Russians and the declaration of foreign accounts: new trends after the ISAAA

Russia's accession to the MCAA

Russia has joined the Agreement on Automatic Exchange of Financial Information (MCAA), and in late December 2017, the Organization for Economic Cooperation and Development (OECD) released a list of countries that will start sharing data in the new format this year. Based on the Adam Smith Conferences survey, which gathered 60 private banking experts, analysts found that there is a direct link between the size of capital and the behavior of foreign financial account holders.

Classification by state level

• MA (mass affluent)- less than $1 million
• HNWI (high net worth individual)— from 1 to 5 million dollars
• VHNW (very high net worth individual)— from 5 to 30 million dollars
• UHNWI (ultra high net worth individual)— more than 30 million dollars

Changes in declarations after signing the agreement

After Russia became a participant in the agreement, owners of mass-affluent categories became more active in declaring their foreign accounts. Respondents noted that about40%Russians with foreign bank accounts have started reporting their assets to the Russian tax authorities, whereas previously the number was only10%People with high income levels are generally much more willing to provide information about their assets than those who are less affluent. This trend has been observed both before and after Russia entered into the agreement.

The increase in the number of declarations among high-net-worth individuals

Less affluent high-net-worth individuals, especially those in the mass affluent category, have significantly increased the number of declarations regarding their foreign accounts after the signing of the MCAA agreement. Starting from2001 yearRussians are required to inform about the presence of foreign accounts, starting fromJanuary 1, 2015They also need to report annually on the movement of funds in these accounts. Previously, if account holders did not do this on their own, it was difficult for Russian tax authorities to identify the existence of such accounts.

Automatic exchange of financial information

With Russia's entry into the MCAA, the automatic exchange of financial information between the agreement's participants has become standard practice. Wealthier clients are increasingly turning to actual tax residency instead of nominal residency. So what do those who are not interested in declaring their assets abroad do? The most common response has been...“change of tax residency”this answer was chosen78%respondents.

Finding workarounds by wealthy investors

The study found that wealthy investors often seek easy ways to avoid compliance with the law. Owners of foreign accounts tend to change their tax residency when they do not want to disclose information about their capital. The larger the owner's capital, the more likely it is that they are actually relocating abroad rather than just making nominal changes, such as through international investment programs for obtaining residency or citizenship. This shows that, despite the increasing transparency of financial information, many continue to look for ways to protect their assets from taxation.

Thus, the issue of asset concealment by financially affluent citizens remains relevant and requires further analysis and oversight from tax authorities.

Trends among wealthy Russians

Russians who fall into the category of mass affluent differ from wealthy high-net-worth individuals in that they more often choose to transfer their assets to the names of nominal owners or seek to place their capital in countries with low levels of financial information exchange. These affluent citizens frequently change their tax status to minimize their tax obligations and avoid the need to disclose information about their accounts.

To become a tax resident of another country, it is often enough to simply live there for more than six months, although in some countries this period may be shorter if certain conditions are met.

Preferences in choosing countries for tax residency

Representatives of the mass affluent class in Russia are usually less inclined to change their tax status than wealthier high-net-worth individuals and prefer to return their assets to their homeland. This is because their capital is often less significant compared to the upper echelon of the wealthy.

High-net-worth individuals typically choose countries like the United Kingdom and Cyprus, while less affluent Russians show interest in Hungary.

Trends among capital owners

According to the gathered information, there is a trend where owners of significant capital are more frequently turning to lawyers who specialize in providing nominee services, or they are opting for trusts to manage their wealth.

Unlike them, people with lower incomes, but still classified as high-budget, are more likely to rely on the support of close ones—friends and relatives—as well as consider insurance companies.

Owners of large assets are exposed to higher risks, which is why they are less likely to trust their relatives with managing their resources, as this imposes certain risks in light of potential scrutiny from tax authorities that may identify the ultimate beneficiary.

Privacy and costs

Trusts and law firms provide a higher level of confidentiality in asset management matters. However, the services of these organizations often come with additional annual costs, making such tools less attractive to the less affluent segments of the population in Russia.

Economic strategies

“By properly organizing the transfer of assets into so-called 'non-legal structures' (such as trusts), one can significantly enhance the efficiency of managing these assets. This route is most often chosen by high-net-worth individuals (HNWI), as the process of creating and maintaining such structures requires substantial financial investments,” explains lawyer Ekaterina Shabalina.

Wealthy citizens of Russia are increasingly active in transforming their controlled foreign companies (CFCs) into structures that do not fall under formal control requirements.

Tax legislation

Since the beginning of 2015, the tax legislation of the Russian Federation requires tax residents to report their foreign assets and may impose tax obligations on income from such activities.

• Less than 50% of Russian CFC owners inform tax authorities about their foreign companies.
• Among those owners who do not wish to declare their companies, there is a clear trend: wealthier participants make greater efforts to conceal their assets compared to those with smaller capital.

Trends in the transformation of offshore companies

As the wealth of owners increases, the number of cases of converting controlled foreign companies (CFCs) into structures that are not subject to formal control also rises. "If a participant's share in a CFC is less than 25%, or less than 10% if there are other Russian tax residents, then declaring such companies in Russia is not required."

• Therefore, transferring company shares to the name of a nominal owner, whether in full or in part, is becoming a quite popular practice among those surveyed.
• This creates additional opportunities for tax planning, as well as protecting capital from potential audits and inquiries from regulators.

Conclusion

In conclusion, this study provides us with a clear understanding of how Russian citizens respond to changes in the rules for declaring foreign accounts introduced after Russia joined the Agreement on Automatic Exchange of Financial Information. The desire of most foreign account holders to comply with the new legal requirements indicates thatgrowth of transparencyandresponsibilitiesamong wealthy Russians.

Since about 40% of respondents from lower-income categories have started to declare their assets, this indicates thatincreasing legal awarenessand possible changes in the assessment of the legitimacy of their financial actions. At the same time, changing tax residency remains a popular strategy among wealthier groups, indicating that despite tightening controls, the presence of significant financial resources continues to provide opportunities to circumvent new rules.

Preferred jurisdictions

The analysis of preferred jurisdictions for relocation shows that the choice of these countries depends not only on financial considerations but also on cultural and social factors, which can serve as key determinants for specific groups of Russians. For example:

• CyprusIt is becoming popular among high-class individuals due to its attractive tax system.
• HungaryIt can be seen as a more affordable option for those with less wealth.

Social connections

We also see that many participants in the study turn toto family and friendsas nominal owners, highlighting the family and social connections that remain important in the field of capital management.

Conclusions

Thus, the survey results present us with a multifaceted picture of Russians' attitudes towards international tax legislation and demonstrate how they are trying to adapt to new conditions. This, in turn, highlights the need for continuous monitoring and analysis of further changes in the global financial system to stay informed about current trends and challenges.

We are on the brink of a new era, where transparency and accountability are becoming essential conditions for successfully conducting financial business, and our ability to adapt to these conditions will determine our future.