Regularization of Russian Private Clients Undeclared/Untaxed Funds

Undeclared Funds vs. Undistributed Revenues

Current Reporting Obligations on Foreign Accounts Residency status (for reporting purposes): Is defined by the RF Currency Legislation; Generally includes Russian citizens, except those who are away for no less than 1 year (uninterrupted stay outsider of Russia without crossing the border) Residency status (for reporting purposes): Is defined by the RF Currency Legislation; Generally includes Russian citizens, except those who are away for no less than 1 year (uninterrupted stay outsider of Russia without crossing the border) General Rule: RF residents shall report to Russian tax authorities: on opening (closing) bank accounts/deposi ts abroad; on changing bank accounts/deposits details; on all transactions of foreign bank accounts (or deposits); During 1 month period

Current Rule: Dividends and Interest are Taxed Only if Actually Paid Foreign Legal Entity Foreign Legal Entity Foreign Jurisdictions: Cyprus, Malta, BVI Switzerland, etc. Russian Federation Withholding tax/ if any Personal income tax: 9% for dividends 13% for interests Personal income tax: 9% for dividends 13% for interests Dividends/Interests

Use of Capitalization Funds. Common Rules. RF tax resident owns units/securities distributed by the fund and; RF tax resident actually receives any income upon sale/disposal of units RF tax resident is liable for RF tax only WHEN Funds units are owned by foreign entities; Russian sourced income from the sale/disposal of units Foreign Companies could be potentially liable for RF tax WHEN Tax rates for income received from transactions with securities in the RF: 13% for the RF residents 30% for non-residents Tax rates for income received from transactions with securities in the RF: 13% for the RF residents 30% for non-residents

Use of Capitalization Funds. Specifics of Securities and Financial Instruments Taxation. Actual expenses for acquisition of securities/financial instruments Market value of the securities/financial instruments Material gain Personal income tax: 13% for the RF residents 30% for non- residents Personal income tax: 13% for the RF residents 30% for non- residents Material gain Paid Personal income tax Expenses reducing personal income from sale In case of further sale of securities Tax base for securities transactions is the financial result: income from sale of securities after deduction expenses for their purchase. Tax rate: 13% for the RF residents, 30% for non-residents; Tax base for securities transactions is the financial result: income from sale of securities after deduction expenses for their purchase. Tax rate: 13% for the RF residents, 30% for non-residents; I. II. III.

Use of Life Insurance Products: Taxation only Upon Distributions Russian national Foreign Insurance Company Funds transfer as payment for insuring life/property/etc. Proceeds from insurance policy upon certain events (death, disability, elderly age, etc.) Income generated during the term of such insurance policy

Use of Life Insurance Products. General Rules: Income generated during the term of insurance policy is taxable at a rate of 13% as income received from foreign sources; Insurance payments are taxable at a rate of 13% (para 2 and 3 of art. 208 of the RF Tax Code); General Rules: Income generated during the term of insurance policy is taxable at a rate of 13% as income received from foreign sources; Insurance payments are taxable at a rate of 13% (para 2 and 3 of art. 208 of the RF Tax Code); Tax exemption is applied to the following payments (para 2 and 3 of art of the RF Tax Code) Insurance payments upon a certain age/period of the insured person or in other events if: (i)the insurance payments are paid by the taxpayer (ii)insurance payments do not exceed the sum of his paid premiums; The difference between these amounts will be included in tax base. Insurance payments upon a certain age/period of the insured person or in other events if: (i)the insurance payments are paid by the taxpayer (ii)insurance payments do not exceed the sum of his paid premiums; The difference between these amounts will be included in tax base. Insurance payments upon events: -Death -Injury to health; and (or) -Reimbursement of medical expenses of the insured person (exception – payments for sanatorium treatment); Insurance payments upon events: -Death -Injury to health; and (or) -Reimbursement of medical expenses of the insured person (exception – payments for sanatorium treatment);

Dividends: Russian Tax upon payment from Cyprus CY Cyprus Russia Dividends No Withholding Tax 9% Personal income tax less WHT paid in Cyprus

Interest: Russian Tax upon Payment from Cyprus CY Cyprus Russia Interests No Withholding tax 13% Personal income tax

Currency Control Foreign Jurisdiction Russia Dividends Foreign Legal Entity Foreign Legal Entity Currency Transaction Currency Control: All transactions shall be made via Authorized banks Otherwise Fine in the amount up to the sum of illegal currency transaction

Proposed CFC Legislation The Russian Ministry of Finance is working on the draft tax law which would introduce concepts of CFC (Controlled Foreign Company) for tax purposes; Potentially, such new CFC rules may require Russian companies and individuals to report and account for passive profits of their CFCs even if no distributions are made;

Taxpayers receiving dividends from sources outside of the Russian Federation are entitled to reduce the amount of tax New Trends on Taxation of Off-shore Profits by Russian Tax Authority

