Automatic Taxpayers Data Exchange: Problems & Solutions

Recently, I read a new issue of a weekly magazine The Economist, which had an article on assets hidden in offshore accounts. The material claimed that most of the money in offshore accounts are hidden by Russians.

Automatic Taxpayers Data Exchange: Problems & Solutions

The History & Development of the Implementation of Automatic Exchange on Taxpayers

The global financial crisis has led to a deficit in the budgets of developed countries. And, as a consequence, the unrelenting need to replenish national treasure at seeingly any cost. In connection to this, the fight against tax evasion and subsequent aggressive tax planning has come first.

The US succeeded in this business: taking FATCA for example: a regulator whose main requirement is to provide information on passive income (such as dividends, royalties and percentages) for all individuals who are somehow connected with the United States.

The stake was placed on financial institutions: under the threat of disconnection from payments in US dollars, they had to report all "tax" offenders respectively. For some time now, the OECD has followed the same strategy. As a result, the first exchange of data on US taxpayers took place.

It should be noted that almost all countries plan to join the automatic exchange of data on taxpayers. The states that have not joined the global project will subsequently be disconnected from the global financial system.

For today, there are two options for sharing data on taxpayers:

  1. Bilateral (two countries stipulate all the details of the exchange).
  2. Multilateral (supported by OECD; more than 100 states have joined this type of agreement at the moment).

Types & method of information transferal on taxpayers

Responsible for collecting information on taxpayers from third countries are financial institutions (banks, insurance and investment companies, etc.).

The data is only transferred to those countries that signed the Agreement on automatic information exchange.

In order to collect information on taxpayers, banks must do the following:

  1. Make a request to the country of an individual's tax residency.
  2. Transfer the received information about the taxpayer to the country where this person will be a taxpayer.

Data accountable for automatic information exchange:

  1. The country transmitting the data.
  2. The country receiving the data.
  3. Taxpayer's data includung:
    1. Tax Identification Number.
    2. Last name, first name and patronymic name.
    3. Adress.
    4. Nationality.
    5. Information about the place and date of birth.
    6. Country of residence (there may be several and consequently the report is being prepared for several countries).
    7. Data on the bank or investment account:
      1. Balance sheet.
      2. Payments and types of payments (dividends, interest, royalties, etc.) indicating the currency of payment.

Data will be transferred both on personal and on corporate bank and investment accounts.

What the Automatic Tax Information Exchange Poses for Russians

Unpleasant surprises await those who diligently have hidden money and assets in offshore locations. Today, the Russian tax agency cannot cope with such an array of data, especially since information is often filed in foreign languages, primarily in English.

To insure yourself against any unpleasant surprises from tax specialists, it is worthwhile considering disclosing all financial information until the Russian tax service receives all the data about the taxpayer from foreign sources. Otherwise you could face large fines and penalties.

Alternatively, you may live in Cyprus just for 60 days a year and you'll become a tax resident of the Republic of Cyprus, a country that is a popular low-tax jurisdiction.

Tax Residency

According to the OECD concept, which most countries adhere to, an individual automatically becomes a tax resident in the country where he resided for more than 183 days a year.

Today, entrepreneurs often have to visit foreign countries on business matters, so not everyone has the opportunity to stay in one country for more than 183 days. In this case, the rule determining the centre of vital interests is applied. One example is the place where the family lives, children go to school, receive higher education, etc.

Currency of Residence

There is one more point that Russians need to consider when storing assets in the currency of another state.

In addition to the Controlled Foreign Corporation Law (CEC), the management of foreign income is carried out in accordance with Russian legislation on currency residence. According to this, every Russian should report on his available foreign bank accounts and attach statements with an official translation into Russian. Inspite of the actual location of the taxpayer, any legal violation is punished accordingly.

What Cyprus Offers as a Solution to the Automatic Exchange of Financial Information on Taxpayers

After the banking crisis of 2013, Cyprus losts its former attractiveness, and this is the reason why the island authorities developed strategies for returning Russian business to the Republic.

After the adoption of the Law on CEC in Cyprus, small business has become more active. As a result, prices for house and office renting in Limassol began to grow. After the implementation of a program to obtain Cypriot passports in exchange for investment the boom in the real estate market arose.

The so-called visa F has made its contribution to the development of the real estate market on the island. It allows to obtain a permanent residence permit in Cyprus without the right to work. In 2016, the government of Cyprus introduced new legislation, according to which it is enough to stay in Cyprus for only 60 days, where you can get a certificate of a tax residency in Cyprus.

In addition, Cypriot legislation introduced the concept of domicile for Cyprus tax residents. Now, passive income in the form of dividends and interest on loans is not subject to a special defense tax in the case when an individual has lived in Cyprus for less than 17 years out of the "prescribed" 20, starting from the moment a third-country citizen becomes a resident of Cyprus. This means that all passive income in Cyprus is not subject to taxation.

In order to attract higher-level specialists whose monthly salary would be much higher than the "standard" for Cyprus, the island's government decided to cut the income tax by half, provided that the annual salary of the resident is 100,000 euros or more.

Status of the Cyprus Tax Resident

All coins have two sides, so being a tax resident in Cyprus has both positive and negative aspects. They must be taken into account when deciding whether to obtain a tax residency on the island.

