Executive summary

Russia's Governmental Decree No. 693 "Concerning the Implementation of the International Automatic Exchange of Financial Information with Competent Authorities of Foreign States (Territories)" (the Decree) was officially published on 19 June 2018. The Decree sets forth fundamental requirements for financial organizations regarding the identification of clients and the provision of financial information on them to the Federal Tax Service (FTS) in compliance with the Standard on the Automatic Exchange of Financial Account Information (the Common Reporting Standard, or CRS). The Decree takes effect a month after its publication.

Russia joined the CRS by signing the Multilateral Agreement on the Exchange of Financial Account Information at the International Tax Administration Forum in Beijing on 12 May 2016.

Federal Law No. 340-FZ "Concerning the Introduction of Amendments to Part One of the Tax Code of the Russian Federation in Connection with the Implementation of the International Automatic Exchange of Information and Documentation Relating to Multinational Groups of Companies" (the Law), which entered into force on 27 November 2017, incorporated CRS requirements into Russian law.

In December 2017, in accordance with the mechanism required by the CRS, Russia activated financial information exchange relationships with 73 states and territories under the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Information. The exchange of financial information may take place on either a bilateral or a unilateral basis. The FTS order approving the list of states and territories was officially published on 26 June 2018.

This Alert summarizes the main aspects of the Decree.

Detailed discussion

To whom does the Decree apply?

Those required to collect financial information on their clients are financial organizations, which, according to the Law, include credit organizations, brokers, depositaries, insurers insofar as voluntary life insurance is concerned, non-state pension funds, fiduciaries, joint stock investment funds, management companies of investment funds, a central counterparty and the managing partner of an investment partnership.

This is an open list, in that financial organizations may additionally include any other companies and unincorporated structures that "accept monetary resources or other financial assets from clients for storage, management, investment and (or) the performance of other transactions in the interests of a client or directly or indirectly at the expense of a client."

The Decree specifies cases where information does not have to be provided in relation to:

• Russian and foreign public companies, organizations that are directly or indirectly controlled by public companies or persons who control those public companies, and organizations that are directly or indirectly controlled by organizations controlled by public companies (control being defined as the possession of an equity interest of more than 50%)
• Financial organizations, other than investment companies, that are managed by another financial organization and are registered in a foreign state (territory) with which Russia does not exchange financial information
• State bodies of Russia or foreign states and certain international organizations
• Certain types of agreements, including compulsory pension insurance agreements, certain types of life insurance agreements and others

What information will be provided to the FTS?

The Decree describes the scope of information that must be included in reports and provided to the FTS in electronic form, including details of the financial organization itself, details of the client and financial information on agreements concluded with the client for the provision of financial services. The Decree also sets out approaches to defining the scope of financial information for each type of agreement.

Notably, the Decree gives only a general definition of an agreement in relation to which information must be provided without any direct reference to the foreign state of which the client must be a tax resident. This may mean that financial organizations will have to establish tax residence and provide information for all clients with foreign tax residence.

The Decree sets out foreign nationality criteria for individuals and companies (unincorporated structures) and, in a number of cases, their beneficiaries and controlling persons.

Finally, the Decree requires a financial organization to divide all agreements with clients into new and existing agreements, which affects the mechanisms for identifying clients. This division into new and existing agreements will take place based on the effective date of the Decree.

When do reports have to be submitted?

Generally speaking, reports must be submitted annually no later than 31 May of the following year. The first reporting period will be 2017. Since the deadline for submitting the first reports has not changed relative to the draft version of the Decree, financial organizations will be required to report to the FTS by 31 July 2018 in relation to the following agreements (large clients):

• Existing agreements with individuals classified as a foreign tax residents with a contract value exceeding US$1 million (or the equivalent in foreign currency)
• Existing agreements with companies classified as foreign tax residents with a contract value exceeding US$250,000 (or the equivalent in foreign currency)

Whether or not the threshold is exceeded will be determined as at the effective date of the Decree. Given this fact, it is important to note a certain ambiguity in the wording of the Decree regarding its entry into force, which has resulted in the cut-off date being variously interpreted as 19 or 20 July 2018. Given the lack of consistent case law on the subject of the entry into force of statutory documents with wording of this kind, it is hoped that the Finance Ministry and the FTS will be able to pronounce an official position on this issue.

What sanctions may be imposed for non-compliance with the established requirements?

The Law includes a provision preventing the imposition of punitive sanctions for offenses discovered in 2017, 2018 and 2019 (RUB500,000 for the non-submission of reports and RUB50,000 for each client not included in reports/each failure to take measures to identify a client).

Uncertainty therefore remains about violations relating to those years that may be revealed by an audit carried out in later periods.

What action should financial organizations take now?

According to information current at the effective date of the Decree, financial organizations which have not already implemented client identification procedures for CRS purposes will have to carry out identification procedures for existing large agreements within a month or adjust the results of previously performed procedures to take account of differences that may exist.

In addition, financial organizations will need to establish financial account reporting procedures that meet the xml reporting schema requirements prescribed by the FTS and published on its website.

What should clients of financial organizations expect?

As soon as the Decree enters into force, clients of financial organizations, seeking to conclude agreements and open new accounts, must be ready to complete self-certification forms for CRS identification purposes.

Therefore, clients, and especially groups of companies, should carry out a preliminary analysis to establish the status of each company for CRS purposes and assess disclosure implications.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young (CIS) B.V., Financial Services, Moscow

• Ivan Sychev
  ivan.sychev@ru.ey.com

Ernst & Young LLP, Russian Tax Desk, New York

• Kirill Lukyanets
  kirill.v.lukyanets1@ey.com

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ATTACHMENT

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