INSIGHT: Russia Takes Another Step Towards “Disclosing” Beneficial Owners?

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By Julia Zakharova

Russian and foreign tax authorities start exchanging information automatically in line with the Multilateral Competent Authority Agreement this month.

Resolution No. 693 of the Russian government “on implementing an international automatic exchange of financial information with competent authorities of foreign states (territories)” entered into force on July 20, 2018, which approves a regulation on financial institutions requesting, processing and transferring information to the Federal Tax Service of Russia (the “regulation”).

This means that Russian tax authorities will automatically transfer information about the bank accounts of foreign passive companies and persons controlling them to the countries of their residence and, most importantly, will receive the same information from foreign tax authorities that have joined the Multilateral Competent Authority Agreement (“MCAA”) dated October 29, 2014.

Which Countries will take Part in the Exchange?

At the end of 2017 information was published on the website of the Organization for Economic Cooperation and Development (“OECD”) about the jurisdictions that are ready to automatically provide to the Russian Federation information with regard to financial accounts of companies and individuals that are tax residents of the Russian Federation. This information is updated on a regular basis as various countries join the MCAA.

As at July 5, 2018, 90 countries had joined the automatic exchange. Out of these 90 jurisdictions, 82 proclaimed themselves ready to transfer information to Russia already in September 2018. Among them are:

  • Liechtenstein, the United Kingdom and Singapore, which will send information for 2017 towards Autumn 2018;
  • Switzerland, which will send information for the 2018 reporting year by Autumn 2019; and
  • certain jurisdictions (for instance, Bermuda, British Virgin Islands, Jersey, Ireland, Cyprus, Luxembourg, Malta, and the Netherlands), which have declared determination to send information without indicating specific deadlines.

Russia will be sending information to 59 countries. The first data exchange of this kind with the Russian Federal Tax Service takes place in September 2018.

Which Information will be Transferred Specifically and How Often?

According to the MCAA (section 2, clause 2), section II of the regulation, the following information will be transferred:

  • bank account information (account number, name and details of the bank in which the account is opened);
  • financial information for and as at the end of the reporting period (account balance, total amount of interest that was credited on the deposit or depositary account; total amount of dividends; coupon income on obligations etc.);
  • for clients who are individuals: country code, TIN (taxpayer’s identification number), full name, date of birth, address of residence;
  • for clients that are legal entities: country code, TIN, name, address of registration;
  • data about a passive company’s controlling person (A company is passive if it has at least 50 percent of passive types of income in a period preceding the reporting period. The list of passive types of income is determined in Annex No. 1 to the Regulation) if such controlling person is a non-resident (country code, TIN, full name, date of birth, address of residence); and
  • proceeds for the reporting period and account balance at the end of the reporting period.

Please note that this list is not exhaustive. For instance, it does not include information about the origin of funds. Consequently, such information may only be provided upon additional request.

In accordance with the Common Reporting Standard (“CRS”) information about the following types of accounts will be transferred:

  • all accounts of individuals, regardless of the account balance;
  • existing corporate accounts (accounts of companies, trusts, partnerships and private funds) with a balance of no less than $250,000 as at December 31 of the relevant year. If the client and/or its controlling person (for example, for a passive company) is a tax resident of a foreign state, this threshold is non-regulatory for the bank (in other words, information may just as well be transferred about bank accounts with a balance lower than $250,000); and
  • all new corporate accounts regardless of the amount.

The total period for presenting the information is until May 31 of the year following the reporting year.

Financial institutions had to report to the Russian Federal Tax Service by July 31 on agreements they had concluded with:

  • individuals for amounts exceeding $1 million (or the equivalent amount in another currency); and
  • legal entities for amounts exceeding $250,000 (or the equivalent amount in another currency).

Clause 17 of the regulation lays down a list of organizations and agreements on which no financial information is provided, given that the risk of tax evasion is low. Among them are:

  • companies whose shares are traded publicly and their controlled companies;
  • Central Bank of Russia;
  • European Bank of Reconstruction and Development; and
  • Eurasian Development Bank and others.
Reporting Institutions and Transfer of Information

A financial market institution will submit information to the tax authority of such institution’s state of residence and from there the information will be forwarded to the foreign tax authority. Financial market institutions include (Article 142.2 of the Russian Tax Code):

  • a credit organization;
  • an insurance company;
  • a participant of a securities market, a manager under a fiduciary management agreement;
  • a non-state pension fund;
  • a joint-stock investment fund; and
  • a managing company of an investment fund, a unit investment fund or a non-state pension fund.

For the purpose of this article and for the sake of giving examples, banks will be referred to.

Reports to Russian tax authorities are filed by Russian and foreign financial institutions that are tax residents of the Russian Federation, i.e. Russian legal entities and their subdivisions, as well as subdivisions of foreign legal entities registered in the Russian Federation.

