We are talking about the Common Reporting Standard (CRS), that is a common information exchange standard developed by the OECD (Organisation for Economic Co-operation and Development) to prevent tax evasion. The matter of Ukraine’s accession to the CRS was not on the agenda, in fact, only the date from which the Ukrainian tax authorities will get automatic access to information on balances in foreign accounts of the Ukrainians remained intriguing. The date in the Cabinet of Ministers was announced this spring: the data will be available to Ukrainian tax authorities in 2020, i.e. by the end of 2019. There is still no legal justification, but in Ukraine, such decisions are made at the legislative level rather promptly as a matter of fact. There is still some time for reflection (and action), but to understand what will happen in the next year we should tell in detail about CRS and its predecessors.
How it has been working in the world
The United States was a pioneer in the fight against tax evasion. Foreign Account Tax Compliance Act (FATCA) is a law that was adopted in the United States in 2010 to ensure control over the financial assets of all persons who have nationality or residency in the USA. Actually, the United States – as well as many other countries — use a residence principle of taxation. This means that as a US resident you have to pay in the country taxes on all your world income. How to trace where there are accounts or shares? For us, Ukrainians, it is obvious because we can’t take a step without the National Bank: if you want to open an account in Switzerland – get a license, if you want to buy a house in Spain – get a license, if you want to establish a company in the Baltic States – get a license… Your every step is controlled by NBU. Americans, as free people, may go to Europe without any visas, to open their businesses, and buy their villas, and keep their money on Swiss bank accounts. ‘It is unfair!’, the US government thought and came up with FATCA. Now the US have their level of pressure over European banks: you do not provide information – get a fine, you don’t pay a fine – we disconnect you from SWIFT. Everything is legal, and European banks have to pay fines, gradually implementing FATCA: UBS has paid 20 million francs, Julius Baer – $500 million, Credit Suisse – $90 million. As a result, they were obligated to carry out additional revision of their customers and to report to US tax authorities. At every opportunity the bankers file a ton of papers to fill in – whether you are a US person, whether you have business in the United States, and perhaps your wife has a GreenCard? The G20 leaders observed the US experience and decided to introduce FATCA for the Europeans. Consequently, Common Reporting Standard or CRS has come to life. And considering the fact that in Europe offshores are almost gone (Cyprus is not offshore anymore), they decided to oblige all the countries in the world to exchange information. They invented their own rules, different from U.S. rules, signed the Agreements on automatic exchange of information and they are ready to receive data. Realizing the fact that they do not have U.S. power in information technology, to begin they established a reporting threshold under CRS as 250 thousand Euros on the account – and only for passive companies as of the end of 2016. But the appetite grew, and presently the minimum threshold does not exist for all accounts — both of natural persons, and active/passive companies, which were established after 2016 — there is no minimum threshold anymore. The information on the accounts of active companies is submitted to the country of a company’s tax residency, in respect of passive companies and natural persons’ accounts — to the country of tax residency of the beneficiary. Now Europe has its own questions: in which country do you have your business, what residency, how will you report under CRS? Taxes should be paid where the income is received. Enough, they say, to engage in treaty shopping and look for blind-spots in the legislation of various countries. Well, it does not matter that the economy of some of them actually survives on the offshore consulting only, if the Treasury of high tax rate top jurisdictions grows smaller due to this.
Now it is clear that our country began to prepare for this event in 2016. After all, it is foolish to introduce automatic exchange in a country with hard currency regulation in respect of opening accounts and acquisition of assets abroad – it all requires a special permit, the license of the National Bank of Ukraine… So we grew suspicious when the National Bank allowed to invest in foreign assets without obtaining a license, if the transaction on assets acquisition was carried out in Ukraine, and in local currency. Further, the regulator allowed to receive foreign income on the foreign accounts of Ukrainian citizens, to invest the resulting income, and most importantly, to do it without additional permits and licenses. Further, in July of this year a new, rather liberal law on currency, was adopted. All of these actions were presented as ‘a package of reforms for liberalization of the currency legislation’. But in reality, the regulator rather warned: get ready for the exchange of information, declare your accounts and assets. And many began to prepare carefully. European bankers started preparation as well – because they had an obligation to collect information about the real owners of the accounts. As part of annual compliance procedures, among other documents, the banks began to request information about the country of tax residence of the beneficiary and his tax number. After all, the tax number of the beneficiary is the “key” in the transmission of information to tax authorities of a particular country. Realizing this, the businessmen and their legal advisers started to ponder about possible options to avoid the transmission of information.
