Developments in regulation of foreign accounts - implications for corporate and private clients

03.09.2014

Legal500

Banking & Finance practice of Goltsblat BLP advises that, on 2 August 2014, Federal Law No. 218-FZ "On Amending Certain Laws of the Russian Federation" dated 21 July 2014 ("Law No. 218"), introducing significant changes to Federal Law No. 173-FZ "On Currency Control" dated 10 December 2003 (the "Currency Control Law"), came into force.
 
On the one hand, Law No. 218, among other things, extends the list of transactions the income from which can be credited to foreign accounts (including deposit accounts) of Russian residents.
 
In the context of the "deoffshorisation" reform, this measure should reduce the currency control risks borne by Russian residents using personal accounts opened with non-Russian banks. It should also discourage residents from using offshore corporate vehicles as account holders, particularly when these have been used mainly in order to avoid liability for currency control violations under Article 15.25 of the Code of Administrative Offences of the Russian Federation (Violations of the Currency Control Legislation of the Russian Federation and Regulations Issued by Currency Control Regulations Authorities).
 
On the other hand, from 1 January 2015, individuals with non-Russian personal accounts will be obliged to file cash flow reports with the Russian tax authorities in relation to such accounts (including deposit accounts), together with supporting bank documents and reporting of account balances.
 
It should be mentioned that Russian resident individuals are currently exempt from this obligation: they are only required to notify their local tax authorities of opening (closing) of foreign accounts (including deposit accounts) and of a change in the details of such accounts.
 
It is also expected that, even if accounts are opened in the name of companies or various structures (including trusts and foundations) instead of personal accounts, disclosure may still be required, but under the upcoming controlled foreign company (CFC) rules rather than the Currency Control Law.
 
Extension of the list of amounts that may be credited to foreign accounts (including deposit accounts) of residents

In addition to amounts that may be credited to foreign accounts (including deposit accounts) of residents in accordance with the previous edition of the Currency Control Law, which was in effect until 2 August 2014, currently the following amounts may, among others, be credited to such accounts:
 
• interest income accrued on the account balance (including a deposit account);

• the minimum deposit required by a bank for opening an account;

• cash credited to the account (including a deposit account);

• funds received from exchange transactions with funds credited to foreign accounts (including deposit accounts);
 
• salary and other payments related to performance by resident individuals of their duties outside the Russian Federation under employment contracts entered into with non-resident employers;
 
• funds paid under foreign state court decisions (but not under arbitral awards); and
 
• insurance payments made by non-resident insurers.

In addition, if a foreign account is opened by a resident with a bank located in one of the OECD/FATF member states (such as Switzerland, Luxembourg, the UK and the USA, but not Cyprus or Latvia), the following amounts can also be credited to such account:
 
• income received from lease (sublease) of real estate and other assets located outside the Russian Federation by a resident individual to non-residents;
 
• grants paid by non-residents; and

• accrued interest (coupon) income paid on non-Russian securities owned by a resident individual and other income received from non-Russian securities (dividends, repayment of the principal of bonds or promissory notes, repayment made upon reduction of the issuer's charter capital).
 
New obligation of resident individuals to file cash flow reports in relation to their foreign accounts (including deposit accounts)
 
An important development is that, from 1 January 2015, Russian resident individuals will be required to file cash flow reports with the local tax authority in relation to their foreign personal accounts (including deposit accounts), together with supporting bank documents and reporting of account balances.
 
Currently, there only exists a procedure for filing such reports for legal entities, as established by Resolution of the Government of the Russian Federation No. 819 dated 28 December 2005 ("Resolution No. 819").
 
In accordance with Resolution No. 819, within 30 days of the end of each quarter, a resident legal entity must file with the tax authority a cash flow report and supporting bank documents (bank statements and/or other documents issued by a bank under the laws of the state in which the bank is registered) confirming the information included in the report as of the last calendar date of the reported quarter. Reports together with supporting bank documents must be filed for each account (including each deposit account) of the legal entity.
 
If the resident legal entity does not duly file a cash flow report and supporting bank documents, it may be fined with the amount of RUB 40 - 50 thousand.
 
There is also a special penalty for failure to meet the deadline for filing a cash flow report, depending on the length of the delay:
 
• for a delay of up to 10 days - a warning or fine of RUB 5 - 15 thousand;

• for a delay of up to 30 days - a fine of RUB 20 - 30 thousand; and

• for a delay of over 30 days - a fine of RUB 40 - 50 thousand.

The penalty may be imposed for each failure to file a report, in other words, every quarter.
 
Nevertheless, pursuant to Resolution No. 819, if the cash flow report on a foreign account (including a deposit account) filed with the tax authority contains false information or is incomplete, or supporting bank documents are not duly filed, the tax authority must, within 5 days after receiving the report and supporting bank documents, notify the resident that it has to file a correct report and/or duly completed supporting bank documents.
 
So far, there are no similar provisions regulating the procedure for filing cash flow reports on foreign accounts (including deposit accounts) of resident individuals. We believe that such provisions may be added to Resolution No. 819 by 1 January 2015.
 
Furthermore, the Code of Administrative Offences of the Russian Federation may also be amended in order to make resident individuals liable for failure to file or duly file cash flow reports.
 
It should also be mentioned that residents (both individuals and legal entities) are currently liable for:
 
• not filing with tax authorities a notice of opening (closing) an account (including a deposit account) with a bank located outside the Russian Federation or a change in the account details, in due form and/or in due course; and
 
• not filing such notice at all with the tax authorities.

In the first case, individuals may be fined RUB 1 - 1.5 thousand, while legal entities - RUB 50 - 100 thousand.
 
In the second case, the fine may be RUB 4 - 5 thousand for individuals and RUB 800 thousand - 1 million - for legal entities.
 
If you have any questions on the developments in the foreign accounts regulation described above, please do not hesitate to contact us.

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