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New restrictions for the US and the UK bank accounts of Russian residents

Russia has lifted with retroactive effect as of 1 January 2018 all currency control restrictions on crediting of funds from non-residents to the foreign accounts of Russian resident individuals, provided that such accounts are opened with banks in countries that participate in the automatic exchange of financial account information with Russia.1 The new list of cooperative jurisdictions that participate in the automatic exchange of financial information with Russia was established by the Russian Federal Tax Service,2 and will come into effect on 5 January 2020.

The new rules mark a simpler regime for Russian resident individuals with personal bank accounts in popular booking centers such as Switzerland, Luxembourg, Monaco, Cyprus, Liechtenstein, Gibraltar and many others, and mitigate historical risks connected with operations performed in 2018 and 2019. Conversely, the rules effectively block - under the threat of 75%-100% fines - the use for investment purposes of the Russian residents' personal bank accounts in non-cooperative jurisdictions (first and foremost, the U.S. and, as of 5 January 2020, the U.K., with the latter being excluded from the list of cooperative jurisdictions).

The restrictions do not apply to accounts opened by Russian resident individuals with other financial market institutions that do not possess a banking license (e.g., with brokerage firms in the U.S. and the U.K.). That said, such accounts are now reportable with the Russian Federal Tax Service and, as was the case before, imply the need to pay tax in Russia on foreign source investment income generated on such accounts.

The change in the regime for foreign bank accounts

Countries participating in the automatic exchange of information

The amendments1 retroactively change the criteria that define countries for which Russia lifts the restrictions on crediting of funds from non-residents to the foreign accounts of Russian resident individuals:

 Conditions for lifting restrictions
Previous edition (was expected to enter into force on 1 January 2020)  New edition (applies starting from 1 January 2018) 

1. the account is with a bank located in an OECD or FATF member state;

AND

2. the country where the bank is located participates in the automatic exchange of financial account information with Russia

1. the account is with a bank located in an EAEU [Eurasian Economic Union] member state;*

OR

2. the country where the bank is located participates in the automatic exchange of financial account information with Russia

 * Armenia, Belarus, Kazakhstan or Kyrgyzstan.

Thus, the changes dramatically improve the regime for the use of personal foreign bank accounts of Russian resident individuals:

1. in the countries and territories that participate in the automatic exchange of financial account information with Russia and that are included in the list of cooperative jurisdictions by the Federal Tax Service (Monaco, Gibraltar, Cyprus, Liechtenstein, etc.), even if such countries are not members of the OECD or the FATF; and

2. in the countries that participate in the automatic exchange of financial account information with Russia and are members of the OECD or the FATF (Switzerland and Luxembourg), but for which the favorable regime in the prevision edition of the law would have been in force from 2020 only and would not have excluded historical risks in relation to transactions performed in 2018-2019; and

3. in the EAEU countries that, in principle, were not previously subject to liberalization of currency control regulations in relation to the foreign accounts of resident individuals. One of the most well-known cases related to violations of the currency control regulations was connected with the crediting of a loan to a bank account in an Armenian bank.

The amendments do not imply a complete abolition of currency control regulations for Russian resident holders of foreign bank accounts in cooperative jurisdictions. For example, such accounts still cannot be used for settlements between Russian residents, for receipt of investment income from domestic Russian securities, and from certain other transactions. Account holders are advised to exercise due care and consider these restrictions when using their foreign personal bank accounts.

U.S., the U.K. and other non-cooperative jurisdictions

The new amendments significantly worsen the currency control regime for the foreign bank accounts of Russian residents in countries that do not participate in the automatic exchange of financial account information with Russia, including OECD and FATF member states (e.g., in the U.S., which does not participate in the automatic exchange of financial account information with Russia, and the U.K., which refused to exchange information with Russia for the year 2018 and will be excluded by the Federal Tax Service from the list of cooperative jurisdictions as of 5 January 2020):

1. first, accounts in such countries, including the U.S. and the U.K., will not benefit from the new favorable regime that lifts all restrictions on the crediting of funds from non-residents to the foreign accounts of Russian resident individuals;

2. second, the list of permitted transactions for bank accounts of Russian residents in such countries is limited retroactively as of 1 January 2018. Receipt of the following types of investment income that was previously permitted is now prohibited: dividends, coupons, bond payments and other payments on external securities, income from the sale of external (foreign) listed securities, income from the transfer of monetary funds and securities to fiduciary management, loans from non-residents received for a period exceeding two years, income from foreign property rental, income from the sale of real estate, and certain others.

No liability should be imposed in the form of a 75%-100% fine for transactions performed in 2018 and 2019, including those using U.S. bank accounts, based on general principles of administrative liability and the prohibition against the retroactive effect of laws that have an adverse effect. In addition, the exclusion of the U.K. from the list of cooperative jurisdictions applies as of 5 January 2020 and does not have retroactive effect.

The restrictions do not apply to accounts opened by Russian resident individuals with other financial market institutions that do not possess a banking license (e.g., with brokerage firms in the U.S. and the U.K.). For such accounts, a special regime established by the Russian Central Bank applies. According to the published draft Central Bank directive, funds can be credited to and debited from the accounts and deposits of Russian residents opened with other financial market institutions located outside of Russia without any restrictions. However, such accounts are now (i) reportable with the Russian Federal Tax Service, including the notification on opening of accounts and submission of regular cash flow reports starting from the year 2020, and (ii) as was the case before, imply the need to pay tax in Russia on foreign source investment income generated on such accounts.

Recommendations

Considering both the new and existing requirements of Russian legislation, as well as the already functioning automatic exchange of financial account information, it is recommended that Russian residents with foreign bank accounts:

a. analyze the structure of their foreign accounts and the practice of their use in order to ensure compliance with currency control and tax regulations;

b. take measures in order to regularize any discovered violations, including (i) disclosure of the accounts and the filing of cash flow reports, and (ii) participation in the third round of the voluntary disclosure program, which is open for filings until 29 February 2020; and

c. consider possible options for restructuring the ownership of foreign assets and accounts in order to comply with Russian currency control and tax regulations.

________________________________________

1. Federal Law No. 398-FZ dated 2 December 2019

2. Order of the Russian Federal Tax Service No. MMV-7-17/582@ dated 21 November 2019

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