Tax Digest for January 2024

Movchan's Group

Feb 26, 2024

• The Federal Tax Service began fining Russians for receiving rental payments to foreign accounts.

• When replacing Eurobonds, the tax benefit for long-term ownership is retained.

• Major UAE banks have restricted transactions with Russia and have started closing accounts of Russian clients.

• Russia proposed to Qatar and Saudi Arabia to revise agreements on avoiding double taxation.

• The Central Bank of Russia announced the timeline for raising the asset threshold for qualified investors.

• Turkish bank Denizbank requests residency permits and Turkish addresses from Russians.

• The Federal Tax Service of Russia clarified the criteria for determining the status of a tax resident of the Russian Federation and the procedure for obtaining a document confirming this status.

• Russian banks were proposed to identify non-resident clients using geolocation data.

The Federal Tax Service began fining Russians for receiving rental payments to foreign accounts

Tax authorities have started considering the receipt of rental payments by Russians with overseas properties to foreign accounts as illegal currency operations, reported "Vedomosti," after reviewing the decision of the Moscow office of the Federal Tax Service (FTS) on the imposition of an administrative penalty.

It was addressed to a Russian resident who owns six commercial premises in Germany, rents them to German companies, and receives rental payments to a foreign currency account. The Moscow FTS deemed this activity entrepreneurial, the currency operations illegal, and fined the violator 30% of the transaction amount.

The FTS decision specifies that a Russian resident renting out commercial real estate abroad is effectively engaged in entrepreneurial activity, as it is "aimed at systematically generating profit." The tax authority emphasized that the law "On Currency Regulation and Currency Control," which allows resident individuals to credit funds from non-residents without restrictions, does not apply to activities related to generating profit from entrepreneurial activities.

In other words, the FTS's position is as follows. If a Russian resident, even if not registered as an individual entrepreneur (IE) in Russia, rents out several commercial (non-residential) real estate objects abroad, Russian tax authorities effectively recognize the presence of an IE in Russia. Meanwhile, the provision allowing them to credit revenue from this activity to a foreign account is only provided for a simple individual, not for an IE. Therefore, this currency operation will be deemed illegal for such an individual.

If the new FTS practice "holds up" in courts and becomes widespread, landlords receiving rental payments to foreign accounts face a fine of up to 40% of the amount of the illegal currency operation. Owners of residential real estate abroad who rent it out may also be at risk. It should be noted that this issue should not affect Russian citizens residing abroad for more than 183 days a year and not having an IE in Russia. Since they are not tax residents of Russia, they are not required to report in Russia and pay taxes there from such activities.

When replacing Eurobonds, the tax benefit for long-term ownership is retained

Amendments to the Tax Code of the Russian Federation by Federal Law No. 8 of February 14, 2024, provide that the period of ownership of replacement bonds will include the period from the date the investor acquired Eurobonds, which were subsequently replaced by Russian bonds.

The amendments aim to address the issue of applying the investment tax deduction for personal income tax for long-term (over three years) ownership of a security. The changes will apply to Eurobonds replaced by local bonds after January 1, 2023, and investors who owned Eurobonds as of March 1, 2022, will be able to use the provision. Previously, the rules assumed that after replacement, the period was reset, causing Eurobond holders to lose the right to the deduction.

Recall that replacement bonds are bonds of Russian companies issued in the Russian infrastructure in place of their Eurobonds previously issued abroad. The nominal value and coupons of replacement bonds are denominated in foreign currency but paid in rubles at the Central Bank's rate. This allows payments without the involvement of foreign financial organizations, bypassing imposed restrictions.

Major UAE banks have restricted transactions with Russia and have started closing accounts of Russian clients

Banks in the United Arab Emirates (UAE), due to the risk of secondary sanctions, have restricted transactions with Russia and started closing accounts for companies and individuals. This was reported to "Vedomosti" by three businessmen working in the UAE and a representative of the "Business Russia" association. The trend has also been confirmed by tax and legal consultants. The government is aware of the issue, although it considers it non-critical and solvable, according to a source close to the cabinet.

Russia proposed to Qatar and Saudi Arabia to revise agreements on avoiding double taxation

The Ministry of Finance of Russia sent a proposal to Qatar and Saudi Arabia to start negotiations on revising agreements on avoiding double taxation (DTA). The existing DTAs with these countries provide preferential rates: for interest and dividends ― 5%, for royalties ― exemption (Qatar) and 10% (Saudi Arabia). Russia proposed to switch to the "10–10–10" formula (tax rate at source for dividends, interest, and royalties, respectively).

The department also shared the status of work on revising other DTAs:

• UAE: The Ministry of Finance of Russia continues negotiations on updating the DTA with the UAE; the next round is scheduled for March 2024.

• Turkey: Russia sent a proposal to start negotiations but has not yet received any feedback.

• Malaysia: An agreement was reached on the terms of a new DTA under the "10–10–10" formula (with some exceptions for state companies); the signing of the agreement is expected.

The Central Bank of Russia announced the timeline for raising the asset threshold for qualified investors

From January 1, 2025, the regulator proposes to increase the asset threshold for qualified investors from the current 6 million to 12 million rubles, and from 2026 ― to double it again, to 24 million rubles.

