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Draft laws on the extension of the offshore amnesty have been submitted to the state duma and are to be adopted soon

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Pepeliaev Group advises that the draft laws have been published which, in line with the Russian President’s position, extend the ‘offshore amnesty’ as well as the tax-free liquidation of foreign entities and unincorporated structures.

It is expected that these draft laws will be adopted in the nearest future.

Offshore amnesty to be extended

For individuals who have transferred their income to foreign jurisdictions or opened bank accounts abroad of which they have not notified tax authorities, there is a renewed possibility to submit a tax return which will relieve such individuals from negative tax and other consequences (including administrative and criminal liability).

The extension of the offshore amnesty is formally put in place as stage two of the declaration process which ended on 30 June 2016. The tax returns can be filed within a year: starting from 1 March 2018 and up to 28 February 2019. The draft law covers income and accounts moved to foreign jurisdictions or opened abroad, as the case may be, before 1 January 2018. Declarants who made use of stage one of the offshore amnesty can still use stage two.

Virtually all of the previous parameters are going to be maintained. As previously, the offshore amnesty deals with tax and currency violations but does not extend to liability for the usage of forged documents when currency transactions were carried out (article 193.1 of the Russian Criminal Code), money laundering, or the acquisition or taking custody of property through committing general crimes (theft, evasion of settling liabilities, etc.).

The draft laws also introduce new provisions. It is allowed to report accounts which have already been closed by the date the tax returns are being filed. If, together with the return, the notice regarding a controlled foreign company (the “CFC”) is filed the deadlines will not be considered to have been missed; however, the CFC’s profit tax assessed after 1 January 2015 will have to be paid. The tax return may be filed with any tax office regardless of the declarant's place of residence or the Russian Federal Tax Service's central headquarters. The Russian Ministry of Finance (the “Ministry of Finance”) is an agency authorised to provide explanations on how a tax return must be filed. All explanations should be published via the Ministry’s website. 

Комментарий ПГ

Some drawbacks of the application of the offshore amnesty still remain.

The list of the assets which may be reported is exhaustive and does not include, for example, any financial instruments similar to unit investment funds, rights under pledge agreements, intellectual property, cultural property, or precious metals.

Only an individual may act as a declarant under the offshore amnesty while legal entities which are the beneficial owners of offshore income and/or the owners of foreign accounts - cannot act in this capacity. Provision is made for the offshore amnesty only to apply to the employees of the legal entities involved in the transactions of a declarant (who is an individual).

In order for the employees of legal entities involved in the transactions of a declarant (who is an individual) to be released from liability the declarant should list them in the tax return (the law does not require their consent to be obtained), in doing so, likely implicating these employees as accessories to the crimes committed.

The tax return and the attachments to it cannot be used as evidence against the declarant or the employees of the legal entity. However, it is not clear whether competent authorities, when they have received information about any violations stated in the respective tax return and attachments to it are allowed to collect and use other evidence relating to the same violations.

Some other ambiguities may be eliminated in future by official explanations from the Ministry of Finance these but remain for now.

The extension of tax-free liquidation

The period for the winding up of CFCs with not tax exposure is being extended – then part of the tax remaining after a CFC has been liquidated will be exempt from tax with an option to book as expenses the cost of the received property as at the day it was received.

The timelines for liquidation will be shifted to 1 March 2019. If the timelines are extended due to restrictions on the liquidation procedure or the CFC being involved in a law suit, the timelines for issuing a resolution for the liquidation are shifted to 1 July 2018.

The inequality between legal entities and individuals has been eliminated: any form of liquidation surplus will be exempt for individuals including monetary funds, as was previously allowed for legal entities.

Both these amendments will have retroactive effect from 1 January 2016.

Комментарий ПГ

The proposed measures to extend and expand tax-free liquidation make this tool rather attractive. But some ambiguities still remain. For example, if before the liquidation of a CFC its assets (shares, interest, etc.) are bought out, the price of the buy-out should be equal to the book value of such assets (article 309.1(10) of the Tax Code). When the assets are revalued this may require that substantial amounts be paid to the CFC which does not make any practical sense when the CFC is being liquidated and its assets are repatriated. For the reasons that remain unclear. The Russian Government in 2017 at first proposed to make the book value of assets the maximum rather than the only possible price of the transaction but then, by amending the draft for the second reading, lawmakers removed this change from their own draft law.

What to think about and what to do

The mechanisms of the ‘offshore amnesty’ and of winding up with no tax exposure should be subject to the closest scrutiny, and the methods of tax structuring that emerged in the previous legal environment need to be reconsidered. Russian tax authorities have joined the international automatic exchange of information including with a number of offshore jurisdictions. The remaining flaws of the Russian requirements for ‘deoffshorisation’ call for a balanced approach to the subsequent steps (having regard to the final texts of the laws once they are adopted).

Help from your adviser

Pepeliaev Group's lawyers are ready to assist with the practical application of the rules for an offshore amnesty and the tax-free liquidation of CFCs. This may include assessing the implications and the risks as well as drafting the necessary documents.

With our partners in the international networks Taxand and Terralex, which bring together consummately professional teams of independent advisers from all around the world, we draw up recommendations on how to use foreign jurisdictions. In doing so, we comply with the strictest confidentiality requirements.

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