Key Events of De-offshorization Taxpayers receiving dividends from sources outside of the Russian Federation are entitled to reduce the amount of tax

Implementation of new special provisions in tax legislation Toughening of law enforcement practice Impact of International organizations on jurisdictions used to aggressive tax planning Strengthening processes for exchange of tax information between countries Key Directions of Further De- offshorization

Recent/Pending Changes to Russian Legislation on Fighting Use of Off-shores 30% tax on Distributions to Foreign Investors not providing information on beneficiaries is introduced to the RF Tax Code (came into force on December 3, 2013); New transfer pricing rules are introduced to the RF Tax Code (came into force on January 1, 2012); Rules on Controlled Foreign Companies (CFC Rules) are under development; Draft of Law on Tax Residence of Companies is under development;

Control on Income Sources For individuals there is no total control for their income sources on which assets were previously acquired: See: Federal Law No. 116-FZ dated July 20, 1998 On state control for compliance of large expenses to income factually received by individuals (did not come into force); See: Art , 86.2., of the RF Tax Code came into force from January 1, 2000, but were cancelled from July 9, 2003; PEPs expenses are under control from January 1, 2013 See: Federal Law No. 230-FZ of December 3, 2012 On control for compliance of expenses of individuals occupying state posts and other individuals to their levels of income (came into force from January 1, 2013);

Federal Law No. 230-FZ of December 3, 2012 Main purpose: fighting corruption; Applies to transactions made from January 1, 2012; Came info force from January 1, 2013;

Key Persons Covered by Federal Law No. 230 Federal State Officials State officials of the RF sub-federal units (regions); Members of the Board of directors of the RF Central Bank Officials of federal state service and state civil service of the RF sub-federal units Officials in Pension, Social and other funds Spouses and minor children of the above mentioned persons Others

Federal Law No. 230-FZ of December 3, 2012 Acquisition of assets: -Land plots -Other real estate -Vehicle -Securities -Shares Acquisition of assets: -Land plots -Other real estate -Vehicle -Securities -Shares The amount of transaction exceeds total income of PEP and his/her spouse for the last 3 years before transaction Obligation of PEPs to inform on:

Consequences for Non-compliance Release from occupied positions; Criminal, administrative or other liability;

Strengthening of Control for Financial Operations of Individuals Federal Law No. 134-FZ as of June 28, 2013 on Fighting of Illegal Financial Operations Tax authorities Operative- investigation bodies Provision of Information on bank accounts of companies, entrepreneurs, individuals In relation to receiving information on individuals: consent of the higher tax authority is required On the basis of court decision Bank

Tax Amnesty Presidential decree 1773 On conducting tax amnesty in 1993 as of 27 th of October, 1993 Federal Law 269 -FZ "On the simplified procedure for declaring of income by individuals" of 30 th of December 2006 Federal Law N 330-FZ as of 21 st of November, 2011 in respect of transport, land and individual property tax, debts on which originated prior to January 1, 2009 Legal entities and individuals who had declared sums of previously unpaid taxes before November 30, 1993 and transferred them into the budget were relieved from tax penalties. Within 10 months, from March 1, 2007 to January 1, 2008, individuals had the opportunity to pay taxes on income earned by them before 1 January 2006, but hidden from taxation without indication of type and source of income. The law was not effective in respect of individuals sentenced under Art. 198 of the RF Criminal Code (tax evasion). Tax debts originated prior to January 1, 2009 were written off (forgiven) by the tax authorities automatically. The law was not effective in respect of such debts, related to entrepreneurs activities or private practice of individuals.

Limitation Period for Tax Offences An individual can not be brought to responsibility (fines) for tax offences if 3 years expired before such decision left was made, beginning from: the next day after the end of the tax period during which the offence was committed (effective for offences under Art. 120, 122 of the RF Tax Code); the date of its commission (for all other offenses); Within the framework of the field tax audit the reviewed period can not exceed 3 years from the date, when decision on the appointment of such audit was made (5 years for taxpayers participating in regional investment projects); Tax liability ceases in the following cases: Payment of taxes; Death of an individual taxpayer; Liquidation of the taxpayer (legal entity); Other cases provided by the law; Tax liability ceases in the following cases: Payment of taxes; Death of an individual taxpayer; Liquidation of the taxpayer (legal entity); Other cases provided by the law;

Relief of Tax Liability The corrected tax return is submitted: after deadline for such submission expired, but before expiry of deadline for tax payment The corrected tax return is submitted: after deadline for such submission expired, but before expiry of deadline for tax payment Relief of tax liability Provided that the taxpayer did not know about: discovery of tax underpayment by the tax authorities the appointment of the field tax audit Provided that the taxpayer did not know about: discovery of tax underpayment by the tax authorities the appointment of the field tax audit The amended tax return is submitted: after deadlines for submission of tax return and for tax payment expired The amended tax return is submitted: after deadlines for submission of tax return and for tax payment expired 1. Provided that the taxpayer paid the underpaid taxes before he became aware of: discovery of tax underpayment by the tax authorities the appointment of the tax field audit 2. Provided that the tax payer paid the underpaid taxes and such underpayment was not identified in course of the field tax audit 1. Provided that the taxpayer paid the underpaid taxes before he became aware of: discovery of tax underpayment by the tax authorities the appointment of the tax field audit 2. Provided that the tax payer paid the underpaid taxes and such underpayment was not identified in course of the field tax audit Relief of tax liability Relief of tax liability does not exclude implication of criminal liability.

