Russian Taxation of Trusts and Private Clients, and Deoffshorization

Dmitry A. Pentsov

March 13, 2015 | Page 1 1. Russian income taxation of US individuals

 The meaning of a "Russian resident" . Depending on whether an individual is recognized as a "Russian tax resident", the Tax Code of the Russian (the "Tax Code") provides for different types of , applicable tax rates as well as different mechanisms of the tax collection. . The Tax Code considers as "Russian tax residents" those individuals, who are physically present in the Russian Federation for at least 183 calendar days during twelve consecutive months. The period of presence in the Russian Federation is not interrupted during the time of leaving its territory for a short-term (less than six months) medical treatment or studies, as well as for the performance of labor or other duties, related to the performance of works (provision of services) at sea deposits of hydrocarbon raw materials. . As was further clarified by the Federal Tax Service of the Russian Federation, in order to be considered as a "tax resident", the required 183-day period of presence in the country does not have to be uninterrupted. From the practical point of view, it is calculated by adding all calendar days when an individual was present in the Russian Federation during 12 consecutive months. While making this calculation, all days when this individual was effectively present in the territory of the Russian Federation shall be taken into account, including the day of his/her arrival and the day of his/her departure.

March 13, 2015 | Page 2 2. Russian income taxation of US individuals

 Russian income taxation of US individuals, who are considered as "Russian tax residents" . If a certain US individual is recognized as a "Russian tax resident", this person is taxable in with respect to all income received during the tax period (calendar year), both in monetary form and in kind, from the sources inside and outside the Russian Federation, other than income exempted from taxation (NK RF, art. 209). . With respect to certain types of income of US individuals, considered as "Russian tax residents", the US-Russia Convention, establishes additional conditions of their , notably as concerns the taxation of income resulting from independent personal services performed in Russia. Under the Convention, this income may be taxable there only when it is attributable to a fixed base which a US individual, considered as a "Russian tax resident", has or had regularly available to him in this country. . of 13% - applicable to all income received by individuals considered as "Russian tax residents", with the exception of types of income with respect to which the Tax Code establishes other applicable tax rate.

March 13, 2015 | Page 3 3. Russian income taxation of US individuals

 Russian income taxation of US individuals, who are not considered as "Russian tax residents" . When a certain individual is not considered as a Russian "tax resident", under the Tax Code, this person shall be taxable with respect to his/her income received during the tax period (calendar year) in monetary form and in kind only from the sources in the Russian Federation, but not from the sources outside of the country (NK RF, art. 209). . Tax rate of 30% - applicable to all income received by individuals not considered as "Russian tax residents", with the exception of types of income with respect to which the Tax Code or the US-Russia Convention establishes other applicable tax rate.

March 13, 2015 | Page 4 4. Russian profit taxation of US corporations, partnerships and trusts

 US persons subject to Russian profit taxation . The Russian profit tax shall be paid by Russian organizations as well as foreign organizations exercising their activities in the Russian Federation through permanent establishments and/or receiving profits from sources in this country. . From January 1, 2015, following the introduction of modifications into the Tax Code, foreign organizations, which are recognized as the tax residents of the Russian Federation in accordance with Article 2462 of the Tax Code, for the purposes of the profit tax are equated with Russian organizations.  US trusts as "foreign organizations" within the meaning of the Russian Tax Code . Although the definition of "organization" in the Tax Code refers to only legal persons and other corporate entities, the Regulations on the particularities of the registration of foreign organizations with tax authorities, issued in 2001 by the Ministry of and Contributions of the Russian Federation on the basis of the Tax Code, takes a broader approach to the scope of this term. In addition to foreign legal persons and other corporate entities having legal personality, the Regulations included in the same category of foreign organizations which may be subject to registration with Russian tax authorities, any other organizations (including general partnerships and personal companies) created under the legislation of foreign states. Furthermore, the sample form of request for registration with Russian tax authorities, attached to the Regulations ("Form No. 2001И"), specifically indicated "trusts" among the possible types of activities of foreign organizations. . That is why, under the Tax Code, US partnerships and trusts which do not have separate legal personality could be considered as "foreign organizations", and therefore as having the status of a separate taxable entity as concerns Russian profit tax. . This conclusion is further supported by the definition of the term "person" in the US-Russia Double Taxation Treaty, which, in addition to individuals and companies, specifically includes estates, trusts, partnerships and any other bodies of persons.

