Russia’s Federal Law “On Individuals’ Voluntarily Declaring Assets and Accounts (Deposits) with Banks and on Amending Certain Legislative Acts of the Russian Federation” - a law broadly known as the “Capital Amnesty Law” - was adopted on June 8. Under the amnesty, taxpayers are able to declare their foreign assets by filing a special declaration with Russia’s tax authorities. Meanwhile, the state guarantees a waiver of tax proceedings related to the assets declared. Mikhail Kazantsev, a member of the taskforce charged with developing the draft law and a partner at Egorov, Puginsky, Afanasiev & Partners, whose experts deal with applying the capital amnesty and act as public business ombudsmen, spoke with RAPSI about what had come out of it and how it might operate in practice. 

- The so-called Capital Amnesty Law was adopted over the course of 6 months. To be honest, the promptness of its passing does send shivers… 

- I’d say it was even faster than that. The drafting [of the capital amnesty law] was launched around late January or early February. The Ministry of Finance was initially told to develop the idea itself, and in addition to myself there were representatives of the Federal Tax Service - Rosfinmonitoring, and the Ministry of Justice, and the Ministry of Economic Development on the task force. 

Various options have been considered. Namely it has been suggested that everyone should be pardoned and bygones should be left as bygones. But when it became clear that FATF (the Financial Action Task Force on Money Laundering, of which Russia has been a member since 2003 – editor’s note) would object, we started looking for a compromise. There have also been disputes around whether the law should apply to all legal entities or whether it should cover only Russian nationals, and what should be declared. 

The Commissioner for Entrepreneurs’ Rights, Boris Titov, has also amended the draft law to a great extent. 

The final version of the draft was ready following the two weeks of the first reading in the lower house of Russian parliament, the State Duma. The draft law was meticulously amended at the Budget and Tax Committee. At that stage, the draft we had prepared jointly with the Ministry of Finance was actually 50% edited, and the draft law became declaratory. 

It was adopted in the first reading, subject to discussions with the Presidential Administration and FATF. By the second reading the draft had been significantly adjusted, and eight out nine amendments I had suggested had been adopted. However, it should be noted that the final version still has some pending issues.  

- What went wrong?

- Here it is important to understand that amnesty has two completely independent components. The first is rooted in historic risks related to the failure to pay taxes, supplemented by tax and foreign currency laws. The gist of it is that you should declare your assets and be pardoned for the related violations.  

The law generally operates this way, but is subject to certain restrictions. The assets involving foreign currency offenses may be declared with almost no risk at all. Thus, foreign currency accounts abroad may be disclosed with no concerns. I think many people would go for it, since firstly, they would lose nothing: no fines or late fees shall be paid. 

But, the fine for failure to notify the authorities about opening an account is only about 5,000 rubles (about $84). 

However, foreign currency offenses may be fined at up to 100% of the amount of the foreign currency transaction. 

Still, it should be taken into account that the statute of limitations for administrative liability for foreign tax offenses is only year.

Moreover, a person filing a declaration on his or her assets is exempt from liability for offenses related not only to the property, but to the sources of its creation as well. Nobody knows what shall be understood as “sources of property creation.” What might be meant here is the last tranche of funds spent to purchase the property declared. Everything that had used to be before is a grey zone. We had initially suggested a declaration of transactions, including the disclosure of the participants, the subject, and amount, and to exempt from liability those transactions that may have in theory involved offences and a risk of failure to pay taxes. But our idea ultimately evolved into an unpredictable mechanism, and it is unclear how this one will operate in practice.

A good question here is - why would anyone declare his or her assets? 

You will declare the assets the state was unaware of, and your risks will automatically increase, as the information becomes available to competitors and corrupt officials, while your protection leaves much to be desired. 

If case proceedings are initiated, say, related to a Rublyovka mansion, the filing of a declaration kept somewhere in the archives would need to be confirmed. Questions will arise, and the law enforcement agencies won’t consider the mansion (the asset declared), but they will check the transactions preceding its purchase, with regard to whether any tax offences have been committed. Moreover, proceedings could be initiated not for failure to pay taxes, but for fraud, which is not covered by the amnesty. 

In order to prevent such incidents, a Business Ombudsman for Capital Amnesty’s Office will be established to oversee the initial goals provided by the amnesty program. Our Firm will be involved in providing expert opinions. Moreover, our representative will act as a public business ombudsman on the issue. 

- I believe the second component of the amnesty law is not all roses either?

- The second component is the transferring of assets from nominal holders to the actual owners. This resonates particularly with Cyprus and Lichtenstein trusts, and funds that hold certain assets for the beneficiary’s benefit based on a deed. The idea was that the amnesty was to provide an opportunity to transfer the assets with no tax payments. The Controlled Foreign Companies (CFC) Rules will also provide for doing so, but only subject to the foreign legal entity being liquidated. 

The amnesty, however, provides for an opportunity to keep the foreign liquid assets, including investments in securities (public companies’ bonds and shares), under foreign management. Unfortunately, this part of the amnesty law raises a string of concerns. 