The taxpayer can be released from criminal liability if a prescribed period of time passed since crime has been committed (p. 1 of art. 78 of the Criminal Code of the RF). Relief of Criminal Liability Two years after committing a Minor offense (maximum punishment does not exceed 3 years of imprisonment); Two years after committing a Minor offense (maximum punishment does not exceed 3 years of imprisonment); Six years after committing an Average- gravity crime (maximum punishment does not exceed 5 years of imprisonment); Six years after committing an Average- gravity crime (maximum punishment does not exceed 5 years of imprisonment); Note: The tax offence is considered to be committed in case taxes are not paid in the time term established by the tax legislation Note: The tax offence is considered to be committed in case taxes are not paid in the time term established by the tax legislation

*Large scale: more than RUB (USD 17,000) within 3 consecutive years, provided such tax underpayment exceeds 10% of due taxes payable, OR more than RUB 1,8 mln (USD 50,000); *Large scale: more than RUB (USD 17,000) within 3 consecutive years, provided such tax underpayment exceeds 10% of due taxes payable, OR more than RUB 1,8 mln (USD 50,000); Relief of Criminal Liability Minor offenses Tax and duty evasion committed by an individual on a large scale* (art. 198 of the Criminal Code of the RF) Tax and duty evasion committed by an individual on a large scale* (art. 198 of the Criminal Code of the RF) Failure to fulfill the tax agent obligations on a large scale** (p. 1 of art of the Criminal Code of the RF) Failure to fulfill the tax agent obligations on a large scale** (p. 1 of art of the Criminal Code of the RF) Tax and duty evasion committed by organization on a large scale ** (p. 1 of art. 199 of the Criminal Code of the RF) Tax and duty evasion committed by organization on a large scale ** (p. 1 of art. 199 of the Criminal Code of the RF) The taxpayer who committed minor tax offence for the first time may be released from criminal liability in case of payment of all underpaid taxes and fines. **Large scale: more than RUB (USD 56,000) within 3 consecutive years, provided such tax underpayment exceeds 10% of due taxes payable, OR more than RUB 6 mln RUB (USD 166,000); **Large scale: more than RUB (USD 56,000) within 3 consecutive years, provided such tax underpayment exceeds 10% of due taxes payable, OR more than RUB 6 mln RUB (USD 166,000);

*Especially Large scale: more than RUB 10 mln. (USD 277,000) within 3 consecutive years, provided such tax underpayment exceeds 20% of due taxes payable, OR more than RUB 30 mln (USD 833,000); *Especially Large scale: more than RUB 10 mln. (USD 277,000) within 3 consecutive years, provided such tax underpayment exceeds 20% of due taxes payable, OR more than RUB 30 mln (USD 833,000); Relief of Criminal Liability (Continuation) Average- gravity crimes Tax and duty evasion committed: by a group of persons with prior agreement on especially large scale* (p. 2 of art. 199 of the Criminal Code of the RF) Tax and duty evasion committed: by a group of persons with prior agreement on especially large scale* (p. 2 of art. 199 of the Criminal Code of the RF) Concealment of funds or property of the legal entity or entrepreneur, at the expense of which taxes and duties are to be paid, on a large scale** (art of the Criminal Code of the RF) Concealment of funds or property of the legal entity or entrepreneur, at the expense of which taxes and duties are to be paid, on a large scale** (art of the Criminal Code of the RF) Failure to fulfill the tax agent obligations on especially large scale* (p. 2 of art of the Criminal Code of the RF) Failure to fulfill the tax agent obligations on especially large scale* (p. 2 of art of the Criminal Code of the RF) **Large scale: More than RUB (USD 42,000); **Large scale: More than RUB (USD 42,000);

Limitation Period for Administrative Liability for Tax Offences The taxpayer can not be brought to administrative liability for a tax offence after expiration of 1 year term from the date when the tax offence was committed (for long- lasting offences - from the date of discovery of the tax offence). Administrative offences related to taxation and duties Violation of time term for registration with the tax authorities Violation of the time term for submission of a tax return Failure to submit data necessary for tax control Gross violation of accounting and submission of financial statements

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