U.S. wealth management professionals need to take them into account.
Despite several major changes introduced into the federal law “[o]n currency regulation and currency control” (the Currency Control Law (CCL)) since its adoption in 2003,1 this law still significantly restricts the ability of Russian nationals who are considered “residents” to use foreign currency as an instrument of payment in their domestic and international commercial transactions, particularly with the use of their bank accounts abroad. Because non-observance of these restrictions could result in the imposition of severe monetary penalties of up to 75 percent to 100 percent of the total amount of the unauthorized transaction,2 or even in criminal proceedings,3 U.S. wealth management professionals need to take them into account to avoid possible negative consequences for their Russian clients. To facilitate this task, let’s focus on the extraterritorial reach of the CCL and analyze the practical effect of its rules on certain typical scenarios involving Russian clients in the United States, namely, opening a U.S. bank account, purchasing or renting real estate, purchasing private jets, yachts or securities, as well as liquidating a U.S. company. Also, long-awaited changes to this law are currently under discussion and could take effect as early as 2018.
CCL
The application of the CCL not only to Russian nationals permanently living in Russia but also to those Russian citizens who permanently live abroad but visit their native country at least once a year remains one of its most controversial aspects. Such extraterritorial reach of the currency control rules beyond the country’s borders is based on the broad interpretation of the statutory definition of “resident” by Russian governmental agencies, notably the former Federal Service for Financial and Budget Supervision (Rosfinnadzor).4 Among various categories of individuals considered residents, this definition specifically mentions citizens of the Russian Federation, with the exception of those Russian citizens who are permanently residing in a foreign state not less than one year, including those having a residence permit, issued by an authorized state body of a foreign state or those temporarily staying in a foreign state not less than one year on the basis of a work visa or a student visa, with the period of validity of not less than one year or on the basis of combination of such visas with the total period of validity of not less than one year.5 While on its face this definition doesn’t say anything about the reinstatement of resident status when a Russian citizen permanently living abroad visits his native country, according to Rosfinnadzor, in such case this status is automatically reinstated, and it could be lost only after one year of permanent absence from the country.6 A challenge to this position before Moscow courts wasn’t successful.7
To illustrate the practical consequences resulting from such interpretation of “resident” for Russian citizens permanently living abroad, consider a U.S./Russian national living in California who, feeling nostalgic after several years of absence, flies to the Winter Olympic Games in Sochi in his private jet to watch ice hockey games, stays there for one week and then goes back. As this individual spent less than 183 calendar days within 12 consecutive months in his native country, he won’t be considered a Russian “tax resident” within the meaning of the Tax Code (NK RF).8 Thus, assuming that shortly after returning from Sochi, he decides to sell his jet to buy a bigger (and better) one, despite this trip, the proceeds of this sale won’t be subject to Russian taxation.9
At the same time, because of his trip to Sochi, during the next 12 months, this ice hockey fan will be considered a “resident” within the meaning of the CCL. Although this individual doesn’t need to pay any Russian taxes with respect to the proceeds from this sale, the subsequent use of these proceeds will be subject to the same currency control rules as those applicable to his compatriots permanently living in Russia, and the same sanctions will apply for the non-observance of these rules. From this perspective, the verification of resident status under the CCL becomes an indispensable element of any wealth management advice involving Russian nationals.
