Legal tips: what Russian owners of foreign bank accounts should know about MCAA

In May 2016, Russia joined the OECD's Multilateral Competent Authority Agreement (MCAA).

What is the Agreement?

The MCAA compels banks, brokerages, investment bodies and insurance companies in signatory countries to provide local tax authorities with bank account information pertaining to non-residents. In turn, the local authorities pass on the data obtained to the tax authorities of the countries where the account holders are residents.

The agreement has over 100 signatory countries: European states, Canada, island countries (the BVI, St. Kitts & Nevis, the Bahamas, etc.), in addition to several Middle Eastern and Asian nations (e.g., the UAE, Saudi Arabia, India and China). The full list of participating countries is available on the OECD's website.

How will non-resident status be checked?

A non-resident is an individual who receives taxable income in one country but permanently resides in another one. Therefore, when opening an account, financial institutions would firstly request residential and mailing addresses, in addition to telephone (fax) numbers. If the bank has any doubts about the information provided, they may also check the IP address used to access online banking and the residency of the individual who has been assigned power of attorney for the account. Regular transfers of funds to another jurisdiction would, most probably, raise suspicion and, therefore, provide a basis for additional scrutiny.

What types of accounts does the Agreement concern?

The information passed on pertains to:

• the accounts of individuals who are tax residents in countries participating in the Agreement (referred to as "Reportable Persons");
• corporate accounts of companies, funds and trusts controlled by one or more Reportable Persons either directly or via a passive Non-Financial Entity (NFE). Such NFEs include all types of business entities, of which over 50% of income received derives from passive sources (real estate, dividends, royalties, etc).

Low-risk accounts, excluded from the list of those requiring review, are:

• retirement accounts;
• fixed-term life insurance accounts;
• escrow accounts;
• the accounts of legal entities, opened prior to the end of 2015 (2016 for “non-early adopters") whose balances do not exceed $250,000 as of 31^st December of the corresponding fiscal year (but both the state and the bank have to agree to the condition of not exchanging information on such accounts).

What information will tax authorities gain access to?

On each Reportable Account the information to be collected and passed on includes:

• information on the Controlling Person (name, date and place of birth, address, tax residency, Tax Identification Number (TIN));
• the account number (or functional equivalent in the absence of an account number);
• financial information (account currency, current balance, profits obtained from passive investment operations);
• information on the financial institution the account is opened with.

In this way, tax authorities will indirectly gain information on their residents´ foreign assets based on the account transaction data.

Where will the information be sent?

The information on the account of an active foreign company (whose income from passive sources does not exceed 50% of the total income) is only passed on to the state of its residency, whilst the information on the account of a passive company is passed on to both to the country of its residency and to the countries of which its beneficiaries are residents.

For instance, a company registered in the UK has an account with a bank in the BVI. The company's beneficiary is a Russian tax resident. If the company is considered active, its account information will be sent to the UK tax authorities only. If the bank has declared the company to be an NFE, both the UK and Russian tax authorities will receive its account information.

When will the Agreement come into effect?

The signatories of the Agreement are divided into two groups:

1. "early adopters" that commence the exchange of data in 2017 and provide information from 2016. They include most European countries: Cyprus, the UK, Spain, Germany, Estonia.
2. “non-early adopters” that commence the exchange in 2018 and provide 2017 data. This group includes Switzerland, the UAE, Singapore, Panama, a number of island states and Russia.

The Common Reporting Standard (CRS) was introduced in the EU as amendments were made to the EU Directive on Administrative Cooperation (DAC2). Non-EU countries need to sign special bilateral protocols with the other parties to the Agreement, make the necessary adjustments to their legislation and facilitate the technical conditions required for information to be passed on.

To date, over 1,800 agreements have been signed, mostly between the "early adopters". In July 2017 there will be another round of negotiations during which the question of concluding agreements with the rest of the jurisdictions, including Russia, will be raised.

Therefore, Russia´s joining of the CRS seems to be a sufficiently effective measure in the struggle against tax law violations. As such, we anticipate an increase in the number of those reporting their foreign accounts, especially once the sanctions against the violators take effect. In this new context of bank secrecy being eroded, we recommend structuring activities in full compliance with regulatory requirements.

Ekaterina Shabalina, Tranio lawyer

* 60 private bankers working with Russian HNWIs took part in the survey