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How the behaviour of foreign bank account holders and the size of their capital are related: a joint...
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How the behaviour of foreign bank account holders and the size of their capital are related: a joint survey by Tranio and Adam Smith Conferences

Russia is a party to the Multilateral Competent Authority Agreement (MCAA) under which signatories allow for the automatic exchange of financial information, which will begin this year. Based on the findings of the latest survey conducted by Tranio and Adam Smith Conferences, which covered 60 private banking professionals, Tranio found out how the size of capital and behaviour of foreign account holders are related.

Category Wealth
($, million)
MA (Mass Affluent) < 1
HNWI (High Net Worth Individual) 1–5
VHNWI (Very High Net Worth Individual) 5–30
UHNWI (Ultra High Net Worth Individual) > 30

The Mass Affluent (MA) have become more active in declaring their foreign bank accounts after Russia joined the MCAA

According to the survey, about 40% of Russian nationals with foreign bank accounts declared them to Russian tax authorities after the country’s joined the MCAA, whereas previously this figure was around 10%.

Data complied by Tranio indicates that wealthier HNWIs are more likely to declare their accounts than less wealthy ones. This trend was observed prior to Russia's accession to the agreement and is still the case.

Less wealthy HNWIs, especially the Mass Affluent (MA), in turn, have become more active in declaring their foreign accounts since Russia joined the MCAA.

Since 2001, Russians have been required to notify tax authorities of their foreign bank accounts, and since January 1, 2015, Russians have been obliged to report cash flows annually. It used to be difficult for Russian tax authorities to identify holders of foreign bank accounts if they did not voluntarily report it. However, with the MCAA, any exchange of financial information between parties to the agreement will be automatic.

The wealthier HNWIs are, the more often they change their tax residency de facto rather than de jure

How do people avoid declaring their accounts abroad? the most popular way to avoid doing so is to change their tax residency, according to 78% of the respondents.

According to the survey findings, "rich" HNWIs are more active in looking for ways to circumvent the law. They would rather change their tax residency than declare their foreign bank accounts. The wealthier HNWIs are, the more often they change their tax residency de facto (that is, by spending most of their time abroad) rather than de jure (participation in foreign programs offering permanent residency or citizenship by investment).

Unlike wealthy HNWIs, Russian nationals falling into the MA category are more likely to transfer their capital to nominal owners or to jurisdictions that are not party to the MCAA.

Wealthy Russians change their tax residency to avoid reporting their accounts and to optimise taxation. Some countries allow changing tax residency after six months of residence while others require lesser time, however, subject to certain conditions.

Wealthy Russians from the MA category are more often inactive or simply transfer money to Russia because they risk a smaller capital compared to individuals in the UHWNI category.

The wealthier HNWIs are, the more often they change their tax residency de facto rather than de jure

"Rich" HNWIs prefer the United Kingdom (UK) or Cyprus, while the "poor" HNWIs prefer Hungary when changing their tax residency

According to the survey, Russians who want to change their tax residency prefer Cyprus or the United Kingdom (UK).

According to Tranio estimates, rich HNWIs who want to change their tax residency are more likely to choose the UK or Cyprus rather than Hungary. However, the opposite is true among less wealthy HNWIs. Monaco and Switzerland are more popular among individuals with more than $5 million in capital than individuals from the MA and HNWI categories. VHNWIs, whose wealth exceeds $30 million, prefer Malta.

Monaco and Switzerland are popular among wealthy Russians because it is expensive to become a tax resident in these countries. To become a tax resident of Monaco one must deposit a minimum of €500,000 in a local bank. Residency in Switzerland can be obtained with a tax agreement stipulating a fixed tax the applicant is required to pay. The tax ranges from CHF400,000 to CHF1 million, depending on the canton and the applicant’s family income.

Among countries not part of the MCAA, the United Arab Emirates (UAE) or Singapore were the most popular destinations for Russians to park their capital (the survey was conducted prior to their accession to the agreement).

According to the survey findings, the wealthier HNWIs are, the more likely they are to transfer their capital to the United States, and less likely they are to transfer their capital to the UAE. However, the opposite is true among less wealthy HNWIs.

UHNWIs prefer using trusts while MA choose their relatives or friends as their “nominal capital owners”

Who are the nominees wealthy Russians use to transfer capital overseas? Relatives, friends and other loved ones are ones who most often end up as nominal capital owners. This opinion is shared by 55% of respondents.

According to Tranio, the richer account holders are, the more often they either engage specialised lawyers to act as their nominal capital owners or use trusts to store their assets..

The less wealthy HNWIs, in turn, are more likely to nominate their relatives, friends and insurance companies as their nominal capital owners. /p>

As wealthier individuals have significantly larger capital at risk, they are less likely to use their associates to be their nominal capital owners. Otherwise the tax authorities will easily trace their relations and identify the ultimate beneficiary. Trusts and law firms offer other ways to protect their confidentiality. However, this is an additional expense, which is another reason why they are not as popular among less wealthy Russians.

“Assets transferred into so-called unincorporated companies such as trusts may be more beneficial if they are properly structured. This method is used mainly by HNWIs, largely because it is very expensive to establish and maintain such vehicles," Tranio lawyer Ekaterina Shabalina explained.

Wealthy Russians convert Controlled Foreign Corporations (CFCs) into entities that are free from formal control criteria

According to the Controlled Foreign Corporation (CFC) law effective January 1, 2015, tax residents of the Russian Federation are obliged to declare business they have overseas and, in some cases, to pay income tax on them. According to the respondents, less than half of Russian CFC owners report their companies to Russian tax authorities.

According to the results of the survey, the richer HNWIs are, the more often they prefer to convert their CFCs into entities free from formal control, and vice versa.

"If an individual has less than 25% ownership in a CFC (or less than 10% if there are other owners who are Russian tax residents), then it is not necessary to report the company in Russia. Therefore, “transfer of a company's shares in whole or in part in the name of a nominal owner” is a popular answer among respondents of the survey. However, in this case, an owner formally loses his or her ability to manage the business, and the income can only be claimed out of the owner’s small share", Ms Shabalina said.

As a whole, Russian investors are becoming more experienced. This is a response to the global market environment and changes in the legislation of the Russian Federation. Keeping funds in the United States and Europe is becoming more complicated – compliance in the banking sector is getting tougher and investors are finding it increasingly difficult to prove the legality of the source of their funds. In addition, various legislative instruments – in particular, the Controlled Foreign Corporation (CFC) law –is making tax optimisation more expensive. More customers are thinking about a proper structuring of transactions involving foreign real estate and ways to reduce their tax burden legally.

George Kachmazov George Kachmazov Founder and Managing Partner

Tranio editorial staff

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