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Russian Taxation of Gifts to Nonresidents: Recent Changes

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The Russian Ministry of Finance (“MOF”) recently issued Guidance Letter 03-04-06/64102 (dated October 31) regarding the taxation of gifts from Russian legal entities to nonresidents (i.e. the Russian taxation of gifts to nonresidents). This Letter will have a direct impact on the tax planning for Russians who are tax residents of the United States.

Russian Taxation of Gifts to Nonresidents: Russian-Source Gifts are Taxable

In the letter, the MOF stated that, under the Russian Tax Code Article 209, Section 2, the Russian-source income of individuals who are not tax residents of the Russian Federation is subject to the Russian income tax (the Russian tax residents are taxed on their worldwide income – i.e Russian-source and foreign-source income).

Furthermore, the MOF determined that gifts received by nonresidents from a Russian legal entity are considered to be Russian-source income. This means that these gifts are taxable beyond the exemption amount. According to Tax Code Article 217, section 28, the exemption amount is 4,000 Russian roubles per tax year. Hence, a gift from a Russian legal entity to a non-resident of Russia will be subject to the Russian individual income tax if it exceeds 4,000 rubles.

Russian Taxation of Gifts to Nonresidents: the Place of Gift Does Not Matter

It is important to emphasize that, in this situation, the sourcing of the gift is determined by the giftor – i.e. if the giftor is a Russian legal entity, the gift is considered as Russian-source income irrespective of the actual location of the place where the gift took place. For example, if a Russian legal entity gifts 10,000 rubles in Switzerland, the gift is still considered to be Russian-source income.

Russian Taxation of Gifts to Nonresidents: Tax Withholding Rules

The general rule is that the Russian legal entity who makes the gift to a nonresident is considered to be the withholding agent who is required to withhold from the gift and remit to the MOF the individual income tax due. However, the MOF specified that, if a gift is a non-monetary one or of such a nature that a tax cannot be withheld, then the entity must notify the Russian Federal Tax Service that it could not and did not withhold the tax (with the amount of the tax due). The nonresident would be responsible for the payment of the tax due in this case.

Impact of the Changes in the Russian Taxable of Gifts to Nonresidents on US Tax Residents

The Guidance Letter 03-04-06/64102 will have an important impact on the Russian tax and estate planning strategies with respect to US tax residents. One of the most common strategies for business succession and estate planning in Russia has been gifting of assets to children who were non-residents of Russia and US tax residents. The guidance letter directly impacts this strategy forcing the re-evaluation of the desirability of this entire course of action.

Form 872 Refund Claims | Foreign Accounts International Tax Lawyer

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The subject of this article is the discussion of the Form 872 Refund Claims, particularly whether filing Form 872 can extend the time for the taxpayer to claim a refund for the relevant years. Stated broadly, the key question that this article seeks to explore is whether an extension of time for assessment of tax can effect the taxpayer’s ability to file a refund claim for the extended years.

Form 872 Refund Claims – Form 872 and Offshore Voluntary Disclosures

Form 872 is a form used by the IRS to obtain the consent from the taxpayer to extend the time to assess tax. This consent can be obtained for income tax, self-employment tax of FICA tax on tips.

The form is used in a great variety of cases, but, in the US international tax context, it is mostly known for its use in the IRS Offshore Voluntary Disclosure Program (OVDP) now closed. Form 872 is in fact obligatory in the OVDP due to the fact that the OVDP voluntary disclosure period is eight years whereas the standard statute of limitations is only three years (even with 25% gross income, there are still at least two years that cannot be opened by the IRS without claiming fraud). Moreover, Form 872 is also used to prevent the statute of limitations from expiring for the rest of the years while the OVDP case is pending.

Form 872 Refund Claims: Form 872 Extends the Statute of Limitations for Refund Claims

According to IRC §6511(c), if the taxpayer and the IRS agree to extend the time within which the IRS can assess a tax, the taxpayer receives a corresponding extension of the time within which he may file a credit or refund claim. Form 872 itself states in paragraph 4 that:

Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including penalties, additions to tax and interest) attributable to any partnership items (see section 6231 (a)(3)), affected items (see section 6231(a)(5)), computational adjustments (see section 6231(a)(6)), and partnership items converted to nonpartnership items (see section 6231(b)). Additionally, this agreement extends the period of limitations for assessing any tax (including penalties, additions to tax, and interest) relating to any amounts carried over from the taxable year specified in paragraph (1) to any other taxable year(s). This agreement extends the period for filing a petition for adjustment under section 6228(b) but only if a timely request for administrative adjustment is filed under section 6227. For partnership items which have converted to nonpartnership items, this agreement extends the period for filing a suit for refund or credit under section 6532, but only if a timely claim for refund is filed for such items.

