the understanding of what may fundamentally be recognised as a currency transaction with cash on accounts (deposits) with FMPs.
At the same time, the basic currency law principle is that any insurmountable doubts, discrepancies or vagueness in the Russian currency laws is to be interpreted in favour of residents and non-residents. In this context, we believe that introduction of special regulation for resident accounts with FMPs means that, until the relevant provisions of the Law take effect, such accounts (deposits) are exempt from currency law requirements unless the FMP is a foreign bank opening an account for a resident.
In turn, by analogy with the rule of the Federal Law on Currency Regulation and Currency Control on broker accounts of Russian professional securities market players opened with Russian banks for carrying funds of non-residents, it may be concluded that similar accounts opened for residents by foreign brokers with foreign banks to carry the residents’ funds should be treated as resident accounts with FMPs.
The list of instances when crediting of funds to and debiting of funds from accounts (deposits) of residents with foreign FMPs is permitted will be determined by the Central Bank of Russia.
At the same time, the Law establishes that residents may enter into currency transactions using funds credited to accounts (deposits) with FMPs located outside Russia in compliance with the currency law requirements without restriction unless these currency transactions are prohibited between residents.
Given the above, it is not quite clear how the provisions of the Law permitting cash debiting from FMP accounts only in the instances established by the CBR dovetail with the absence of any restriction on currency transactions with such cash.
In this context, we believe the least risky option is to stick to the transactions on FMP accounts (deposits) that will be approved by the CBR once the discussed provisions of the Law take effect.
As is the case with foreign bank accounts, residents must notify the tax authorities about opening and closing accounts (deposits) with FMPs and report on any account (deposit) activity. The relevant notification and reporting procedure will be approved by Russian Government and FTS regulations.
At the same time, the Law offers a number of exemptions when notices and reports to the tax authorities on FMP accounts (deposits) and accounts (deposits) with foreign banks are not needed. In particular, some of these exemptions apply to accounts (deposits) with foreign banks and FMPs located in foreign OECD or FATF member states party to automatic exchange of financial information agreements.
New possibilities opened for using resident accounts (deposits) with foreign banks.
Residents may now use their accounts with foreign banks to accrue proceeds from sale of precious metals booked on their accounts with the banks paid by virtue of foreign law, bypassing Russian bank accounts.
The possibilities for crediting funds to accounts (deposits) of resident individuals opened with banks in OECD and FATF member states have been extended:
cash amounts previously transferred by the resident individual for trust management to a non-resident trust manager may be credited back to the account;
unrestricted amounts of cash received from non-residents may be credited to the accounts (deposits), provided the foreign state where the bank accounts are opened joins in information exchange under the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information dated 29 October 2014 or another international agreement/convention made by the Russian Federation for automatic exchange of financial information.
When taking advantage of the latter possibility, one should remember that absence of restrictions on crediting cash from non-residents to foreign bank accounts does not obviate the need to comply with the revenue repatriation requirements. Consequently, when the repatriation requirement applies, cash should be credited to accounts with Russian banks.
Requirements on currency revenue repatriation under specific types of foreign trade contract have been revised.
The requirement is cancelled for repatriation by residents of currency revenues under foreign trade contracts with non-residents where the obligation is denominated and payments effected in roubles. Yet, this exception does not extend to foreign trade contracts for supply of certain types of wood, charcoal and timber products to non-residents.
If such contracts regulate supply to a non-resident of certain mineral and (or) other commodities, including certain types of hydrocarbon and ferrous and non-ferrous metal industry product, a step-by-step increase in cash amounts exempt from being credited to accounts with authorised banks applies:
effective from 1 January 2020: up to 10% of the foreign trade contract value;
effective from 1 January 2021: up to 30% of the foreign trade contract value;
effective from 1 January 2023: up to 70% of the foreign trade contract value;
after 1 January 2024: the entire foreign trade contract value.
The above cancellation of the repatriation requirement does not extend to contracts between non-residents and residents involved in the federal budget process, federal state budget-financed (autonomous) institutions and federal state unitary enterprises.
While lifting the requirement for revenue repatriation under these contracts, the law requires residents to ensure proper performance or termination of obligations under such contracts by having cash due from non-residents under the terms of such contracts credited to their bank accounts with authorised banks or by other means permitted by the Russian legislation. In particular, the Law permits currency revenues under such contracts to be credited to residents’ accounts with foreign banks.
1Federal Law No. 265-FZ dated 2 August 2019 “On amendments to the Federal Law “On Currency Regulation and Currency Control” liberalising restrictions on currency transactions by residents using accounts (deposits) with banks located outside the Russian Federation and pertaining to cash repatriation”.
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