On 8 June 2015, the Law "On optional declaration of assets and bank accounts (deposits) by individuals" (the "Capital or Tax Amnesty Law") came into force. It was announced as part of the deoffshorisation campaign and opens a window of opportunity for the business community to declare "grey" assets without facing any risk of criminal or other liability. This was the intention of the legislators, but how would this play out in practice?
- Tax amnesty update
- What can be declared?
- When can the declaration be filed?
- What are the guarantees?
- Who might consider declaring?
- What are the main "hidden pitfalls" of the amnesty?
1. Tax amnesty update
Nationwide deoffshorisation is well under way – the laws on controlled foreign companies ("CFCs") have been adopted and are rapidly being amended. The laws governing income and property reporting by certain individuals (legal entities) are changing, with the anti-money laundering and banking laws following suit. The forthcoming automatic tax information exchange with other countries only strengthens the understanding of the business community that the old rules are soon to become redundant.
All of this is happening in the midst of foreign policy turmoil, an economic crisis and multiple sanctions regimes imposed by foreign states on Russia.
In the current environment, the tax amnesty seems like a reasonable tool and, based on a literal interpretation of the law, should enable business' to disclose assets, which had previously existed in the "grey zone", without incurring significant losses. In addition to an obvious advantage that an asset declaration will remove any related liability, it is intended (although not expressed as such by the state) that such assets would be better protected than undisclosed assets held in countries that have, in an instant, grown unfriendly.
Remarkably, the law does not link the provision of guarantees with the actual return of assets to Russian territory (save where such assets are in a FATF listed state or in a state which does not engage in tax information exchange with the Russian Federation). Furthermore, the transactions associated with asset transfers from nominee holders to the actual owners are tax exempt.
The law has a number of positive points, such as: (i) release from criminal liability for crimes in connection with foreign currency proceeds repatriation, customs and tax issues, alongside the release from administrative and tax liability; and (ii) a ban on using the disclosed information for initiating criminal, administrative and/or tax proceedings against the general public (unless the declarant is willing to provide such information by way of evidence).
At the same time, a restrictive or formal interpretation of this law by law enforcement agencies could erode all of its advantages.
The business community retains a degree of scepticism (at times understandably) about the prospect of open interaction with the state. Moreover, the implementation of the law in the future is concerning: (i) the information may be deployed as unnamed intelligence, as opposed to evidence, to instigate criminal proceedings; and (ii) criminal proceedings might be initiated through non-associated provisions, such as fraud and some special elements of criminal law. Finally, where a declaration is made in a joint ownership scenario, the declarant is making a de facto declaration on behalf of any joint owner. In that sense, any non-declaring joint owner may be left in a less favourable position than the declarant.
The mechanisms of the tax amnesty are not as simple as they first appear and even now we can predict the "sensitive points" which are likely to emerge upon implementation. Therefore, before deciding on whether or not to use the tax amnesty, we should analyse how an individual might benefit and whether the advantages outweigh the associated risks.
To those in doubt, once again, while engaging suitable professionals, we recommend that one analyses the Tax Amnesty Law to see whether a declaration might entail further risks that would be more significant for the declarant, his or her partners, customers and employers. Could an investigation challenge elements of the previous transactions? Might this result in the instigation of criminal proceedings under the "non-exempt" articles?
In any case, legislation such as the Tax Amnesty Law is not common, and as such it is worth considering whether it should be used whilst it remains available. Alternatively, one could decide not to use it, but this should be an informed decision based on a comprehensive analysis of its risks and advantages.
2. What can be declared?
- Property (land plots, real estate, vehicles, securities, including shares, interests and equity units in the authorised share capital of Russian and foreign entities)
- accounts (deposits) in foreign banks
- CFC (if the grounds for recognition of the foreign entity or CFC entity are not related to an equity interest held by an individual)
Individuals are further entitled to disclose information in respect of the sources for property acquisitions (methods for generating the acquisition sources), sources of cash credited to accounts (deposits).
3. When can the declaration be filled?
From 1 July to 31 December 2015.
4. What are the guarantees?
- The amnesty covers acts performed prior to 1 January 2015
- The guarantees apply to declarants and individuals (entities) whose details are set out in the declaration (including company management), however, such other persons are accorded less protection
- The guarantees are provided in the form of a release from criminal, administrative and tax liability further to specific elements of criminal conduct– repatriation, customs and tax
- The guarantees are provided within the limits of the property set forth in the declaration (CFC, accounts, transactions
- The declaration could not serve as the grounds for undertaking a tax inspection. The information in the declaration constitutes a tax secret and cannot be used as the grounds for initiating or as evidence within the framework of criminal, administrative and/or tax offence proceedings (unless the declarant is willing to use such information)
5. Who might consider declaring?
- Holders of undeclared bank accounts and cards in foreign banks (including those registered in the name of companies but used for personal purposes)
- Holders of deposits in foreign banks without any tax on the interest thereon paid in Russia
- Securities transactions outside Russia
- Advisory services providers whose fees are paid through offshore companies
- Owners of foreign real estate rented out
- Options structured through foreign companies
6. What are the main "hidden pitfalls" of the amnesty?
- It is unclear whether guarantees cover the company shares in classic offshore companies
- Risk of liability under the "non-exempt" articles of the Criminal Code