The adverse impact of the automatic exchange of information for Russians holding bank accounts in Belgium and Luxembourg

On 12 May 2016, Russia joined the OECD Automatic Exchange of Information Agreement on the introduction of the automatic exchange of information in tax matters on a reciprocal basis (Common Reporting Standard or “CRS”).
 

I. Russia joins the automatic exchange of information

 
On 12 May 2016, Russia joined the OECD Automatic Exchange of Information Agreement on the introduction of the automatic exchange of information in tax matters on a reciprocal basis (Common Reporting Standard or “CRS”).

On the one hand, this implies that, as from 2018, Russia will in principle be obliged to exchange information to the tax authorities of partner jurisdictions regarding financial accounts held by tax residents of those jurisdictions.

On the other hand, joining the CRS will enable the Russian tax authorities to obtain information on foreign financial accounts held by Russian tax resident individuals and legal entities in partner jurisdictions (i.e., jurisdictions that have signed the Multilateral Competent Authority Agreement -“MCAA”), from the tax authorities of the relevant countries.
 

II. Belgium and Luxembourg : early adopters

 
More than 100 jurisdictions have undertaken to implement the CRS, amongst others Belgium and Luxembourg. Both countries have, at the end of last year, implemented the CRS in their domestic laws[1]. They are early adopters: they intend to carry out the first exchange of information in 2017 (in respect of the taxable period 2016).

Example: a Russian citizen (Russian tax resident) holds a bank account in Belgium. The Belgian bank will exchange automatically information to the Belgian tax authorities with respect to:
  • The account holder (the Russian tax citizen), i.e.  name, address, taxpayer identification number (TIN) and Member State of residence;
  • The following information about the custodial account:
    • The account number;
    • total gross amount of income (interest, dividends and other income) generated with respect to the assets held in the account during the calendar year
    • total gross proceeds from the sale or redemption of financial assets
    • account balance of the financial account, as of the end of the relevant calendar year,
  • The following information about the financial institution
    • Name and identifying number.

The Belgian tax authorities will then transfer this information to the Russian tax authorities.
 

III. Why does the automatic exchange of information matter?

 
In the case at hand, this means that the Russian tax authorities will, each year, automatically receive financial information (account balance; interest and dividend income, …) from the Belgian tax authorities regarding Belgian bank accounts held by Russian tax residents[2]. It goes without saying that the Russian tax authorities will use the information received with a view to assess whether the Russian taxpayers have correctly fulfilled their tax duties. One of the items on the list of the Russian tax authorities will undisputably be the compliance with the Russian currency control regulations[3].
 

IV. The Russian currency control regulations: why should Russian citizens worry?

 
Under these (extremely harsh) rules, Russian citizens are subject to compliance requirements with respect to their foreign bank accounts. Firstly, a notification on opening of a foreign bank account should be filed with the Russian tax authorities within one month after opening of such an account. Secondly, they must report each year on the movement of funds on their foreign bank accounts.

Apart from these cumbersome reporting duties, there is a list of illicit transactions, i.e. transactions that Russian residents may not perform using their foreign bank account. Extremely harsch administrative penalies of 75%-100% of the size of the illegal transaction apply (full confiscation!). Russian residents could be at risk, for instance, if their foreign bank account (e.g. Belgian bank account) is credited with commissions.

It is striking to note that the scope of these currency control regulations is extremely broad. It catches individuals who are Russian citizens, with the exception of Russian citizens who have been living permanently in a foreign state at least for one year. The notion of “currency control resident” goes far beyond that of “tax residence”. By Letters issued on 12 May 2016 and 25 April 2016, the Russian Federal Tax Service has indicated that any short-term trips to Russia (even for one day a year) results in the loss by a Russian citizen of his non-residency status for the purpose of Currency Control law. Example: even if a Russian citizen is tax resident of Belgium (he lives in Belgium with his family), he will be “in scope” of the currency control regulations as soon as he returns to Russia for a few days to visit friends and family.
 

V. Conclusion

 
Under the automatic exchange of information, the Russian tax authorities will (automatically!) obtain precious information regarding foreign financial accounts held by Russian tax residents. The Russian tax authorities could use the information received with a view to assess whether the Russian taxpayers have breached or not the Russian currency control regulations. Russian citizens should therefore closely monitor their situation, even if they live outside Russia (but return occasionally to Russia). Amongst others, the following questions arise:
  • Is the Russian citizen a “currency control resident” (in scope of the currency control regulations)?
  • What are the fines, in practice, in case of Russian currency control violations ? What steps could be undertaken to mitigate these penalties?
  • How to assess the detecting risk? Will the foreign (Belgian) bank automatically exchange information with respect to the bank account held by the Russian citizen?
 

[1] Belgium : Loi du 16 décembre 2015 réglant la communication des renseignements relatifs aux comptes financiers, par les institutions financières belges et le SPF Finances, dans le cadre d'un échange automatique de renseignements au niveau international et à des fins fiscales, M.B., 31 Décembre 2015. Luxembourg : Loi du 18 décembre 2015 concernant l’échange automatique de renseignements relatifs aux comptes financiers en matière fiscale et portant transposition de la directive 2014/107/UE du Conseil du 9 décembre 2014 modifiant la directive 2011/16/UE en ce qui concerne l’échange automatique et obligatoire d’informations dans le domaine fiscal, Mémorial A, n°244, 24 décembre 2015, p. 5967.
[2] The automatic exchange of information can also include the Belgian bank accounts held by passive non-financial entities whose controlling persons are Russian tax residents.
[3] Federal Law of 10 December 2003 # 173-FZ "On currency regulation and currency control".