On the one hand, the tax-free transfer of assets from a nominal holder to the actual owner has been provided for. On the other hand, the filing of a declaration and a tax-free transfer of assets will require a nominal holding agreement, i.e. an agreement for ownership transfer to a manager or a management company governed by foreign law. 

Some people have such agreements, but not many. In a best-case scenario, people would be able to provide a deed of trust, the so-called declaration of trust, whereby a trust shall manage the assets but where no title will be transferred. The thing is, if you fail to provide a nominal holding agreement, you do not comply with the Amnesty Law requirements, and in eighteen months, the tax authorities will require you to pay up. 

It should also be noted that the amnesty will expire on December 31, 2015, and the related case law will only be established two years later. Thus, those who choose to take advantage of the amnesty will only learn if they are in compliance with the law some time later, once they’ve pursued their complaints in court. 

- Does that mean we should expect show trials?

- A show trial may certainly emerge, though it is technically difficult to do at least because the law enforcement agencies won’t pursue proceedings without good reason, and nobody is likely to voluntarily agree to act as a guinea pig. But the statistics may well be announced within the next couple of years. 

Two things are interesting here: how many proceedings will be initiated, and what percentage of such proceedings will be terminated. According to the statistical data, almost nobody was held liable under the previous amnesty. Though, only about 30 billion rubles were declared during that period. 

- Who might be interested in the amnesty in principle? Surely not big businesses, right?

- In my opinion, big businesses won’t be interested. And that’s not from a legal point of view. The thing is, it’s about amnesty (though legally it is not an amnesty), i.e. actually pardoning of an offense. 

By filing a declaration, you are a sort of acknowledging you have committed an offense, and due to this psychological aspect, big businesses won’t be interested in amnesty. That said, small and mid-sized businesses and entrepreneurs that applied certain schemes are part of a different scheme. Even if it was just a failure to pay taxes, small businesses are most likely to jump on the amnesty, since they are sure to find advantages. 

As for transferring assets from a nominal holder to the actual owner, I don’t know who might be interested. Initially, foreign real property managed from Cyprus or the British Virgin Islands was supposed to be transferrable with no tax payments at all. But again, the nominal holding agreement thing will scare people off from using the instrument. 

The CFC law here provides a clearer mechanism for this: between six and twelve months for liquidation of an entity and a tax-free transfer, which, I believe, is likely to be in demand. 

The CFC law, however, also raises issues. I have already mentioned that under this law, individuals liquidating foreign legal entities may transfer all assets except funds in their names. It is unclear why the restriction has been introduced. Instead of creating an additional barrier, i.e. making people to get rid of their funds and buy other assets that may be easily re-registered with no tax payments, there could have been granted an opportunity to transfer the money to another account, like one in Russia. 

In fact, the meaning of the Amnesty Law provided for the declaration of assets abroad. However, due to the lack of bans and restrictions, it makes sense to go and declare what the state should already be aware of, such as an apartment or a car in Russia. In this case, when inspected you may always refer to the declaration filed and to the evidence required of property law. Even if it turns out that the Russian assets declared have been purchased in violation of the tax law, the amnesty shall pardon everything. In other words, people should feel safe under this law. 

- It feels like there is a good start but still a bad end… 

- In fact, it’s a huge step toward business transparency. In addition, let’s not forget how fast the law was adopted. 

Russian law does not provide for notions of a nominal and beneficiary owner or a trust. In my opinion, these issues first should have been introduced into the Civil Code in order to establish a certain theoretical basis, and only after that, things should have played out with fiscal regulatory acts. Plus, the President suggested considering trust law at the time. Trust law needs to be developed and only then can it be ensured that the new laws will comply with those. At the end of the day we had to make do with what we had.

- Still it was rushed…

- On the whole, the timelines were rather tough for such a large-scale law. It should also be noted that CFC notices were to be introduced at the same time as the capital amnesty. My opinion is that it would have been more efficient to introduce CFC notices upon completion of the amnesty.

This amnesty is actually unique since it creates inequality between the law-abiding taxpayers and the offenders: while the international practice normally pardons late fees and fines but still requires that unpaid capital amount be covered, in our case the reasoning is different, and this is rather weird from a law-abiding taxpayer’s point of view. 

- How did your clients react to the CFC Law and the so-called “de-offshorization” as a whole?

- CFCs are painful for everyone. Everyone has gotten used to Russian assets being managed by Cypriot or BVI companies, and this was initially done for the purpose of tax optimization. But the situation has changed over the past 5 to 10 years, a possibility of legal protection of assets, where nobody may come and take your company through some regional court, now prevails. This used to be something of an airbag in the relations between counterparties and the Russian state authorities. It is no secret that offshore companies were still managed from offices in Russia. 

Now the traditional model won’t be operational anymore. Since there is a chance to overpay, businesses would need to be either transferred to Russia, or held directly. It won’t be possible, as it used to be, to manage Cyprus companies from Russia, since in this case they will become Russian tax residents. They would have to meet the reporting requirements and pay taxes as Russian residents, and this creates a high-stress situation for everyone, where everyone is looking for the best solution. Some transfer businesses to Russia, some create real offices in Cyprus. It happens that half of an office, say financial and legal departments are sent to Cyprus, Jersey or Lichtenstein. There are many of those who keep low profile, since the law may finally change in some six to twelve months. 