March 13, 2015 | Page 5 5. Russian profit taxation of US corporations, partnerships and trusts

 Foreign organizations considered as tax residents of the Russian Federation  Under the Tax Code, the following categories of foreign organizations are considered as tax residents of the Russian Federation: . foreign organizations recognized as tax residents of the Russian Federation in accordance with an international treaty on the tax matters – for the purposes of application of that treaty; . foreign organizations, whose place of effective management is located in the Russian Federation, unless provided otherwise by an international treaty on tax matters.  The place of effective management of a foreign organization is located in the Russian Federation if this organization or its activities satisfy one of the following conditions: . the majority of meetings of the Board of Directors (or other similar body of the organization, with the exception of its executive body) is conducted in the territory of the Russian Federation; . the executive body (executive bodies) of the organization regularly conducts its activities with respect to the organization out of the Russian Federation; . the principal (executive) officials of the organization (persons authorized to carry out and responsible for the planning, management and control over the activities of the enterprise) predominantly carry out their activities in the form of executive management of this foreign organization in the Russian Federation.

March 13, 2015 | Page 6 6. Russian profit taxation of US corporations, partnerships and trusts

 The meaning of a "" of a foreign organization . The term "permanent establishment" is defined in the US-Russia Double Taxation Convention, as a fixed place of business through which a resident of a Contracting State, whether or not a legal person, carries business activities in the other Contracting State. This place would include a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources. Pursuant to the Convention, a building site or construction, installation or assembly project, or an installation or drilling rig or ship used for the exploration or exploitation of natural resources, constitutes a permanent establishment only if it lasts more than 18 months. . Unless a US trust has a fixed place of business through which it carries out its business activities in the Russian Federation, it would not fit under the definition of "permanent establishment" in the US-Russia Double Tax Convention or in the Tax Code. On the other hand, it would be not unusual for a US trust to receive on their shares in Russian companies. Therefore, from the point of view of the US-Russia Double Tax Convention and the Tax Code, a foreign trust in Russia would normally fall into the category of foreign organizations which do not exercise their activities through a permanent establishment, but receive profits from Russian sources.

March 13, 2015 | Page 7 7. Russian profit taxation of US corporations, partnerships and trusts

 Profits of permanent establishments subject to Russian profit taxation . Under the Tax Code, the profits of a permanent establishment of a foreign organization subject to Russian profit taxation consist of: . the profits received by this organization as a result of exercising activities in the territory of the Russian Federation through its permanent establishment, with the deduction of expenses, associated with this permanent establishment; . the profits of foreign organization resulting from the possession, use and(or) disposal of assets of its permanent establishment in the Russian Federation, with the deduction of expenses, associated with receiving these profits; . other profits from sources in the Russian Federation, listed in Article 309(1) of the Tax Code ("Particularities of taxation of foreign organizations not exercising their activities in the Russian Federation through a permanent establishment, but receiving profits from the Russian sources"), attributable to the permanent establishment.

March 13, 2015 | Page 8 8. Russian profit taxation of US corporations, partnerships and trusts

 Profits of permanent establishments subject to Russian profit taxation . Although Article 309(1) of the Tax Code provides an extensive list of profits of foreign organizations from Russian source, under the US-Russia Double Taxation Convention, items of income of a resident of a Contracting State, wherever arising, not dealt in the foregoing Articles of this Convention shall be taxable only in that State. . In view of this provision, despite the existence in Tax Code of this list of profits, only the following profits of US organizations not exercising activities in the Russian Federation through a permanent establishment would be subject to Russian profit taxation: - income derived from use and sale real property situated in the Russian Federation; - income derived from the shares or other rights participating in profits in a company whose assets consist not less than 50 percent of real property situated in the Russian Federation; - dividends.