Limitations on Form 872 Refund Claims

There is an important limitation on Form 872 Refund Claims. Form 872 Refund Claims will only be accepted if the extension agreement is entered into before the expiration of the claim period. See IRC §6511(c)(1). This means that, if Form 872 is entered into by the parties by the time that the statute of limitations had already expired, the taxpayer is unlikely to succeed in his Form 872 Refund Claims.

The Form 872 agreement becomes effective when signed by the taxpayer and the District Director or an Assistant Regional Commissioner (See Treas. Reg. § 301.6511(c)-1).

Let’s look at a basic example to understand this limitation on Form 872 Refund Claims better.  Let’s suppose that a taxpayer X filed his 2003 US tax return on April 15, 2004. In March of 2007, the IRS decided to audit X’s 2003 US tax return and Form 872 was entered into by both parties at that time. In this case, without an agreement (and absent other special circumstances such as foreign tax credit issues, 25% under-reporting of income, et cetera), the presumed expiration of the assessment period would be on April 15, 2007; similarly, X’s refund claim period would have expired on April 15, 2007. Since Form 872 was entered into by both parties in March of 2007 (i.e. prior to the expiration of the normal refund claim period), however, X can file his Form 872 refund claims during the period that covers the duration of the extension plus six months thereafter.

Time to File Form 872 Refund Claims

As it was hinted in the example above, the period within which a taxpayer may file a credit or refund claim arising from the tax liability covered by Form 872 is extended for the period of the extension plus an additional six months. See IRC §6511(c)(1).

What Can Be Claimed on Form 872 Refund Claims

With respect to timely Form 872 Refund Claims, the taxpayer can claim an amount limited to the amount that would have been allowable under the normal limitation rules if the claim had been filed on the date the agreement was executed AND any tax paid after the execution of the agreement but before the filing of the claim. IRC §6511(c)(2).

What is the amount allowable under the normal limitation rules? It varies widely based on for what the refund is claimed (i.e. the type of the claim) and what is the filing period. For example, if Form 872 Refund Claims are filed within the three-year filing period, the amount of the refund or credit is limited to the tax paid on the liability at issue within the three years immediately preceding the filing of the claim plus the period of any extension of time for filing the return. IRC §6511(b)(2)(A). On the other hand, Form 872 Refund Claims based on a foreign tax credit adjustment can be granted many years back because the statute of limitations is ten years.

Form 872 Cannot Reduce the Claim Period for Form 872 Refund Claims

One final point that should be mentioned is that Form 872 and any other agreement to extend the assessment period cannot reduce the refund and credit claim period. The law clearly states that, when an extension agreement is executed, the taxpayer’s claim period shall not expire before the expiration of the additional assessment period plus six months.

Contact Sherayzen Law Office for Help With Your Form 872 Refund Claims

If you entered into a Form 872 agreement to extend the time to assess tax (whether as a result of OVDP, opt-out OVDP audit, FBAR Audit or regular audit) or any other type of agreement to extend the assessment period, contact Sherayzen Law Office for help with filing your Form 872 refund claims.

Minneapolis International Tax Attorney: Geography in Retainer Choice

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If you were to search “Minneapolis international tax attorney”, Sherayzen Law Office, PLLC (which is based in Minneapolis) is likely to come out on the first page together with other Minneapolis international tax attorneys. The question is: should the geographical proximity of an attorney play a role in the retainer decision?

The answer depends on many factors. On the one extreme, if you are looking for a criminal law attorney in a murder case, then you may not have a choice but to find a local attorney. This is because local law and procedure would govern in this case, and only an attorney admitted to practice before the court of a local jurisdiction should handle the case. Of course, even in this case, there are exceptions because, sometimes, the unique qualities of an outside attorney are so desirable by the client that the court may accede in temporarily admitting this outside lawyer to practice just for one case.

If you are searching for a Minneapolis international tax attorney because you have undeclared offshore assets, then the pendulum swings to other extreme. Here, the knowledge of local law and procedure are likely to be of very little value. Instead, the experience and knowledge of an attorney in his area of practice (i.e. international tax law) will become the overriding factors in retaining an international tax attorney.

If you live in Minneapolis and you find a Minneapolis international tax attorney, then consider two other factors before hiring the attorney. First, international tax attorneys differ in their natural ability to identify problems and find solutions, creativity, advocacy and many other factors. Therefore, have a consultation with your Minneapolis international tax attorney before retaining him.

Second, in addition to differences in personal qualities, the experience of the international tax attorney in the international tax sub-area that you need and the ability to analyze the specific subject matter in the broader context are very important factors in retaining the attorney and should override the attorney’s particular geography.

Of course, the best outcome would be to find the international tax attorney in Minneapolis who you trust and who satisfies both issues above.

Contact Sherayzen Law Office Minneapolis International Tax Attorney for Help With International Tax Issues

If you have any international tax issues with respect to undeclared foreign assets, international tax compliance or international tax planning, contact the experienced international tax firm of Sherayzen Law Office for comprehensive legal and tax help.