It is fair to say that CFC law did not drop from the clouds. In the second quarter of 2014, it was discussed with the business community, and the Ministry of Finance suggested options, not to mention that the tool had been long provided for by the main tax policies. Many proposals were not heard, but some were adopted. People were just reluctant to believe until the very last day that sooner or later the law would become operational. 

The Ministry of Finance and the Federal Tax Service are sure to issue explanations on how it will be applied. Europe and the US have similar laws, and the businesses do remain competitive, against all odds. Our businesses will also adapt, but it takes time. 

It should be noted, however, that the CFC law itself would have been stillborn if the Federal Tax Service had not pushed the idea of automatic data sharing with other countries. As soon as the system becomes operational, and according to the Federal Tax Service, it will begin to take effect by 2017 or 2018, there will be no need to request information from the authorities for each individual taxpayer or case. There will be a unified database containing information on the company, and namely on its beneficiary. When the system is operational, so will be the CFC law. Failure to provide notice of a CFC will only be fined at 100,000 rubles at most, under the current legislation. As of 2017, there will be a risk of being held criminally responsible for failure to pay taxes, and then people will be really concerned about what to do. 

- So we have a carrot in the form of the Amnesty and the CFC Law, and here comes the stick…

- To be honest, the carrot is not very sweet, but here comes a stick and it is indispensable. Let’s turn to the idea of the CFC law. It is no secret that people simply siphoned money off Russia, transferred it to foreign companies and kept it there until they retired. 

The Russian legislature is currently limiting the tax base erosion offering to simply pay taxes on this money, while it may be kept wherever you want. This is reasonable, and all decent jurisdictions go that way; that is why the CFC concept itself is right. It being uncomfortable for businesses and not very clear to lawyers is another cup of tea, since it is not clear how it is going to be implemented. 

- It must be nice to follow the world trend, but still are we reinventing the wheel or are we following the proven practices? 

- We were surely focused on the foreign practices, but many things have been made from scratch. Moreover, the foreign practice is ephemeral, since all countries have their own particular - and sometimes controversial - practices, and you may refer to this or that experience. 

The Russian Ministry of Finance has collected proposals and gathered information. It should also be noted that foreign tax systems are not always comparable to the Russian one. As such, a foreign experience cannot simply be applied cut and dry to the Russian Tax Code. This is not a trivial task. I am sure that the CFC Law will be improved. Moreover, there are a number of amendments that have been discussed at the Ministry of Finance and are to be submitted at the State Duma’s autumn session. 

- Well, let’s wait and see. And in the meantime I have recalled the Domodedovo Airport episode where they were looking for its beneficiaries but still failed to find them, if I am not mistaken. This won’t happen again, right?  

- Surely, it is getting more difficult for the Russian business to exist without a clear ownership structure, but a reasonable approach is needed to explain why the state and the public should know who owns this or that business or company. 

I may understand it from the fiscal and tax perspective. It does work in the banking sphere, even without the CFC Law. You just run a risk of losing the license if you fail to disclose the beneficiaries. In the end, if you look at the Central Bank’s website, everybody has disclosed their holding structures, and this creates certain confidence and contributes to the banking system’s stability. 

Being interested in, say, who owns this or that house because you like it and feel like procuring it as a gift is different. In this regard, I don’t really like the public disclosure idea. The purpose of the corporate veil is to protect the asset holders from public disclosure and, thus, from certain related risks. At the end of the day, the main principle of civil law is that you create a business, you don’t use the money from the business illegally, and it is managed for your (shareholders’) benefit. That said, if something is wrong, you will not be personally liable. This is about the legal entity’s legal personality. 

As for disclosure, it is no secret that all databases still may be bought at Gorbushka Market, and this is a problem. The business community is no longer afraid of taxes - all the more so considering taxes in Russia are among the world’s lowest. 

As for the Domodedovo episode, I believe the law enforcement agencies will sort it out under the criminal proceedings that have been initiated.  

- Considering all the risks, as well as all pros and cons, is the wheel called “capital amnesty” going to spin?

- As I have mentioned, there are three promising trends: foreign currency offenses, the declarations of CFCs, and the declarations of assets in Russia. The latter case involves no risks at all. 

Regardless, one should keep in mind that whether the amnesty is good or bad, it will never take this form again. A tax amnesty may eventually be launched, whereby another opportunity to pay taxes and sleep tight will be granted. One has to understand that by 2018, give or take a year, the global data sharing system will be operating normally, and unless some natural disaster happens, the tax authorities will have access to all foreign bank accounts and beneficiaries’ data. 

Europe is going to launch a public register of trust beneficiaries; therefore businesses won’t be able to continue operating as they have for the past 20 years. This is sure to bring about change. There will be no way to keep everything hidden without sharing anything. Therefore, protections providing for public disclosure, on the one hand, and certain guarantees, on the other hand, will be needed. 

Interviewed by Vladimir Yaduta, RAPSI