The reasons for raising the asset threshold are named as inflation, as well as minimizing the practice of recognizing individuals as qualified investors who do not understand the structure of complex financial products and the risks associated with investments. Meanwhile, experts criticize the initiative, noting that its adoption will negatively affect the dynamics of the Russian stock market.

Turkish bank Denizbank requests residency permits and Turkish addresses from Russians

One of Turkey's largest banks, traditionally loyal to Russians, Denizbank sent letters to some clients from Russia requesting documents confirming the right to reside in Turkey. This was reported to RBC by two intermediaries who help Russians open cards in Turkish banks.

"Unfortunately, your Turkish residential address is not listed in our bank. To enter your Turkish address into the system, we urgently ask you to send your residency permit and a document confirming your Turkish registration in response to this email; or please come with the documents to the nearest Denizbank branch," the bank's letter states.

Intermediaries helping Russians interact with Turkish banks note that the central office of Denizbank has not yet explained why these data are required, and there has been no official information about the intention to close accounts for a certain category of Russians. However, clients without a residency permit may fall into the risk group and face account closures if there is no movement of funds and sufficient balance.

Earlier, RBC reported on large-scale payment problems for Russian businesses in Turkey.

The Federal Tax Service of Russia clarified the criteria for determining the status of a tax resident of the Russian Federation and the procedure for obtaining a document confirming this status

According to the current provisions of the Tax Code of the Russian Federation, tax residents are recognized as individuals who are physically present in Russia for at least 183 calendar days during the year. Other criteria, including citizenship or residency, are not currently provided in the Code.

The department noted that the list of documents confirming the actual presence of individuals in and outside the Russian Federation is not currently established. According to the service, such documents may include copies of passports with border control marks on crossing the border, hotel stay receipts, migration cards, timesheets, and other documents.

To obtain a document confirming the status of a tax resident, the taxpayer must fill out and submit an application to the tax authority in the prescribed form for the issuance of a document confirming the status. This can be done through the interactive service on the official website of the Federal Tax Service of Russia or by mail.

Russian banks were proposed to identify non-resident clients using geolocation data

A document came into the possession of "Izvestia," according to which the authorities propose to oblige credit organizations to verify the tax residency of clients using geolocation data.

Credit organizations will need to track where clients access online banking from. If it becomes clear that a person predominantly uses internet services from foreign territories, the bank should request additional information from the client about their place of residence.

The draft resolution specifies the following: if the client does not provide the requested documents, the bank has the right to stop conducting operations on their account and terminate the contract unilaterally.

Mark Gindileev

For detailed explanations, you can contact the author directly via Facebook or Telegram

