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Sale of Russian Real Estate by US Residents | International Tax Lawyer

Sale of Russian Real Estate by US permanent residents was the subject of a recent guidance letter from the Russian Ministry of Finance (“MOF”). Guidance Letter 03-04-05/66382 (dated October 11, 2011, but released only earlier this week) provides a thorough analysis of questions concerning the sale of real estate in Russia by a US resident and, eventually, comes to conclusion such a sale should be subject to a 30% tax rate. Let’s explore this recent MOF analysis in more detail.

Sale of Russian Real Estate: What is MOF Guidance Letter?

The closest US equivalent to the Russian MOF Guidance Letter is the IRS Private Letter Ruling (“PLR”). Similarly to PLR, the MOF Guidance Letters usually address a fairly specific situation and, generally, have a suggestive rather than normative value. A Guidance Letter does not have a precedential value (again similar to PLR). Nevertheless, the MOF Guidance Letters are good indicators of how the MOF would view similar situations and have a very strong persuasive value.

Sale of Russian Real Estate: Fact Pattern Addressed by Guidance Letter 03-04-05/66382

Guidance Letter 03-04-05/66382 specifically addresses a situation where an individual is a Russian citizen who has resided in the United States since 1996. It is not clear whether the individual actually received his green card in 1996 or he simply commenced to reside in the United States on a permanent basis in 1996. This individual wishes to dispose of (or already sold) a real property in Russia.

Sale of Russian Real Estate: Is the Sale Done by a Russian Taxpayer Who Is Subject to Russian Taxation?

The MOF begins its analysis by establishing that, in accordance with Section 1 of Article 207 of the Russian Tax Code (“Tax Code”), individuals who receive Russian-source income are Russian taxpayers for the purposes of the Russian income tax irrespective of whether they are Russian tax residents or not. Since Article 208, Section 1(5) states that income earned from the sale of Russian real estate is considered to be Russian-source income, an individual selling Russian real estate is considered to be a Russian taxpayer who is subject to Russian taxation.

Sale of Russian Real Estate: Is the Sale Done by a Russian tax resident?

The MOF then continued its analysis to determine whether, in the situation described in the Guidance Letter 03-04-05/66382, the individual is a Russian tax resident. I believe that this was the key reason why the individual in question requested the MOF Guidance letter: he was hoping that he would be found a Russian tax resident under the Russia-US tax treaty due to the fact that he had real estate in Russia (and, hence, subject to lower tax on the proceeds from sale).

The MOF analysis involved two steps: the determination of tax residency under the tax treaty between the United States and the Russian Federation (because the individual in question has resided permanently in the United States since 1996) and, then, the determination of tax residency under the domestic Russian tax laws.

First, the MOF stated that, pursuant to paragraph 1 of Article 4 of the Russia-US Tax Treaty, a person should be recognized as a permanent resident of a contracting state in accordance with the provisions of the national law of that state. In other words, the determination of who is a tax resident of the Russian Federation should be done under the Russian domestic tax law.

Here, the MOF also addressed the critical part of this Guidance Letter – does the ownership of Russian real estate matter for the purposes of establishing the Russian tax residency under the Treaty. The MOF determined that the factor of ownership of real estate matters only in cases where the owner of real estate is recognized as a resident of both contracting states in accordance with the national legislation of both, the United States and Russia. This is the most important part of the MOR Guidance Letter 03-04-05/66382.

Having made this determination, the MOF went into the second half of its analysis – who is considered to be a Russian tax resident under the Russian laws. According to Section 2 of Article 207 of the Tax Code, individuals are considered Russian tax residents if they are physically present in Russia for at least 183 calendar days within a period of 12 consecutive months. Since the individual in question did not satisfy the residency requirement of Article 207, the MOF determined that he was not a tax resident of the Russian Federation.

Sale of Russian Real Estate: Can Russia Tax the Proceeds from the Sale under the Russia-US Tax Treaty?

Having determined that the owner of the Russian Real Estate was not a Russian tax resident, the next issue was whether Russia can still tax the proceeds from the sale. The MOF stated that, under paragraph 3 of Article 19 of the Treaty, the gains from the sales of real estate located in one contracting state received by a permanent resident of the other contracting state can be taxed in accordance with the domestic tax legislation of the state where the property is located. Hence, Russia can tax the sale of Russian Real Estate made by a US permanent resident.