Impact on Certain Typical Scenarios
In view of the relatively small amounts of money required for its implementation and lack of legal complexity, the most common scenario involving a Russian client in the United States is the opening of a bank account. Unless a certain client, considered a “resident” within the meaning of the CCL, also occupies one of the public positions in Russia in accordance with the list approved by the President of the Russian Federation,10 is a member of the Council of Federation or a deputy of the State Duma of the Federal Assembly11 or belongs to another category of persons who are expressly prohibited from having foreign bank accounts,12 (or is a spouse or minor child of any of these persons), he may freely open such account in a foreign currency or in Russian rubles.13 Following the opening of the account, its holder shall report it to the tax authorities at the place of his registration in the Russian Federation, as well as notify them in case of a change of its requisites or its closing within one month after the respective event in accordance with the form approved by the Federal Tax Service.14 In addition, the account holder shall inform the same tax authorities about movement of assets on this account on an annual basis until June 1 of the year following the reporting year.15 In case the account holder fails to report his account or comply with these periodic reporting obligations, according to the Federal Tax Service, all transactions with the use of the assets on this account shall be considered as “illegal currency operations.”16
Once a U.S. account is opened and properly reported to the Russian tax authorities, a Russian client may freely transfer to this account money from his accounts in domestic banks and in other foreign banks.17 Moreover, this client may freely use money on this account for his acquisitions outside the Russian Federation, including, for example, the purchase of a New York apartment with a Central Park view, a penthouse with an ocean view in Miami Beach or a luxurious yacht moored not far from this penthouse.18 At the same time, the CCL will allow the use of the same account to receive payments from other individuals in a limited number of cases specifically listed in this law.19 In all other cases, the incoming payments could only be credited to the resident’s account in the “authorized bank,” meaning a bank in Russia authorized by the Central Bank to carry out currency operations.20
Because the sale of aircrafts, yachts and real estate currently doesn’t appear on the list of cases when the proceeds can be directly credited to a foreign account, assuming that our ice hockey fan received the money from the sale of his private jet directly to his U.S. bank account within a year after his return from Sochi, he committed a violation of Russian law.21 The same violation would be committed by a Russian millionaire living in Monaco, but visiting his native country from time to time for business reasons, in case he decides to sell his New York apartment (or Miami Beach condominium) as well as his yacht and receive the proceeds from this sale to his account in the United States, Monaco or Cyprus. At the same time, if instead of selling, he decides to rent his U.S. real estate, he’ll be able to receive the rent payments to his accounts at banks located in the Organisation for Economic Co-operation and Development (OECD) or the Financial Action Task Force (FATF) member countries, provided that the lessee isn’t a “resident” within the meaning of the CCL.22 Because the United States is an OECD and an FATF member country, but Monaco and Cyprus aren’t,23 he’ll be able to receive rent payments to his U.S. bank account, but not to his bank accounts in Monaco or Cyprus. When the lessee is a resident, the owner of real estate will be able to receive the rent payments only to his account in an authorized bank in Russia.
Suppose the same Russian client also purchased U.S. Treasury bonds, shares of a company listed on the New York Stock Exchange (NYSE) and the majority of shares in a closely held U.S. corporation. He may freely receive interests and dividends on these securities to his U.S. bank account and to his accounts in other OECD and FATF countries. He may also receive to the same account income generated by his assets and securities that he previously transferred into trust management (doveritelnoe upravlenie) to a manager who isn’t a “resident” within the meaning of the CCL.24 On the other hand, in case he decides to sell his U.S. securities, unless they’re listed on the NYSE, Nasdaq or another foreign stock exchange included in the list of the Federal Service for Financial Markets,25 he’ll have to transfer the proceeds from their sale to his account in Russia.26 Finally, because the liquidation of “controlled foreign companies” within the meaning of NK RF isn’t included in the list of cases in which a foreign account could be used, in case of liquidation of a U.S. corporation that he controls because of his majority stake, or by other reasons stipulated in NK RF,27 the proceeds from this liquidation shall also be transferred to his Russian bank account.
