Monopoly, Russian style: collect foreign real estate, pass 'Go', but don't collect rental income into foreign accounts, or pay a fine.
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Russian Monopoly: acquire property abroad, pass 'Go', but don't receive rental income into foreign accounts or pay a fine.
We're delving into the new rules of the game.
Earlier this year, Vedomosti published an article, detailing a fine against a Russian resident for using foreign accounts to receive rental payments for commercial real estate in Germany.
While this practice has not yet gained widespread adoption, the tax authority has not abandoned its position. Therefore, C Cases has sought to understand the situation and provide some recommendations.
The Case in Brief
It concerned a ruling by the Moscow branch of the Federal Tax Service (FTS) imposing an administrative penalty in the form of a fine amounting to 30% of the received payments.
The FTS believes that a Russian currency resident who leases out several commercial properties abroad is engaged in entrepreneurial activity, as they conduct activities 'aimed at systematic profit generation'.
The FTS equates this individual entrepreneur to a company from a currency control perspective and thus refuses to apply the provisions of Part 5.2, Article 12 of Law No. 173-FZ to them, which allows individual residents to deposit funds from non-residents into foreign bank accounts without restrictions.
And, since, according to Clause 2, Article 14 of the Law on Currency Regulation, companies are obliged to conduct settlements for currency operations through bank accounts opened in Russian banks, the tax authority concludes that a currency resident engaged in entrepreneurial activity violates currency legislation and must bear the corresponding penalty.
Initial questions regarding the FTS's position
- Russian legislation defines an individual entrepreneur (IE) as a citizen conducting business without forming a legal entity. This means that, depending on the context, a person can be viewed by law as either an entrepreneur or an ordinary individual. However, individuals have never been equated with legal entities.
- Currency legislation also contains no provisions for applying requirements to individual entrepreneurs that are analogous to those applicable to legal entities.
- In the current situation, it is impossible to arrange for rental payments from tenants in Europe and the USA to be received into Russian bank accounts, rendering the FTS's requirement unenforceable for individuals.
It is unknown whether the fined individual notified the FTS about opening accounts in foreign banks or submitted reports on the movement of funds and other financial assets in those accounts.
Legal Opinion
- Equating citizens engaged in entrepreneurial activity with legal entities, particularly under currency legislation, has no legal basis. This is because Part 4 of Article 23 of Federal Law No. 173-FZ of December 10, 2003, "On Currency Regulation and Currency Control," states that individual entrepreneurs are classified as individuals.
- Any irresolvable doubts, contradictions, or ambiguities in the acts of the Russian Federation's currency legislation, acts of currency regulation bodies, and acts of currency control bodies are to be interpreted in favor of residents and non-residents.
What to do?
- It would be wise to consider using companies and agents authorized to manage foreign real estate.
- Alternatively, manage foreign real estate through your own foreign company, after first obtaining tax and legal advice.
Concerns
If this practice takes root, then the scope of 'activities aimed at systematic profit generation' could include not only foreign real estate, but also, for example, deposits in foreign banks, securities, shares in foreign companies, and other investment instruments.
C Cases will monitor the situation.