As a side note, Russia can also tax a disposition of shares or other rights of participation in the profits of a company in which Russian real estate makes up at least 50 percent of the assets.

Sale of Russian Real Estate: What is the Applicable Tax Rate?

The final point addressed by the MOF was the applicable tax rate for the sale of Russian real estate by a US permanent resident and a nonresident of Russia. Pursuant to Section 3 of Article 224 of the Tax Code, the MOF decided that tax rate in this situation should be 30 percent.

Contact Sherayzen Law Office for Professional International Tax Help

If you are looking for a professional advice concerning US international tax law, contact Sherayzen Law Office. Our legal team, headed by attorney Eugene Sherayzen, is highly experienced in US international tax law, including international tax compliance filing requirements, international tax planning and offshore voluntary disclosures.

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Offshore Accounts Tax Lawyer: Delinquent FBAR Submission

If there is anything familiar left of the old offshore voluntary disclosure landscape for an Offshore Accounts Tax Lawyer after the 2014 update to the IRS Offshore Voluntary Disclosure Program (“OVDP”),  it will be the submission of delinquent FBARs under the old FAQ 17. Of course, under the new 2014 OVDP, there is no FAQ 17.

However, an Offshore Accounts Tax Lawyer will find a very similar language under the new “Delinquent FBAR Submission Procedures”.

Offshore Accounts Tax Lawyer: Old 2012 OVDP FAQ 17

Under the old 2012 OVDP FAQ 17, an Offshore Accounts Tax Lawyer would advise his U.S. clients who reported and paid tax on all their taxable income for prior years but did not file FBARs that there would be no penalties for the failure to file the delinquent FBARs. The key to the application of Q&A 17 is that there should be no underreported tax liabilities (actually, no underreported income at all) by the taxpayer and the taxpayer was not previously contacted regarding an income tax examination or a request for delinquent returns.

Offshore Accounts Tax Lawyer: New 2014 OVDP Delinquent FBAR Submission Procedure

The 2014 OVDP rules offer to an Offshore Accounts Tax Lawyer fairly similar language. They state that, where neither Streamlined Filing Compliance Procedures nor the OVDP rules are applicable because the taxpayer does not need to file delinquent or amended tax returns to report and pay additional tax, the IRS is not likely to impose penalties as long as three conditions are met:

1. The taxpayer has not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1);

2. The taxpayer is not under a civil examination or a criminal investigation by the IRS; and

3. The taxpayer has not already been contacted by the IRS about the delinquent FBARs.

In such case, an Offshore Accounts Tax Lawyer should advise his clients to file the delinquent FBARs according to the FBAR instructions and include a statement explaining why the FBARs are filed late. All FBARs are required to be filed electronically at FinCen (contact an Offshore Accounts Tax Lawyer for more details).

If all of these conditions are met and the taxpayer voluntary files the FBARs with an explanatory statement, the IRS promises not to impose FBAR penalties. However, an Offshore Accounts Tax Lawyer should point out to his clients that, while the FBARs will not be automatically subject to audit, there is always a possibility that these FBARs may be selected for audit through the existing audit selection processes that are in place for any tax or information return.

Offshore Accounts Tax Lawyer: Issue of Streamlined vs. Delinquent FBAR Procedure

An interesting issue arises for an Offshore Accounts Tax Lawyer where the client closed his accounts four years ago (for example, in 2010) but still would have additional tax liability for the two years prior to that for year period (in this example, 2008 and 2009). Should an Offshore Accounts Tax Lawyer advise his client to enter the Streamlined Option at this point even though the amended tax returns would show no additional tax liability for the past three years?

In reality, situations are rarely as clear cut as this example and the legal determinations with respect to the path of your voluntary disclosure must be discussed with an experienced Offshore Account Tax Lawyer, at the international tax law firm of Sherayzen Law Office.

Contact Sherayzen Law Office for Help With Your Delinquent FBARs

If you have undisclosed foreign accounts, contact Sherayzen Law Office for professional legal help. Our experienced international tax law firm specializes in Offshore Voluntary discloses and we can provide our expert opinion with respect to every offshore voluntary disclosure option open in your case.

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