Tax Law

Do you have a company or a bank account in the UAE? Be prepared to report it to the Russian tax authorities

ALPINE Tax has begun to receive increasing confirmation that the Russian tax authorities are starting to learn about controlled foreign companies (CFCs) owned by Russians in the UAE, as well as bank accounts opened with UAE banks.

If you have undeclared CFCs with bank accounts in countries that exchange financial information with Russia, this may be grounds for an audit.

The Federal Tax Service sends demands to remedy violations and asks taxpayers to submit notifications of participation in foreign companies and of CFCs if you have a business in the UAE. These requests are based on data obtained through international automatic exchange.

In such notifications, the tax authority indicates:

The account number of your foreign company;
The bank where it is opened;
The country where the bank is located;
The name and address of your company.

It is important to understand that although the UAE is not eager to participate in automatic exchange with Russia, information still reaches the Federal Tax Service if foreign company accounts are opened with banks in third countries participating in the exchange.

Alpine Tax’s view

Russian individuals who own companies and bank accounts in the UAE should not neglect their obligation to notify the Russian tax authorities of the existence of CFCs and bank accounts in the UAE. Sooner or later, the tax authority will learn about them, which may lead to negative consequences in the form of fines:

RUB 500,000 for each CFC for each year for failure to submit a CFC notification;
RUB 500,000 for each CFC for each year for failure to submit financial statements for the CFC;
From RUB 1,000 to RUB 5,000 for failure to submit a notice of account opening;
From RUB 2,000 to RUB 20,000 for failure to submit a report on movements of funds across foreign accounts;
From 20% to 40% of the amount of the unlawful currency transaction (if any).

We would also like to remind you that information on Russians may be obtained by the tax authorities not only directly from the UAE authorities, but also from third-party sources, which is still recognized by Russian courts as lawfully obtained information.

How can we help you in such a situation?

ALPINE Tax can assist CFC owners and holders of bank accounts in the UAE in the following ways:

1. Risk analysis and defense strategy:

We will check whether there is a risk of receiving demands from the tax authorities.
We will assess whether it is possible to avoid recognition of the company as a CFC.
We will prepare a strategy to minimize the consequences.

2. Preparing responses to tax authority requests:

We will help you respond properly to the inspectorate’s demands.
We will develop a legal position to avoid fines.

3. Advice on declaring CFCs and foreign accounts

We will explain when and how to file notifications, and we will prepare such notifications.
We will calculate taxes and help avoid double taxation.
We will advise whether benefits and exemptions can be applied.

4. Business structure optimization:

We will advise how to change the corporate structure to reduce risks.
We will help select a jurisdiction and bank that reduce the risks associated with automatic exchange.
We will calculate the tax consequences of moving a business structure or cash flows to another jurisdiction.

5. Representation before tax authorities and in court:

We will challenge the tax authority’s actions if the demands are unlawful.
We will prepare complaints, appeals, and statements of claim.
We will represent your interests in court if necessary.

The absence of a reference to individual entrepreneur status in the decision does not make the audit unlawful

A recent ruling by the Arbitration Court of the Far Eastern District in case No. A16-932/2024 (Sole Proprietor Yavits) confirmed that the absence of an explicit reference to an individual entrepreneur (IE) status in the decision to conduct an on-site tax audit is not grounds for declaring such an audit unlawful.

In this case, the tax authority ordered an on-site audit in respect of an IE, but the decision did not state that the audit concerned his status as an entrepreneur. The IE challenged the decision, arguing that the audit should concern only his tax obligations as an individual, since the decision did not specify that it related to him as an individual entrepreneur.

The tax authority, in turn, stated that the Tax Code of the Russian Federation does not require several separate decisions on conducting an on-site audit for a natural person registered as an IE and for an ordinary individual.

Under Order of the Federal Tax Service of Russia No. ММВ-7-2/628@ dated 07.11.2018, a single standard decision form applies, suitable both for IEs and for individuals not registered as entrepreneurs. Moreover, during on-site audits, the tax authorities may check not only taxes related to entrepreneurial activity, but also taxes that an IE must pay as an individual, including taxes related to personal activities.

The court sided with the tax authority, stating that the Tax Code of the Russian Federation and regulatory acts do not require a separate indication in the decision that the taxpayer is registered as an IE. The question of whether the audit concerns exclusively the entrepreneur’s tax obligations or also personal tax obligations does not affect the lawfulness of the audit.

Conclusion: tax authorities may conduct an on-site audit of an IE covering both entrepreneurial activity and taxes related to personal activity, even if the decision does not state that the audit concerns his IE status.

Alpine Tax’s view on this ruling

This case underscores the importance of taking all possible nuances into account when dealing with tax authorities. Although this ruling concerned a specific situation involving an IE, it is a reminder that circumstances can sometimes develop unexpectedly, and it is important to be prepared for an audit to go beyond what initially seems obvious.

In such circumstances, it is worth remembering that tax authorities have the ability to verify not only the issues expressly set out in the decision, but also other aspects that may be connected with the taxpayer’s activities. Therefore, the prudent approach is always to anticipate possible risks and “play it safe” by properly preparing all documents and carefully monitoring compliance with all tax obligations.

How can we help you in such a situation?