Proposed Legislative Changes
In 2016, the Ministry of Finance of the Russian Federation prepared a draft federal law (the Draft Law). Its contents and the views expressed during its subsequent public discussion reflect the growing recognition by Russian governmental authorities, as well as by the public at large, that a number of currency control rules no longer reflects Russia’s modern realities and undermines the objectives of the de-offshorization campaign launched by the country’s leadership several years ago.28 While one of this campaign’s major objectives was the reduction in the use of foreign companies and foreign law by Russian nationals, the existing restrictions on the use of foreign accounts by residents may have induced them to open these accounts in the name of their offshore companies, not considered as residents and, therefore, not subject to the existing restrictions. Furthermore, the mandatory need to transfer the proceeds from the liquidation of a controlled foreign company to an account in an authorized bank could have created significant practical difficulties for many law-obedient Russian citizens willing to close their offshore companies and re-invest the remaining assets abroad. In addition, the existing statutory definition of “resident” and its interpretation by administrative authorities and courts may discourage certain Russian citizens permanently living abroad from visiting their native country and, if they still have to go there for personal or professional reasons, to induce them to give up their Russian citizenship. Needless to say, this would have undermined the efforts of the country’s leadership to strengthen ties with compatriots living in other countries within the State Program to assist the voluntary resettlement of compatriots residing abroad,29 as well as directly affected human ties with their relatives continuing to live in Russia.
In an apparent effort to address these problems, the Draft Law proposes several major modifications to the existing currency control rules. First, while the Draft Law extends the scope of the term “resident” to all citizens of the Russian Federation regardless of the place of their residence, it simultaneously exempts from the application of rules concerning the opening and use of accounts (deposits) in foreign banks outside the territory of the Russian Federation those residents staying outside the territory of the Russian Federation in total more than 183 days during the calendar year, regardless of the number of their entries to the territory of the Russian Federation in such year. Second, the Draft Law allows residents to transfer proceeds from the sale to non-residents of their foreign real estate, on the condition that: (1) this real estate is registered in the territory of the OECD or the FATF member state; (2) this foreign state joined the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information, dated Oct. 29, 2014 (the CRS MCAA);30 and (3) the account (deposit) of the resident is opened in a bank located in the territory of such foreign state. Third, the Draft Law allows residents to transfer the proceeds from the sale to non-residents of their foreign means of transportation to the account of the seller in a bank located in OECD or FATF countries.
Although at this point, it isn’t clear when the Draft Law may enter into force, it’s possible this may happen in 2018. Once the proposed changes take effect, Russian nationals staying in their native country less than 183 days in a calendar year will no longer need to regularly provide information about movements of assets on their U.S. bank accounts to Russian tax authorities and will be able to credit to these accounts proceeds from sales of any foreign assets or securities. Russian citizens staying in their native country for more than 183 days in a calendar year will be able to credit to their accounts abroad the proceeds from the sale to non-residents of their foreign aircrafts and yachts. However, until the United States signs the CRS MCAA, if such Russian citizen sells his New York apartment or Miami Beach penthouse, he’ll still need to transfer the proceeds from this sale to the bank account in his native country.
Significant Restrictions
The very technical nature of the CCL, which contains repeated internal cross references31 as well as references to other federal laws and regulations,32 may require U.S. wealth management professionals to conduct a diligent review of each scenario involving their Russian clients. While the proposed legislative changes may certainly be welcoming news for residents having foreign bank accounts, it may be expected that even in its amended form, the CCL will continue to impose significant restrictions on their activities abroad. That’s why the verification of compliance of the proposed activities with the requirements of this law shall remain a mandatory part of any meaningful wealth management advice provided to Russian clients.
Endnotes
1. Federal Law No. 173-FZ, “On currency regulation and currency control” (Dec. 10, 2003). For a summary of changes, see, e.g., Glenn S. Kolleeny, Artem V. Zhavoronkov and Dmitry A. Pentsov, “Major Changes in Russian Currency Control Law Create New Opportunities For Foreign Investors,” BNA’s Eastern Europe Reporter, 2007, Vol. 17, No. 1, at pp. 30-33. Russian legislation and court cases can be found at www.consultant.ru or www.garant.ru.
2. Currency Control Law (CCL), art. 25; Code of the Russian Federation of Administrative Violations (KOAP RF), art. 15.25(1).
3. Criminal Code of the Russian Federation (UK RF), art. 193.
4. The Federal Service of Financial-Budget Supervision (Rosfinnadzor) performed functions of the currency control authority. In accordance with the Decree No. 41 of the President of the Russian Federation, “On certain matters of state control in the financial-budget sphere” (Feb. 2, 2016), the Service was liquidated and its functions of the currency control authority were transferred to the Federal Customs Service and the Federal Tax Service.
