Tax Russia Legal Alert April 2015 www.bakermckenzie.com For more information please contact: Alexander Chemelev +7 495 787 27 00 firstname.lastname@example.org Sergei Zhestkov +7 495 787 27 00 email@example.com Maxim Kalinin +7 812 303 90 00 firstname.lastname@example.org Baker & McKenzie — CIS, Limited White Gardens, 10th Floor 9 Lesnaya Street Moscow 125047 Russia Tel.: +7 495 787 27 00 Fax: +7 495 787 27 01 BolloevCenter, 2nd Floor 4A Grivtsova Lane St. Petersburg 190000 Russia Tel.: +7 812 303 90 00 Fax: +7 812 325 60 13 A draft law on the voluntary declaration of property (amnesty), and an extended deadline for filing notifications on owning shares in foreign companies The draft law “On Voluntary Declaration by Individuals of Property and Bank Accounts (Deposits)” (the “Draft Law”) was submitted to the Russian State Duma on 27 March 2015; it should motivate business owners to disclose their foreign property and facilitate tax-free restructurings of foreign assets. Amendments to the Tax Code requiring all Russian taxpayers to file notifications on owning shares in foreign companies, and on the establishment of foreign structures, before 1 April 2015 (the “Notifications”) entered into force from the beginning of the year. Russian taxpayers must also disclose controlled foreign companies (CFCs), and must pay taxes on their undistributed profits. And on 1 April 2015 the Federation Council approved a draft law extending the filing deadline for the Notifications until 15 June 2015.1 Implications for taxpayers The Draft Law seeks to create a simplified mechanism for individual taxpayers in Russia (“Declarants”) to declare property and bank accounts (deposits). Declarants are guaranteed exemption from criminal, administrative and tax liability with regard to the acquisition (accumulation of funds), use, and disposal of declared property. Also, the Draft Law sets up a legal mechanism for the transfer of assets from nominees to actual beneficiaries who are Russian individuals, based on property transfer agreements and special declarations. Although some of its provisions may be amended, the current version of the Draft Law calls for a liberal approach to amnesty: it provides for a full tax exemption on declared assets, and does not require repatriation of the assets back to Russia (except for property in offshore jurisdictions with which Russia has no tax treaty). The extension of the deadline for filing the Notifications gives extra time to taxpayers to finalize the restructuring of foreign assets. If participation in a foreign company is suspended before 15 June 2015, the filing of a Notification is not required. What the Law says The Draft Law was introduced to the Russian State Duma under a tight deadline in order to synchronize it with the extension of the deadline for submitting the Notification until 15 June 2015, and apparently it is still far from being finalized. At 1. The Draft Law “On Changes to Article 219 of Part Two of the Tax Code of the Russian Federation and Article 4 of the Federal Law ‘On Changes to parts One and Two of the Tax Code of the Russian Federation’” (in relation to taxation of profits of controlled foreign companies and the revenues of foreign entities). Tax 2 Legal Alert April 2015 this time the Government is continuing to consult with the Financial Action Task Force on Money Laundering (FATF) regarding compliance of the amnesty with FATF principles, so a number of provisions in the Draft Law could be revised. 1. A Special Declaration Russian taxpayers may legalize their property by submitting a special declaration (the “Declaration”) before 31 December 2015. The Declaration may indicate information on the following (the declaration forms will be approved by Federal law): (1) property (land plots, other real property, securities, etc.) owned by the taxpayer; (2) property received from a nominee; (3) CFCs, where the Declarant is the controlling person; (4) unreported foreign bank accounts, as well as accounts for which the Declarant is the ultimate beneficiary. The Declaration should be filed along with a set of supporting documents, including information on the declared property, notarized copies of agreements on the transfer of property from the nominee to the Declarant, etc. The Declarant may submit the Declaration one time to the local tax inspectorate or to the Federal Tax Service. 2. Transfer of Property from the Nominee to the Ultimate Beneficiary To facilitate transfer of property owned by a nominee and reorganization of foreign holding structures that are controlled via foreign nominees, the Draft Law sets up a special mechanism for transferring property from nominees to the ultimate beneficiaries. The property should be transferred from the nominee under a property transfer agreement (with or without consideration). The agreement should be notarized and shall serve as grounds for the state registration of the rights to the transferred assets in Russia. This agreement is to be submitted by the ultimate beneficiary together with the Declaration. 3. Guarantee to Declarants At present, it is contemplated that the amnesty will be “free of charge,” and that Declarants will not make any “declaration payments.” The Draft Law states that Russian taxpayers will be exempted from paying taxes on property transferred by nominees via the special procedure. Tax exemption for other kinds of declared property is not clearly addressed, but it may appear in further revisions. The Draft Law provides for Declarant’s right, but not the obligation to disclose information about the sources of acquisition (accumulation) of the declared property, and the sources of monetary funds in bank accounts. But this provision may be changed in future wordings if it goes against FATF principles. Declarants and nominees are guaranteed exemption from criminal, administrative and tax liability with respect to violations of Russian legislation occurring during the acquisition (accumulation of funds), use, or disposal of the declared property or CFC, or during currency transactions via disclosed bank accounts before 1 January 2014. Information in the Declaration is to be treated as a tax secret, and may not be used as evidence in criminal, administrative or tax cases. Tax 3 Legal Alert April 2015 The guarantee does not cover movable property (monetary funds, shares) held in jurisdictions on the FATF List or jurisdictions which have no tax treaties with Russia, which is not repatriated back to Russia by the filing date. Similarly, the guarantee does not extend to filers involved in ongoing criminal cases, administrative proceedings, or tax audits, with respect to violations that fall under the amnesty. 4. Notification on Owning Shares in Foreign Companies Since the Russian Ministry of Finance failed to adopt forms of the Notifications on owning shares in foreign companies (establishment of foreign structures without the status of legal entity) in time, the deadline for submitting such Notifications has been extended to 15 June 2015. It was clarified that taxpayers are not required to file Notifications if they suspend their participation in a foreign company or liquidate a foreign structure prior to 15 June 2015. Actions to consider Russian private individuals should analyze their Russian and foreign assets, controlled foreign companies and foreign bank accounts, and assess the likelihood of claims related to the history of acquisition and use of such assets, taking into account recent judicial practice and new trends; Assess the implications of declaring foreign assets, return of property from offshores back to Russia, and transferring assets from nominees to ultimate beneficiaries, taking into consideration the guarantees under the Draft Law and the provisions of the deoffshoring legislation; If decisions are made to declare foreign property, transfer assets from nominees, and liquidate certain foreign companies, begin the necessary corporate procedures and start collecting any necessary documents. We will immediately notify you about amendments to the Draft Law, and about any changes to its legislative status. We would also be happy to answer, on an individual basis, any questions you may have on the declaration procedure. This LEGAL ALERT is issued to inform Baker & McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.