If your business finds itself in such a situation, it is important to understand how to minimize risks and prepare properly for the audit. We offer:

Risk assessment and strategic advice: We will thoroughly analyze your situation, assess the possible risks, and propose the optimal strategy to protect your interests.
Document preparation and objections: We will help prepare all necessary documents for the tax audit and draft well-formulated objections if disagreements arise with the tax authorities.
Full support during the audit process: Our specialists will represent your interests before the tax authorities, helping minimize fines and additional assessments.
Tax optimization: We will provide recommendations on tax optimization to help avoid similar situations in the future.

If funds are wrongfully debited from the unified tax account, the inspectorate must return them with interest

The tax authorities twice debited land tax and property tax from the taxpayer’s unified tax account (UTA), resulting in an over-collection of more than RUB 10 million.

As a result of a reconciliation of accounts, the double debit was identified, and the amounts wrongfully debited were returned to the taxpayer’s UTA.

The taxpayer demanded that the inspectorate pay interest, believing such unlawful debit to constitute excessive tax collection. However, the courts did not support this position, finding that the debit was made using funds voluntarily contributed by the taxpayer and did not constitute compulsory collection.

However, the Judicial Chamber for Economic Disputes of the Supreme Court of the Russian Federation pointed out the courts’ error in failing to take into account that funds forming a positive balance on the UTA remain the taxpayer’s property until they are debited in satisfaction of the relevant tax obligations, despite their designated purpose. Accordingly, an arbitrary downward adjustment of the positive UTA balance should be treated as excessive collection of funds. The taxpayer’s violated rights must be restored by paying interest on the over-collected amounts pursuant to Article 79 of the Tax Code of the Russian Federation.

The case has been remanded for reconsideration in order to determine the period of delay in returning the unlawfully debited funds and to verify the interest calculation.

Thus, the Supreme Court of the Russian Federation confirmed that an unlawful reduction of a positive UTA balance constitutes excessive tax collection, and in such cases the tax authorities are obliged to pay the taxpayer interest calculated in accordance with Article 79 of the Tax Code of the Russian Federation.

The full decision is available at the link.

Alpine Tax’s view on this ruling

This court ruling is an important precedent for taxpayers, as it confirms their right to protection against arbitrary actions by the tax authorities when debiting funds from the UTA. The court’s conclusions strengthen the position that if the tax authorities mistakenly reduce a positive UTA balance, this should be treated as excessive collection, even if the funds were initially contributed voluntarily. Accordingly, the taxpayer is entitled to interest for the unlawful use of its funds.

How can we help you in such a situation?

ALPINE Tax can help in such situations in the following ways:

Situation analysis – we will review the documents, check the correctness of debits from the UTA, and assess the validity of claims against the tax authorities.
Support during reconciliation of accounts – we will help properly prepare a request to the tax inspectorate to identify errors in the debits.
Recovery of unlawfully collected funds – we will prepare applications and demands to the tax authorities for the return of the funds and the accrual of interest.
Challenging the tax authority’s actions – if the inspectorate refuses to return the interest, we will help prepare a complaint to a higher tax authority or to court.
Litigation support – we will develop a defense strategy, prepare a statement of claim, and represent your interests in court, including on appeal and cassation.
Prevention of similar situations – we will help establish a system for monitoring settlements with tax authorities to avoid similar mistakes in the future.

In this situation, contacting ALPINE Tax will help not only recover the money, but also obtain fair compensation in the form of interest.

Tax consequences of redomiciliation of economically significant companies

Redomiciliation of foreign companies to Russia entails adverse tax consequences for private investors. This follows from a letter from the Bondholders Association (hereinafter, the ABA) sent to the Ministry of Finance, the Bank of Russia, and the Federal Assembly in connection with numerous appeals from investors in X5 Retail Group and Rusagro. The Retail Investors Association had previously addressed similar requests to the authorities.

As an example, the ABA cites X5 Retail Group, whose depositary receipts were converted into shares of the Russian PJSC Corporate Center X5, as well as Rusagro, whose redomiciliation procedure is still ongoing. Both organizations are included in the list of economically significant companies approved by the Government in March 2024.

The ABA points to the following consequences of forced redomiciliation:

1. the inability to count the period during which private investors held receipts of the foreign company before their conversion into shares of the Russian PJSC for purposes of the long-term holding benefit.

Under paragraph 1 of Article 219.1 of the Tax Code of the Russian Federation (the Tax Code), investors are entitled to a tax deduction equal to the positive financial result from the sale of securities, provided they have held them continuously for more than 3 years. The maximum amount of such deduction is RUB 3 million.

In accordance with Federal Law No. 470-FZ “On the Specifics of Regulating Corporate Relations in Business Companies That Are Economically Significant Organizations” dated 04.08.2023, continuity of the holding period for securities is preserved for corporate investors upon conversion. As for individual investors, the rule allowing the holding period of foreign company securities to be counted for purposes of the deduction does not apply to them. Such regulation places private investors in an unequal position compared with institutional investors and is contrary to the principles of equality of taxation and the prohibition on differentiating tax benefits based on the form of ownership (paragraphs 1 and 2 of Article 3 of the Tax Code).

2. payment of higher personal income tax on income from the sale of shares because the acquisition costs are taken into account only partially.

Under Article 214.1 of the Tax Code, the tax base for securities transactions is reduced by the amount of expenses incurred in acquiring such securities. However, in the case of shares in PJSC Corporate Center X5, only 57.6% of the investors’ initial costs are taken into account when calculating the tax base. The situation with Rusagro is worse, as only 10.94% of expenses are eligible for offset. This leads to an increase in the tax base and, accordingly, the amount of tax payable.

In this regard, the ABA proposes making the relevant amendments to Russian tax legislation.