Liberalising currency laws: yet more do’s and less dont’s
Liberalising currency laws
On 2 August 2016, Federal Law No. 265-FZ on Making Amendments to the Federal Law on Currency Regulation and Currency Control (hereinafter, the “Law”) was adopted to reduce restrictions on currency transactions by residents of the Russian Federation using accounts (deposits) opened with banks located outside the Russian Federation, and to encourage the repatriation of cash funds.
The Law shall take effect on 1 January 2020, except for certain provisions to be examined separately.
More opportunities for Russian residents to use foreign accounts and perform currency transactions with residents
Foreign account redefined
From 1 January 2020, “foreign account” will cover accounts held by Russian residents with Foreign Banks and also accounts held by them with foreign financial market entities that can raise cash funds and financial assets for Russian residents but pursuant to the laws of the entities’ jurisdiction. These accounts fall under the provisions of Article 12 of the Currency Regulation Law; in particular, residents have a duty to notify the tax authorities that such accounts have been opened, and also of transactions made using their foreign accounts and movements of cash funds therein, including accounts held with participants in the securities market (such as brokers, depositories, etc.).
Permitted currency transactions between residents
The Law follows the trend of softening currency limitations for that special category of resident whose duration of stay outside of the Russian Federation during a calendar year exceeds 183 days (“special residents”). For example, the Law allows normal residents to make cashless transfers of foreign currency from their accounts with Russian banks to the foreign accounts of these special residents, doing the business as unincorporated bodies (under the law of their country of stay) for goods or intellectual property transferred, works performed or services rendered.
More grounds for crediting money to foreign accounts for resident individuals
From 01.01.2020, resident individuals may credit to their foreign accounts opened with banks located on the territory of FATF or OECD member states any amounts obtained from non-residents:
- as income from selling external securities listed on a Russian stock exchange or foreign stock exchange that meets the criteria approved by the Bank of Russia1;
- as income from placing cash funds and securities into trust with a non-resident or into a cash fund refunded by a non-resident trustee; and
- irrespective of the grounds and forms of payment – provided that the foreign state in which the bank is located participates in the automatic exchange of financial information with the Russian Federation under the Multilateral Agreement on Automatic Exchange of Financial Information dated 29.10.2014, or any other suitable international treaty2.
Resident individuals are allowed to credit to accounts held with banks in any foreign state any cash funds obtained from non-residents as income from selling precious metals paid for under the law of a foreign state, thus avoiding accounts with the competent banks.
Free from obligation to report cash movements in foreign accounts
Resident individuals will be released from the duty to submit regular reports on cash movements in foreign accounts to the tax authorities, provided that the following parameters are met in their entirety:
- the foreign account is opened with a foreign financial entity located in a FATF or OECD member state participating in the automatic exchange of financial information with the Russian Federation; and
- the total amount of cash funds credited to the foreign account does not exceed RUB 600,000 or its equivalent in a foreign currency, or the cash balance in the foreign account to which amounts were credited in the reporting year does not exceed RUB 600,000 or its equivalent in a foreign currency3.
Weakened repatriation requirements
The Law significantly eases the regulatory burden on residents that insists that settlements in foreign trade contracts with non-residents must be made in Russian rubles. The amended Law abolishes the requirement that cash funds be repatriated as part of foreign trade contracts – in which the amount of liabilities is denominated, and settlements with non-residents are effected, in rubles.
From 01.01.2020, exporters of non-resource goods4, as well as residents performing works, rendering services or transferring intellectual property to non-residents under foreign trade contracts, will cease to be required to repatriate the entire amount of cash funds in rubles under foreign trade contracts.
For Russian residents exporting resources (ores, minerals, oil, gas, precious metals, etc.)5, the repatriation duty shall be abolished on a phased basis:
|Timing||Maximum % of the contract value exempt from repatriation|
In addition to the above amendments, the Law supplements Article 24 of the Currency Regulation Law, obliging residents to secure proper performance or termination of their obligations under foreign trade contracts in any way permitted by Russian law (except for obtaining cash funds from non-residents into accounts held with relevant banks).
In particular, residents may, within the permitted quota, obtain cash funds in their foreign accounts or settle indebtedness under a foreign trade contract via use of a set-off, novation or break-up fee.
Conclusions and practical implications
Over recent years, currency laws have slowly changed, but enough to keep up with the intensity of modern trade transactions and cash settlements.
On the one hand, some amendments under review are softening the regime governing the use of foreign accounts and lifting direct administrative barriers for transactions therein. To a certain degree, this is facilitated by the automatic exchange of financial information, enabling tax authorities to exercise indirect control over the foreign accounts of residents.
On the other hand, the Law is a much-needed revolution, as it abolishes outdated repatriation provisions. By supporting the national currency, lawmakers are basically giving exporters a reasonable business choice between shifting currency fluctuation risks to non-residents (by obliging them to make contractual settlements in rubles) or continuing to bear repatriation duty if exports are paid in a foreign currency.
It is important to note that, apart from foreign trade contracts, liberalisation does not affect loan agreements concerning the financing of non-residents. Under these agreements, residents secure the refund of cash funds to their accounts with respective banks, irrespective of the contractual currency or the currency of contractual settlement.
The Law does not contain any retroactive effect clauses and applies to all foreign trade contracts providing for the Russian ruble to be the debt and payment currency. However, the implications of changing the debt and payment currency in current contracts with non-residents denominated in a foreign currency has not been dealt with in the Law.
Particular attention must be given to the role of banks as agents of currency control, along with improving currency control rules in the light of the amendments laid down by the Law. It is highly probable that the Law will be followed by the introduction of relevant adjustments to the Instruction of the Bank of Russia dated 16.08.2017 No. 181-I.
KPMG’s legal team will be happy to give detailed answers to any questions of interest that you may have in connection with these amendments and their law-enforcement effect. Please do not hesitate to contact us.
1 Hereinafter the “Currency Regulation Law”
2 Hereinafter “Foreign Banks”.
3 The list of foreign stock exchanges was approved by Instruction of the Bank of Russia dated 28.01.2016 No. 3949-U
4 The list of such foreign states will be published on the official website of the Federal Tax Service of Russia. The current list was approved by Order of the Federal Tax Service of Russia dated 04.12.2018 No. MMV-7-17/784@.
5 The amount in a foreign currency is converted into Russian rubles at the exchange rate of the Central Bank of the Russian Federation as at 31 December of the reporting year.
6 Except for the goods with codes 4401 - 4403 99 000 9 of the Harmonized Commodity Description and Coding System of the Eurasian Economic Union.
7 A complete list of codes of the Harmonized Commodity Description and Coding System of the Eurasian Economic Union for resource goods subject to a phased abolishment of repatriation is available at: http://publication.pravo.gov.ru/Document/View/0001201908020034
© 2021 KPMG. KPMG refers to JSC “KPMG”, “KPMG Tax and Advisory” LLC, companies incorporated under the laws of the Russian Federation, and KPMG Limited, a company incorporated under the Companies (Guernsey) Law, 2008, member firms of the KPMG global organization of independent member firms. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.