5. CCL, art. 1(1)(6)(a).
6. “Federal Service for Financial and Budget Supervision: Information concerning the determination of status of resident (non-resident) of the citizen of the Russian Federation living on the territory of a foreign state” (undated), www.consultant.ru; “The currency should flow out of Russia in accordance with the rules”: Interview of Natalia Plotnikova, Deputy Chief of Rosfinndazor (Nov. 12, 2013), www.rosfinnadzor.ru.
7. Appellate Ruling of the Moscow City Court in case No. 33-10871/14 (April 4, 2014).
8. Tax Code (NK RF), art. 207(2).
9. Ibid., art. 207(1).
10. Decree No. 32 of the President of the Russian Federation, “On public positions of the Russian Federation” (Jan. 11, 1995).
11. Federal Law No. 3-FZ, “On the status of a member of the Council of the Federation and the status of a deputy of the State Duma of the Federal Assembly of the Russian Federation” (May 8, 1994), art. 6(2)(k).
12. Federal Law No. 79-FZ, “On the prohibition to certain categories of persons to open and possess accounts (deposits), to keep cash and assets in foreign banks, situated outside the territory of the Russian Federation, to possess and (or) to use foreign financial instruments” (May 7, 2013).
13. CCL, art. 12(1).
14. CCL, art. 12(2); Order No. MMB-7-6-457@ of the Federal Tax Service, “On the approval of the forms of notification about the opening (closing), changing of requisites of an account (deposit) located outside of the territory of the Russian Federation and about the possession of an account in a bank outside the territory of the Russian Federation” (Sept. 21, 2010).
15. Resolution No. 1365 of the Government of the Russian Federation, “On the procedure for providing information by natural persons—residents to the tax authorities of the reports about the movements of assets on the accounts (deposits) in banks outside the territory of the Russian Federation” (Dec. 12, 2015).
16. Letter No. ZN-3-17/5523@ of the Federal Tax Service (July 16, 2017).
17. CCL, art. 12(6)(2).
18. Ibid.
19. CCL, art. 12(4) and (5).
20. CCL, art. 1(8).
21. CCL, art. 15.25(1).
22. CCL, art. 12(5.1)(3).
23. Currently, there are 35 OECD (Organisation for Economic Co-operation and Development) member countries. See www.oecd.org/about/membersandpartners/list-oecd-member-countries.htm. The Financial Action Task Force currently comprises 35 member jurisdictions and two regional organizations. Seewww.fatf-gafi.org/about/membersandobservers/.
24. CCL, art. 12(5.1)(6). About the Russian concept of “trust management” and its differences from the common law concept of “trust,” see Dmitry A. Pentsov, Glenn S. Kolleeny and Anna Zhukova, “Russian Law Governing Trust Management of Assets,” BNA’s Eastern Europe Reporter, 2007, Vol. 17, No. 7, at pp. 23-30.
25. CCL, art. 12(5.1)(5); Order No. 07-51/pz-n of the Federal Service for Financial Markets (April 27, 2007).
26. CCL, art. 12(5.1)(5).
27. NK RF, art. 2513(3).
28. Draft Federal Law, “On the introduction of modifications into the Federal Law on currency regulation and currency control” (draft No. 02/04/09—16/00053390), http://regulation.gov.ru/projects#npa=53390.
29. Decree No. 637 of the President of the Russian Federation, “On measures for assisting voluntary resettlement to the Russian Federation of compatriots, residing abroad” (June 22, 2006).
30. Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (Oct. 29, 2014), www.oecd.org/tax/automatic-exchange/international-framework-for-the-crs/multilateral-competent-authority-agreement.pdf.
31. See, e.g., CCL, art. 9(1(1); art. 12(5); art. 12(6.1(4); art. 14(3)(8).
32. See, e.g., CCL, art. 12(1); art. 12(5.1)(5); art. 25.