What can be done
For example, you can obtain the passport of the citizen of Israel and forget about taxes for the next 10 years. According to the Israeli Law of Return, the right to return to your historical homeland and become a citizen of Israel applies to close relatives of immigrants – spouses, children, and grandchildren. Thus, according to Article 14 of the Income Tax Ordinance, a new immigrant for 10 years in Israel has the right to be exempt from paying taxes on any income derived from abroad, both active and passive, from dividends to real estate. If your family tree is far from Jewish roots, you may find a solution in the form of citizenship by investment. One of the most common ways is to keep money in a country that has not acceded to the exchange of information under the CRS. As of the beginning of July 2018, these European countries did not sign a bilateral Convention on automatic exchange of information — Serbia, Macedonia, Albania, Moldova, Ukraine, Belarus – therefore, the exchange of information is not possible in fact. At this point, by the way, it should be clarified that the USA did not join the Standards at all. This country that knows everything about their taxpayers-residents thanks to FATCA is not going to provide information about owners of accounts held in American banks. At least for now – and this explains the popularity of opening accounts in the USA lately. Another option is obtaining a tax residency status in the country you keep your savings in – even if it has joined CRS. It’s convenient: for example, a significant part of savings is traditionally localized in Switzerland, while you have your main operating business in the countries of the former Soviet Union. And rare businessman will be ready to move to permanent residence in Switzerland, leaving unattended his operating companies. But you may send your heirs to receive an education in Switzerland, having appointed them your beneficiaries and having registered your property in a trust (under your protectorate). There is a third option – to become a tax resident of the country, which provides full or partial exemption from taxation. In view of this, the economic programs ‘citizenship by investments’ have become quite popular, they have been actively offering small island states interested in developing their economy. In any of these cases, it is worth taking into account that when considering the application for obtaining permanent residency or economic citizenship not only your purse’s volume and your absence in Interpol list should be considered. It is important to confirm that the funds for investment were obtained in an absolutely lawful way. And that nobody, including tax authorities, claims them because nobody wants to get involved in litigation with tax authorities in other countries. But in exchange, the applicant often receives not only the right to reside in the country without any time restrictions but also the right to be considered a tax resident of that country. This means that the actual citizen of country X can be considered by a tax resident of country Y for the purpose of exchanging information under the CRS.
- A passive company is a legal entity, which assets consist mainly of passive income (dividends, interest, royalties). Such companies are often used for the purpose of unfair tax planning. Only those companies are not deemed passive, which shares are traded on the stock exchange (publicly traded).
- The beneficiary (the controlling entity) is a natural person directly or indirectly controlling the company by 25 percent or more.
- Trusts, foundations, partnerships and other similar structures, which were previously widely used to conceal the beneficiaries and tax optimization, also fall under the CRS – they are all for the purpose of exchanging information are covered by the concept of an entity (company).
- Information is the data of an account holder (name, address, tax number), account details, account balance, total amounts credited to the interest, dividends, royalties, income from financial assets’ sale. That is, all the information transfers, which can help to reveal the facts of building unfair tax schemes.
What kind of information is this, and how it will be collected and sent under CRS
|What falls under the automatic exchange||Where does the information go?|
|Accounts of natural persons and active companies, which are the residents of another country participating in the CRS.||In the country of tax residency of an account holder.||It is possible that the information may be transferred in several countries. For example, in the case of an account of a passive foreign company, which beneficiaries are also foreigners, the information will be also sent at the place of tax registration of the company, and at the place of tax registration of beneficiaries (subject to the countries are CRS participants).|
|Accounts of passive companies (irrespective of their tax residence), which beneficiaries are residents of a country under CRS.||In the country of tax residency of the beneficiary.|
Lana Golyan, Juscutum JSC’s International Business Administration Practice Partner