March 13, 2015 | Page 9 9. New Russian legislation on the controlled foreign companies

 The meaning of the "controlled foreign company" . Under the Tax Code, the "controlled foreign company" is a foreign organization which simultaneously satisfies the following criteria: - the organization is not considered as a tax resident of the Russian Federation; - the controlling persons of the organization are organizations and (or) natural persons, considered as tax residents of the Russian Federation. . In addition to foreign organizations, as "controlled foreign companies" are also considered the foreign structures without creation of a legal person, whose controlling persons are organizations and (or) natural persons, considered as tax residents of the Russian Federation. . By "foreign structures", the Tax Code means organizations, established in accordance with the legislation of a foreign state (territory) without creation of a legal person (in particular, foundations, associations, partnerships, trusts, other forms of collective investments and (or) trust management), which in accordance with their personal law have the right to carry out activities, aimed at receiving income (profits) in the interests of their participants (shareholders, principals or other persons) or other beneficiaries.

March 13, 2015 | Page 10 10. New Russian legislation on the controlled foreign companies

 The meaning of the "controlling person" . The Tax Code considers as "controlling persons" with respect to foreign organizations (including foreign structures without the creation of a legal person) the following persons: - natural or legal person, whose share of participation in the organization is more than 25 per cent; - natural or legal person, whose share of participation in the organization (for natural persons – together with the spouse and minor children) is more than 10 per cent, if the share of participation of all persons considered as tax residents of the Russian Federation in this organization (for natural persons – including spouse and minor children) is more than 50 per cent . . Until January 1, 2016, the size of the share required for the recognition as the "controlling person" is 50% (for natural persons – together with the spouse and minor children). . In addition to that, a person not satisfying these criteria may be still recognized as a "controlling person" a person, who exercises control over the foreign organization in his/her interests or in the interests of his/her spouse and minor children.

March 13, 2015 | Page 11 11. New Russian legislation on the controlled foreign companies

 The meaning of the "exercise of control" . The Tax Code makes a distinction between the exercise of control over foreign organizations and the exercise of control over foreign structures without creation of a legal person. . On the one hand, as exercise of control over the foreign organizations is considered the exercise or the possibility to exercise the decisive influence over the decisions taken by this organization with respect to the distribution of received profits (income) after taxes by virtue of a direct or indirect participation in this organization, the participation in the contract (agreement), the subject of which is the management of this organization, or other particularities of relations between this person and organization and (or) other persons. . On the other hand, as exercise of control over the foreign structure without creation of a legal person is considered the exercise or the possibility to exercise the decisive influence over the decisions taken by the person, carrying out the management of assets of this structure, with respect to the distribution of received profits (income) after taxes among its participants (shareholders, principals or other persons).

March 13, 2015 | Page 12 12. New Russian legislation on the controlled foreign companies

 Consequences of recognition as a "controlling person" . Reporting obligations with respect to "foreign organizations" and "controlled foreign companies"; . to provide information about participants in foreign organizations and structures holding Russian real estate; . The non-distributed profits of a controlled foreign company shall be attributed to the taxable base of its controlling person. The attribution of these profits to the controlling person of non- distributed profits for 2015 shall be made only if they exceed the equivalent of 50 million Russian , whereas for 2016 – the equivalent of 30 million Russian rubles.

March 13, 2015 | Page 13 13. New Russian legislation to implement FATCA

 Federal Law No. 173-FZ "On Particularities of Financial Operations with Foreign Citizens and Legal Entities, on Amendments to the Code of Administrative Offences and on Declaring Certain Legislative Acts of the Russian Federation No Longer in Force", dated June 28, 2014, which entered into force on June 30, 2014. . While this Law does not expressly mention FATCA, it refers to the "legislation of foreign states on taxation of foreign accounts, effective as of the date of the entry of this Law into force". Other than FATCA, as of July 30, 2014 there was no such other "legislation of foreign states". This clearly suggests that the main reason behind the Law’s adoption was the need to address the FATCA-related concerns of Russian financial institutions.

