The first case of imposing an administrative fine on a resident of the Russian Federation for receiving rental income abroad is still being discussed. The Russian tax authorities imposed a fine on a Russian resident in the amount of 30% of the income he received from renting out six commercial premises in Germany to a foreign account. The editorial board of Tranio has asked experts in the fields of international and tax law for comment on this practice. We asked experts to tell us what was the reason for the fine, how Russians register income from foreign real estate and does the country of its location affect reports to the tax service?
Alina Shinchuk is a senior legal consultant at Tranio with more than 15 years of experience in the field of international law.
Ksenia Pavlova is a partner in the tax practice of an international company with 15 years of experience in the Big Four companies.
Editorial office of Tranio: According to media reports, the fined landlord notified the Russian authorities about foreign accounts, regularly submitted cash flow reports and a 3-personal income tax declaration, where he indicated information about receiving rental payments. Why was this data insufficient?
Alina Shinchuk: All citizens of the Russian Federation are currency residents even if they have a residence permit or other citizenship and are obliged to comply with the requirements of the currency legislation of Russia. Starting from 2022, foreign currency residents The Russian Federation is prohibited from receiving income from the sale or lease of real estate to bank accounts in those countries with which there is no automatic data exchange. Such income must be transferred to accounts in a Russian or authorized bank (branches of Russian banks abroad).
Ksenia Pavlova: The law “On Currency Regulation and Currency Control” does provide for the possibility for resident individuals to accept funds from non-residents without restrictions on certain types of accounts in banks of countries where automatic exchange operates. According to the tax authority, at the same time, these provisions do not apply to the activities of individual entrepreneurs who profit from entrepreneurial activities.
The Agency emphasizes that the owners of commercial real estate abroad, renting it out, in fact, carry out entrepreneurial activities, since its purpose is to regularly make a profit. And from the point of view of currency control, individual entrepreneurs are considered as legal entities.
In accordance with the law on currency regulation, companies are required to conduct foreign exchange transactions through bank accounts in authorized (i.e. Russian) banks, except in cases expressly provided for by law, which do not include the receipt of rental income.
The current list of countries that do not exchange information with the Russian tax authorities is presented in the Order of the Federal Tax Service, which is systematically updated. As of January 12, 2024, 88 countries and 14 territories are included in the list.
Editorial office of Tranio: That is, a fine is imposed for the fact that the rental income has been credited to a foreign account?
Ksenia Pavlova: Responsibility is provided not for crediting to a foreign account, but for non-crediting to an account in the Russian Federation. If we turn to the wording from the legislation, it sounds like this: “For committing administrative offenses related to foreign exchange transactions, bypassing accounts in authorized banks.”
Alina Shinchuk: Yes, a fine of 20 to 40 percent of the amount received may be imposed for non-compliance with this requirement. Germany officially suspended the exchange of tax information with Russia and Belarus in April 2022. It is worth noting that the exchange of information with such countries and with countries that are not included in the list of countries that support the exchange of information can be carried out point-by-point, in manual mode. For example, information is exchanged with Georgia.
Editorial office of Tranio: Does the type of real estate rented by Russian residents play a role for the tax?
Alina Shinchuk: The tax authorities of the Russian Federation regard the following types of activities as commercial:
- renting out commercial real estate;
- buying any property for subsequent sale and/or renting it out before sale;
- purchase of residential real estate intended only for renting, and not combining your own living and renting (for example, service apartments with a permanent rental contract);
- renting out several residential properties;
- construction or purchase of real estate to generate income.
Commercial activity may also include the acquisition of land plots abroad, depending on their intended purpose. In this case, even in the absence of an individual entrepreneur registered in the territory, the activity of an individual will be regarded by the tax service as the activity of an individual entrepreneur on the basis of all the ensuing tax consequences and obligations.
Editorial office of Tranio: Do all these criteria apply only to tax residents of the Russian Federation?
Alina Shinchuk: In some cases, the attention of tax authorities may also be attracted by those who have lost the status of a tax resident of the Russian Federation: for example, if they have a registered In Russia, sole proprietors, as well as in the case when, before the loss of resident status, reports on the movement of funds and 3-personal income tax were submitted indicating the transfer of rent to a foreign account. For a non-resident who is not registered as Sole proprietor in the Russian Federation and receives income abroad, there are no consequences associated with the recognition of his sole proprietor.
Ksenia Pavlova: It is also worth considering that the statute of limitations for currency offenses is 2 years, in connection with which the tax authorities can return with questions for already completed periods.
Read also: How to report to the tax service about accounts abroad?
Editorial office of Tranio: What are the differences in the rental income of individuals and legal entities? Maybe it is worth registering foreign real estate for a legal entity?
Alina Shinchuk: Foreign real estate can be registered to a foreign legal entity owned by a resident of the Russian Federation. However, such a legal entity owned by a resident of the Russian Federation will be recognized as a CFC (Controlled foreign company), which means that its activities must be reported, corporate tax and personal income tax must be paid when distributing profits. At the same time, the income from renting or selling real estate becomes the income of a legal entity. A foreign sole proprietor for the tax service of the Russian Federation is recognized as a foreign organization, is not regarded as a CFC, which can also be a solution for renting commercial real estate abroad. Thus, there is no obligation to report on a foreign Sole proprietor as a CFC, but the requirement remains for notifications of foreign accounts and other forms of reporting by individuals who are residents of the Russian Federation.
The information discussed in the material is relevant at the time of publication of the article and is not an individual recommendation.
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