Monopoly, Russian-style: collect property abroad, pass Go, but don't receive rent into foreign accounts — or pay a fine.

We look at the new rules of the game.

At the beginning of the year, Vedomosti published a piece about a Russian resident fined for using foreign accounts to receive rent for commercial property in Germany.

The practice has not yet spread, but the tax authority has not abandoned its position either. So C Cases has tried to make sense of the situation and offer some recommendations.

The case

It concerned a ruling by the Moscow office of the Federal Tax Service (FTS) imposing an administrative fine of 30% of the payments received.

The FTS considers that a Russian currency resident who leases out several commercial premises abroad is engaged in business, because the activity is "aimed at systematically generating profit".

The FTS equates this individual entrepreneur with a company for currency control purposes and therefore refuses to apply Article 12(5.2) of Law No. 173-FZ, which allows resident individuals to receive funds from non-residents into accounts with foreign banks without restriction.

And since, under Article 14(2) of the Currency Regulation Law, companies must make settlements in currency transactions through bank accounts opened with Russian banks, the tax authority concludes that a currency resident engaged in business breaches currency legislation and must be penalised accordingly.

First questions about the FTS's position

1. Russian law defines a sole proprietor as a citizen engaged in business without forming a legal entity. In other words, depending on the context, the law may treat a person as an entrepreneur or as an ordinary individual. But individuals have never been equated with legal entities.
2. Currency legislation contains no indication that requirements similar to those for legal entities apply to sole proprietors either.
3. In the current situation, it is impossible to arrange for rent from tenants in Europe and the USA to be paid into accounts with Russian banks, which makes the FTS's requirement impossible for individuals to comply with.

It is not known whether the person fined notified the FTS of the opening of accounts with foreign banks or reported on movements of funds and other financial assets in those accounts.

A lawyer's view

1. There is no legal basis for equating citizens engaged in business with legal entities for the purposes of currency legislation in particular, since Article 23(4) of Federal Law No. 173-FZ of 10.12.2003 "On Currency Regulation and Currency Control" implies that sole proprietors are individuals.
2. Any irremovable doubts, contradictions and ambiguities in Russian currency legislation and in the acts of currency regulation and currency control authorities are interpreted in favour of residents and non-residents.

What to do?

1. It would be sensible to consider using companies and agents authorised to manage foreign property.
2. Alternatively, manage foreign property through your own foreign company, after first obtaining tax and legal advice.

Concerns

If this practice takes root, activities "aimed at systematically generating profit" may cover not only foreign property but also, for example, deposits with foreign banks, securities, shares in foreign companies and other investment instruments.

C Cases will keep following developments.