Tax Digest for December 2023

Movchan's Group

Jan 29, 2024

Main topics of the past month:

• The Federal Tax Service (FTS) began to show interest in the foreign citizenship and residence permits of Russians.
• The Russian Ministry of Foreign Affairs announced the termination of tax agreements with Denmark and Latvia from January 1, 2024.
• Portugal introduced a restriction on tax-free gifts between relatives.
• The German Ministry of Finance included Russia in the list of "tax havens."
• The President of Russia prohibited encumbrances and arrests on assets in accounts of types "C" and "I."
• The USA, UK, Switzerland, and other countries were included in the Russian list of states not providing information exchange for tax purposes.

FTS began to show interest in the foreign citizenship and residence permits of Russians

The FTS began to survey Russian citizens regarding their compliance with currency legislation. In particular, the tax service asks taxpayers to provide the following data:

• a copy of the Russian passport;
• a copy of the foreign passport;
• the number of days spent outside Russia;
• copies of documents confirming citizenship or residence permits of other states;
• statements from foreign bank accounts;
• documents confirming currency transactions on foreign accounts.

The data is collected in accordance with the provisions of the law "On Currency Regulation and Currency Control," emphasizes the FTS. 

It appears that in this way, the tax authorities are primarily looking for violations of currency legislation on foreign accounts of Russian citizens. It is possible that they will also pay attention to tax violations, including cases where the taxpayer has lost the status of a Russian tax resident but tries to maintain a reduced (13/15%) tax rate for income still received in Russia, such as income from investments in a brokerage account or income from the sale of real estate. Recall that most income from sources in Russia for tax non-residents is taxed at an increased (30%) rate of personal income tax. 

The request for statements from foreign accounts is a long-standing and widespread practice by tax authorities, and information about foreign citizenship and residence permits previously did not interest the FTS, as they rarely affect tax obligations and obligations under Russian currency legislation. 

It is worth noting that a Russian citizen must notify the migration department of the Ministry of Internal Affairs of Russia about obtaining a foreign residence permit or citizenship within 60 days from the date of entry into the territory of Russia. Checking compliance with this obligation is not within the competence of the tax authorities, but it is possible that tax departments will begin to interact with the Ministry of Internal Affairs of Russia in identifying cases where a citizen has not fulfilled this obligation. However, such interaction between the Ministry of Internal Affairs and the FTS is not yet known in practice. We emphasize that to comply with Russian legislation, we recommend timely notifying the relevant authorities about the presence of a residence permit or citizenship in a foreign state.

The Russian Ministry of Foreign Affairs announced the termination of tax agreements with Denmark and Latvia from January 1, 2024

The Ministry of Foreign Affairs of Russia announced the termination of the double taxation avoidance agreement with Latvia. A similar agreement between Russia and Denmark has also lost its force. Recall that double taxation avoidance agreements are used to regulate cases where the same income is subject to taxation both in the country of origin and in the country where the taxpayer is a resident.

The presence of such agreements is an important condition for foreign investments, as well as the movement of people and capital between countries that have signed such an agreement. However, in the current geopolitical conditions, the applicability of agreements concluded by Russia with "unfriendly" countries is becoming less feasible in practice.

Portugal introduced a restriction on tax-free gifts between relatives 

Tax-free gifts between relatives in Portugal have been restricted. Now gifts (donations) between spouses and relatives in the ascending/descending line are exempt from tax only if the gift/donation amount does not exceed 5,000 euros.

Until 2024, there was no restriction on the value of such gifts. From 2024, if the gift amount exceeds 5,000 euros, the tax rate will be 10% on the excess amount.

The German Ministry of Finance included Russia in the list of "tax havens"

The Ministry of Finance of Germany included Russia in the list of tax haven countries.

In addition to Russia, from December 20, the list of countries not ready to cooperate on taxation issues was supplemented by Antigua and Barbuda, Belize, and the Seychelles. Currently, the list includes 16 countries. The resolution emphasizes that this decision was made following the revision of the list of tax haven countries by the European Commission on October 17.

This event implies a range of negative tax consequences for German-Russian business. This means, among other things, that cooperation with Russian business will lead to increased accounting and reporting requirements in Germany, increased taxation in this country, and refusal to use certain tax benefits.

Similarly, the Netherlands added Russia to the list of low-tax and non-cooperative jurisdictions for tax purposes.

The President of Russia prohibited encumbrances and arrests on assets in accounts of types "C" and "I" 

The President of Russia, Vladimir Putin, prohibited the imposition of collection, arrest, and other security measures on assets in accounts of types "C" and "I." This follows from the decree of the head of state, which is posted on the portal of official publication of legal acts. The changes came into force on January 3, 2024.

In particular, Decree No. 95 "On the temporary procedure for fulfilling obligations to foreign creditors" introduces a clause that provides that funds and securities accounted for in accounts of type "C" cannot be subject to collection under executive documents, arrest, and other security measures cannot be taken against them.

Accounts of type "C" were introduced in Russia after the start of military actions in Ukraine to freeze the funds of "unfriendly" non-residents in response to foreign sanctions. Since March 2022, all payments in favor of "unfriendly" non-residents (dividends, interest, redemptions) are credited to accounts of type "C." The withdrawal of funds from such accounts to other accounts of "unfriendly" non-residents is currently prohibited.

Accounts of type "I" are used for investments and reinvestments by foreigners in Russia. They are also needed for the purchase of foreign currency for rubles in connection with the repatriation of income received from investment activities in Russia.

In November 2023, the President of Russia signed Decree No. 844 "On additional temporary economic measures related to the circulation of foreign securities," which creates conditions for the exchange of blocked assets of Russian and foreign investors. Thus, non-residents can buy blocked foreign securities of Russian investors using funds from their accounts of type "C."

The USA, UK, Switzerland, and other countries were included in the Russian list of states not providing information exchange for tax purposes

The updated list contains 88 countries and 14 territories (previously, the list included 89 countries and 16 territories).

The list excludes countries Antigua and Barbuda, Vanuatu, Ghana, Grenada, Maldives, Oman, Peru, as well as territories Curaçao and the Cook Islands.

At the same time, the list was supplemented with countries such as the USA, the UK and Northern Ireland, Switzerland, Germany, Latvia, and Ukraine.

Recall that this list is mainly used for regulating the peculiarities of taxation of profits of controlled foreign companies (CFC). Inclusion of a country in this list means the absence for companies from such a state and their shareholders in Russia of the opportunity to use a number of benefits and preferences provided by the Russian Tax Code.

Mark Gindileev

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