• The Federal Tax Service began fining Russians for receiving rental payments to foreign accounts.• When replacing Eurobonds, the tax benefit for long-term ownership is retained.• Major UAE banks have restricted transactions with Russia and have started closing accounts of Russian clients.• Russia proposed to Qatar and Saudi Arabia to revise agreements on avoiding double taxation.• The Central Bank of Russia announced the timeline for raising the asset threshold for qualified investors.• Turkish bank Denizbank requests residency permits and Turkish addresses from Russians.• The Federal Tax Service of Russia clarified the criteria for determining the status of a tax resident of the Russian Federation and the procedure for obtaining a document confirming this status.• Russian banks were proposed to identify non-resident clients using geolocation data.The Federal Tax Service began fining Russians for receiving rental payments to foreign accountsTax authorities have started considering the receipt of rental payments by Russians with overseas properties to foreign accounts as illegal currency operations, reported "Vedomosti," after reviewing the decision of the Moscow office of the Federal Tax Service (FTS) on the imposition of an administrative penalty.It was addressed to a Russian resident who owns six commercial premises in Germany, rents them to German companies, and receives rental payments to a foreign currency account. The Moscow FTS deemed this activity entrepreneurial, the currency operations illegal, and fined the violator 30% of the transaction amount.The FTS decision specifies that a Russian resident renting out commercial real estate abroad is effectively engaged in entrepreneurial activity, as it is "aimed at systematically generating profit." The tax authority emphasized that the law "On Currency Regulation and Currency Control," which allows resident individuals to credit funds from non-residents without restrictions, does not apply to activities related to generating profit from entrepreneurial activities.In other words, the FTS's position is as follows. If a Russian resident, even if not registered as an individual entrepreneur (IE) in Russia, rents out several commercial (non-residential) real estate objects abroad, Russian tax authorities effectively recognize the presence of an IE in Russia. Meanwhile, the provision allowing them to credit revenue from this activity to a foreign account is only provided for a simple individual, not for an IE. Therefore, this currency operation will be deemed illegal for such an individual.If the new FTS practice "holds up" in courts and becomes widespread, landlords receiving rental payments to foreign accounts face a fine of up to 40% of the amount of the illegal currency operation. Owners of residential real estate abroad who rent it out may also be at risk. It should be noted that this issue should not affect Russian citizens residing abroad for more than 183 days a year and not having an IE in Russia. Since they are not tax residents of Russia, they are not required to report in Russia and pay taxes there from such activities.When replacing Eurobonds, the tax benefit for long-term ownership is retainedAmendments to the Tax Code of the Russian Federation by Federal Law No. 8 of February 14, 2024, provide that the period of ownership of replacement bonds will include the period from the date the investor acquired Eurobonds, which were subsequently replaced by Russian bonds.The amendments aim to address the issue of applying the investment tax deduction for personal income tax for long-term (over three years) ownership of a security. The changes will apply to Eurobonds replaced by local bonds after January 1, 2023, and investors who owned Eurobonds as of March 1, 2022, will be able to use the provision. Previously, the rules assumed that after replacement, the period was reset, causing Eurobond holders to lose the right to the deduction.Recall that replacement bonds are bonds of Russian companies issued in the Russian infrastructure in place of their Eurobonds previously issued abroad. The nominal value and coupons of replacement bonds are denominated in foreign currency but paid in rubles at the Central Bank's rate. This allows payments without the involvement of foreign financial organizations, bypassing imposed restrictions.Major UAE banks have restricted transactions with Russia and have started closing accounts of Russian clientsBanks in the United Arab Emirates (UAE), due to the risk of secondary sanctions, have restricted transactions with Russia and started closing accounts for companies and individuals. This was reported to "Vedomosti" by three businessmen working in the UAE and a representative of the "Business Russia" association. The trend has also been confirmed by tax and legal consultants. The government is aware of the issue, although it considers it non-critical and solvable, according to a source close to the cabinet.Russia proposed to Qatar and Saudi Arabia to revise agreements on avoiding double taxationThe Ministry of Finance of Russia sent a proposal to Qatar and Saudi Arabia to start negotiations on revising agreements on avoiding double taxation (DTA). The existing DTAs with these countries provide preferential rates: for interest and dividends ― 5%, for royalties ― exemption (Qatar) and 10% (Saudi Arabia). Russia proposed to switch to the "10–10–10" formula (tax rate at source for dividends, interest, and royalties, respectively).The department also shared the status of work on revising other DTAs:• UAE: The Ministry of Finance of Russia continues negotiations on updating the DTA with the UAE; the next round is scheduled for March 2024.• Turkey: Russia sent a proposal to start negotiations but has not yet received any feedback.• Malaysia: An agreement was reached on the terms of a new DTA under the "10–10–10" formula (with some exceptions for state companies); the signing of the agreement is expected.The Central Bank of Russia announced the timeline for raising the asset threshold for qualified investorsFrom January 1, 2025, the regulator proposes to increase the asset threshold for qualified investors from the current 6 million to 12 million rubles, and from 2026 ― to double it again, to 24 million rubles.The reasons for raising the asset threshold are named as inflation, as well as minimizing the practice of recognizing individuals as qualified investors who do not understand the structure of complex financial products and the risks associated with investments. Meanwhile, experts criticize the initiative, noting that its adoption will negatively affect the dynamics of the Russian stock market.Turkish bank Denizbank requests residency permits and Turkish addresses from RussiansOne of Turkey's largest banks, traditionally loyal to Russians, Denizbank sent letters to some clients from Russia requesting documents confirming the right to reside in Turkey. This was reported to RBC by two intermediaries who help Russians open cards in Turkish banks."Unfortunately, your Turkish residential address is not listed in our bank. To enter your Turkish address into the system, we urgently ask you to send your residency permit and a document confirming your Turkish registration in response to this email; or please come with the documents to the nearest Denizbank branch," the bank's letter states.Intermediaries helping Russians interact with Turkish banks note that the central office of Denizbank has not yet explained why these data are required, and there has been no official information about the intention to close accounts for a certain category of Russians. However, clients without a residency permit may fall into the risk group and face account closures if there is no movement of funds and sufficient balance.Earlier, RBC reported on large-scale payment problems for Russian businesses in Turkey.The Federal Tax Service of Russia clarified the criteria for determining the status of a tax resident of the Russian Federation and the procedure for obtaining a document confirming this statusAccording to the current provisions of the Tax Code of the Russian Federation, tax residents are recognized as individuals who are physically present in Russia for at least 183 calendar days during the year. Other criteria, including citizenship or residency, are not currently provided in the Code.The department noted that the list of documents confirming the actual presence of individuals in and outside the Russian Federation is not currently established. According to the service, such documents may include copies of passports with border control marks on crossing the border, hotel stay receipts, migration cards, timesheets, and other documents.To obtain a document confirming the status of a tax resident, the taxpayer must fill out and submit an application to the tax authority in the prescribed form for the issuance of a document confirming the status. This can be done through the interactive service on the official website of the Federal Tax Service of Russia or by mail.Russian banks were proposed to identify non-resident clients using geolocation dataA document came into the possession of "Izvestia," according to which the authorities propose to oblige credit organizations to verify the tax residency of clients using geolocation data.Credit organizations will need to track where clients access online banking from. If it becomes clear that a person predominantly uses internet services from foreign territories, the bank should request additional information from the client about their place of residence.The draft resolution specifies the following: if the client does not provide the requested documents, the bank has the right to stop conducting operations on their account and terminate the contract unilaterally.