In an attempt to encourage “economic patriotism,” Russia recently adopted two new laws:
(1) The De-Offshorization Law, which makes a number of major changes in the existing systems of corporate and personal taxation in Russia, particularly as they pertain to foreign companies and structure used to hold domestic assets; and
(2) The Capital Amnesty Law, which offers to natural persons the guarantees of liberation from tax, administrative and criminal liability in exchange for voluntarily reporting to the tax authorities their assets, controlled foreign companies (if they’re controlling persons), foreign bank accounts and bank accounts with respect to which they’re considered as beneficial owners pursuant to the Russian legislation.
U.S. wealth management professionals dealing with Russian markets need to be aware of the potential effects of these new rules.
Effects on U.S. Professionals
First, U.S. professionals need to address the risk of recognition of U.S. companies whose day-to-day management is carried out by their economic beneficiaries located in Russia, as its tax residents could transfer their key management personnel to the United States. This transfer of residence could generate additional legal and tax work for U.S.-based professional advisors.
Second, to comply with the reporting obligations with respect to U.S. companies that they founded or control, if they hold at least a 10 percent share, as well as those U.S. structures without legal personality (including trusts) in which they’re founders or beneficiaries, Russian tax residents will need the regular cooperation of their U.S. legal and tax advisors and corporate service providers.
Third, starting in 2017, the undistributed profits of U.S. companies and structures without legal personality (including trusts) will be included in the taxable base of Russian tax residents who are considered as their controlling persons, so U.S. tax advisors can already start a preliminary determination as to whether it would be more beneficial for their clients to distribute these profits in the United States or declare them in Russia. Either of these solutions may require preparation of extensive documentation.
Fourth, U.S. nationals spending more than 183 calendar days during 12 consecutive months in Russia will also have to report their U.S. companies and structures to Russian tax authorities, as well as pay income tax on the undistributed profits of these companies (structures). Consequently, U.S. tax advisors will have to carefully analyze this scenario and its economic implications for their clients.
Finally, an eventual participation of Russian clients of U.S. banks and asset managers in the voluntary declaration program shouldn’t necessarily result in the decrease of assets under their management. The existence of the convention on the avoidance of double taxation between the United States and the Russian Federation, which contains provisions on the exchange of information in tax matters, releases the participants in the voluntary declaration program from the duty to repatriate their U.S. movable assets (notably, money in the accounts in U.S. banks) to the Russian Federation once these assets have been reported to the Russian tax authorities.
In any event, U.S. wealth management professionals should thoroughly analyze possible implications of the two new laws for their clients’ Russia-related activities.
This is an abbreviated version of the author's article in the August issue of Trusts & Estates, "De-Offshorization and Capital Amnesty in Russia."