Advantages of acquiring Cyprus tax residency status:

  1. The automatic exchange of taxpayer data is carried out between Cyprus and the country (or countries) where an individual has an open bank account.
  2. If an individual is not a domicile in Cyprus, then his passive income in the form of dividends and interest on loans is not subject to defense tax.
  3. Cyprus abolished capital gains tax, excluding tax on income from real estate transactions. The profit from operations with real estate objects located outside Cyprus is not subject to taxation in Cyprus.
  4. The profit received from operations with securities is not taxed in Cyprus.
  5. In Cyprus, there is no tax at the source, with the exception of a small number of cases when it is levied in Cyprus.

The disadvantages of acquiring the status of a tax resident in Cyprus:

  1. There is an obligation to prepare and file an annual tax return.
  2. The income of individuals who are tax residents of Cyprus are subject to taxation in Cyprus, regardless of the place where they were received. Therefore, the profit received outside Cyprus must be declared, and then all taxes must be paid from it in Cyprus .
  3. One of the drawbacks of the tax residency in Cyprus is a progressive scale of taxation in this country.

Solution for Residents of Third Countries

The solution for third-country nationals is quite simple - to become a tax resident in Cyprus.

There are two ways of acquiring Cyprus residency:

  1. Live in Cyprus for more than 183 days a year.
  2. It is possible to obtain the status of a tax resident of Cyprus while staying on the island for at least 60 days for one year.

Obtaining tax resident status via the 60-day rule

No matter how good Cyprus is, not everyone has the opportunity to live in Cyprus for more than 183 days in a row. For those wishing to obtain the status of a tax resident of Cyprus, the option of staying in the country for at least 60 days a year is envisaged.

To obtain the status of a tax resident in Cyprus by a 60-day rule, a third-country national needs to take the following actions:

  1. Formal employment in a Cypriot company.
  2. Register a company and after that  make contributions to social insurance monthly.
  3. In the case of a lack of EU citizenship - to obtain a work permit, and in the case of having citizenship on the territory of the European Union - to issue a document confirming the right of residence in Cyprus.
  4. Employ a foreign worker with payment of all social contributions to the budget of Cyprus.
  5. A foreign employee must rent or buy property in Cyprus and provide the tax service with a rent or purchase of immovable property.
  6. Cyprus tax office reserves the right to check whether the applicant lives at the address indicated, and also check the meters for water and electricity.
  7. Fill in the form TD 126-2017.

After the conditions above are fulfilled, the non-resident of Cyprus has to solve the last problem - to decide whether to rent or buy the property in Cyprus. In order to get an answer to this question, it is necessary to compare benefits and costs, as well as to take into account some risks, such as the fact that the status of a tax resident may not be given at all or withdrawn after a short time.

It should be understood that rent is a temporary solution. Buying property is already an investment. The choice of how to obtain the status of a tax resident in Cyprus directly depends on the amount of money a person has and the subsequent benefits for a particular individual.

It should be noted that an individual can have the status of tax resident in one country only.

What to Choose: Buying or Leasing a House

Rent: pros & cons

Pros of rent:

  1. Low renting price - from 500 euros per month.
  2. Termination of a lease contract is possible at any time (the maximum loss is the amount of the deposit).

Cons of rent:

  1. In the case of a small rent, Cyprus tax office can refuse to accept such a contract and, accordingly, refuse to issue a certificate of a tax residency in Cyprus.
  2. When renting housing in Cyprus, it is impossible to transfer utility bills to your name.
  3. If you do not sublet such an apartment, that can be prohibited by the lease, the consumption of water and electricity will be zero, and based on this, Cyprus tax office can refuse to issue a certificate of a tax residency of Cyprus.
  4. The cost of renting a house in Cyprus is constantly growing.

Property purchasing: pros & cons

Pros of property purchasing:

  1. You can immediately transfer utility bills to your name.
  2. The possibility of renting a property out, which ensures the fact of "living" in an apartment or house (this is necessary to obtain a certificate of a tax resident of Cyprus).
  3. Additional income in the form of rental payments (when renting a property out).
  4. The use of housing in Cyprus for your own needs.
  5. Relatively low cost of property in Cyprus (from 35,000 euros).
  6. You can get mortgage at 6% per annum when buying housing in Cyprus on condition of a down payment of 40% of the property's value.

Cons of property purchasing:

  1. Availability of free capital for the purchase of the property in Cyprus.
  2. Costs related to the maintenance of housing (utility bills, repairment, etc.).

How the Cyprus office at Eltoma Corporate Services Can Assist

  1. Register a company in Cyprus, open a current account with a Cypriot bank.
  2. To issue a work permit (the so-called pink slip for non-EU residents and yellow slip for residents).
  3. To register the company and the employee with social funds for the organisation of deductions.
  4. Provide accounting support and audit of the company, make budget contribution.
  5. File and submit tax reports for the company (employee).
  6. To obtain a certificate of a tax resident, the form TD 126-2017 should be filled out and submitted to the tax office.
  7. Help in finding property for renting or buying in Cyprus.
  8. To carry out legal support for the acquisition of Cyprus real estate.
  9. Get a mortgage to buy real estate in the Republic of Cyprus.
  10. Undertake other troubles regarding the Cyprus real estate.