Banks must perform due diligence procedures with respect to existing and newly opened accounts of their clients (individuals and legal entities). It should also be determined whether a client is considered a reportable person (a person that is a resident of a state that is a party to the MCAA) and the tax residency of the account holder should be determined. The information will be analyzed on the basis of data that the bank obtained from its client’s questionnaire.

At the same time, Russian tax authorities will obtain information both on private foreign accounts of Russian tax residents and on accounts of foreign passive companies controlled by beneficial owners from Russia (individuals that are tax residents of Russia).

Let us assume that an individual who is a tax resident of Russia has a passive company abroad (with at least 50 percent of such company’s income being generated in a passive manner, i.e. in the form of interest, dividends, royalties, lease payments etc.), for instance, in Cyprus, then all the identifying information and bank account information will be sent automatically to the Russian Federal Tax Service.

Example

A company in Liechtenstein is controlled by a tax resident of Russia and has an account in a Cyprus bank. All of the countries mentioned have signed up to automatic exchange. The Cyprus bank establishes:

  • that the tax residence of the client company is Liechtenstein (the country has joined the exchange);
  • the amount of the account balance with respect to accounts opened earlier (the Bank is obliged to submit information on amounts starting from $250,000);
  • whether the company is “active” or “passive” (by conducting a questionnaire survey of the client) to determine whether it is required to submit information about the controlling person to the tax authority of its country of residence; and
  • Russia is the country of tax residence for the client’s controlling person, which is a passive company (Russia has signed up to the exchange).

If, as a result of the questionnaire survey, the company has been classified as “passive,” then data about the company’s account will be transferred to Liechtenstein and data about the controlling person and the bank account will be transferred to Russia.

We note that in June 2018 the Central Bank of Cyprus sent a letter to commercial banks warning them which companies they should cease working with. According to the letter, in the near future the Bank will amend the Directive on anti-money laundering measures and combating the financing of terrorism.

Before July 31, 2018, banks had to check their client databases and exclude “dummy” corporations. According to the regulator, “dummies” are companies that do not have a physical presence in Cyprus, do not conduct actual economic activity and are offshore residents for tax purposes. The letter states that a nominal office, even with a number of employees, is not regarded as a physical presence. If a company falls under at least one of these criteria the banks should stop working with it.

This means that Russia will soon start transferring and, most importantly, receiving information about all foreign accounts of Russian beneficiaries (naturally, if foreign banks receive accurate information about them, which will be discussed below).

In terms of information exchange, Russia is more of a receiving than a transferring party. This will allow for technical companies to be identified sooner: at the moment tax officers may obtain the same information from their foreign colleagues, but only upon request. An automatic exchange will facilitate and expedite the receipt of such information.

The information received may be used by local tax authorities for controlling compliance with currency legislation requirements, rules on controlled foreign companies (“CFC”) and transfer pricing (formation of an evidence base on the relationship between parties, transactions involving further sale etc.), as well as requirements regarding the beneficial owner of income when beneficial rates are applied in double tax treaties (when sham foreign contracting parties or nominal intermediaries are identified).

Yet, the role of automatic exchange in the disclosure of beneficiaries should not be overestimated: normally the bank makes the client’s profile based on the data provided by the client itself. Whether the client provides accurate information about the beneficiary depends, in many respects, on the mechanisms stipulated by national legislation of the country in which the bank is located, i.e. on whether the bank has an obligation to identify beneficiaries and, most importantly, on what kind of means the bank has at its disposal to perform such obligation.

For instance, a Russian bank’s questionnaire contains a question regarding the beneficiary, but the answer received from the client is usually inaccurate. Russian banks do not have such a wide discretion as tax authorities in identifying beneficiaries. They are mainly guided by the information they receive from the client itself (for instance, in situations when a beneficial rate is applied to interest paid to a foreign company). Naturally, the bank may refuse to work with a company that does not disclose information about beneficiaries (for instance, such a right is granted to a Russian bank by clause 60 of the regulation). This, however, does not solve the problem of the credibility of such information.

Planning Points

Now that automatic exchange has been introduced, Russian tax authorities will find it quicker and easier to identify technical companies; an additional obligation has been imposed on Russian banks to analyze the clients and report on nonresidents’ accounts to tax authorities.

However, in terms of disclosing beneficiaries, whether the automatic exchange has a practical value remains an open and complex question. Bearing in mind that the bank is guided mainly by the information provided by the client, it is not yet clear how accurate the information received from foreign banks will be with respect to Russian beneficiaries. As far as Russian banks are concerned, with the same degree of doubt about the credibility of information, they will most likely face more stringent requirements on the part of Russian tax authorities with respect to identifying beneficiaries when cross-border payments are involved.

Julia Zakharova is a Senior Associate at Pepeliaev Group, Russia

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