March 13, 2015 | Page 14 14. New Russian legislation to implement FATCA

 Financial market organizations and persons covered by the Law No. 173-FZ. . The Law defines "financial market organizations" by providing their exhaustive list which consists of: (1) credit organizations; (2) insurers exercising voluntary life activities; (3) professional participants of the securities markets, exercising broker activities and/or securities management and/or depositary activities; (4) managers under the asset management contract; (5) non-state pension funds; (6) investment funds organized as a joint- stock company; (7) management companies of investment funds, share investment funds and non-state pension funds; and (8) clearing organizations. . The Law itself does not provide a definition of a "foreign taxpayer". Instead, it required financial market organizations to determine the criteria for classification as a "foreign taxpayer" in its internal documents, which shall be placed on its official Internet web-site not later than fifteen days after their approval. . Unless otherwise is provided by other federal laws of the Russian Federation, no information may be collected and transmitted about the clients who are: (1) natural persons-citizens of the Russian Federation, other than natural persons who (a) together with the citizenship of the Russian Federation have citizenship of a foreign state (other than the citizenship of a state – member of the Custom Union); (b) have residence permit in a foreign state; (2) legal persons created in accordance with the legislation of the Russian Federation, where more than 90 per cent of shares (parts) of the share capital are directly or indirectly controlled by the Russian Federation and /or citizens of the Russian Federation, including those, who, simultaneously with the citizenship of the Russian Federation have the citizenship of a state-member of the Custom Union (with the exception of natural persons referred to above).

March 13, 2015 | Page 15 16. New Russian legislation to implement FATCA

 Transmission of information to foreign tax authorities / foreign tax agents . The Law authorizes Russian financial market organizations to transmit information about their clients-foreign taxpayers to foreign tax authorities and/or foreign tax agents, authorized by foreign tax authorities, only when a client gives consent for the transmission of this information. . The deadline for the client to provide his/her consent (refusal) can’t be shorter than 15 working days after the date when the financial market organization sends such request. The consent of the client for the transmission of information to foreign tax authorities is simultaneously considered as his/her consent for the transmission of the same information to the Central of the Russian Federation, to the federal body of executive power authorized to exercise functions of preventing legalization (laundering) of profits resulting from illegal activities and the financing of terrorism ("Rosfinmonitoring"), as well as to the federal body of executive power, authorized to exercise control and supervision in the area of taxes and duties. . Not later than 10 days before sending information about the client to the foreign tax authorities, the financial market organization shall transmit this information in the amount and in accordance with the procedure prescribed by the Government of the Russian Federation in coordination with the Central Bank of the Russian Federation, to authorized Russian authorities. Not later than 10 working days after receiving this information, Rosfinmonitoring has the right to prohibit its transmission to a foreign tax authority. In case Rosfinmonitoring does not notify the financial market organization of its decision until the date when the transmission is due, the organization has the right to transit requested information to foreign tax authorities.

March 13, 2015 | Page 16 16. New Russian legislation to implement FATCA

 Right to terminate business relationship with a foreign taxpayer . When a financial market organization has justified suspicions based upon documents that a client shall be classified as a foreign taxpayer, but he/she did not provide information requested by this organization in accordance with its internal documents, or when a client does not provide his/her reply to a request to give consent to the transmission of information to a foreign tax authorities within 15 working days from the date when this request is sent, the financial market organization may take the decision on the refusal of execution of transactions conducted in favor of this client or pursuant to his/her orders. . Furthermore, when this financial market organization is a credit organization (such as bank), and the client does not provide information required for his/her identification as a foreign taxpayer or does not reply to a request to give consent for transmission of information within 15 working days from the date when the request is sent, the organization has the right to unilaterally terminate the relationship, by notifying the client not later than 30 working days before the expected date of termination. . The Law introduced into the Russian Code of administrative violations a new Article 15.27.2 ("Non-compliance with the requirements on transmission of information about persons covered by legislation of a foreign state on the taxation of foreign accounts").

March 13, 2015 | Page 17 17. Additional information:

Dmitry A. Pentsov Senior Associate, "FRORIEP" rue Charles-Bonnet 4 CH-1211 Geneva 12, Switzerland Phone: +41 (22) 839 63 42 Fax: +41 (22) 347 71 59 E-mail: [email protected] Web-site: www.froriep.com

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