Reveal wallet: CRS – sharing of users' financial information

On 28th April 2023, the law on the automatic exchange of financial information (relevant Bill No. 8131) came into force. The act adopted at the end of March 2023, was signed by the President on 21st April. Currently, the new tool for tracking the financial accounts of Ukrainians abroad and informing foreign financial institutions about accounts in Ukraine still raises many questions. Anton Zaderygolova, AVELLUM's counsel, and Olga Rudevych, the company's lawyer, have explained Mind what awaits all subjects to whom the law applies.

While Ukraine's security and defence forces are fighting for every inch of our land against russian aggressors, the Ukrainian budget particularly needs additional funds to continue the fight and rebuild the country after our victory.

One of the sources of budget replenishment could be the funds of non-compliant Ukrainian HNVIs and UHNVIs who have not paid or continue not to pay taxes in Ukraine. Of course, compliant payers can be calm, but they must consider what information may eventually reach Ukrainian tax authorities.

The infrastructure within the Ukrainian legislation is being built that allows the identification of untaxed funds and imposes taxes on them. One of the pieces of this infrastructure is automatic tax information exchange. And this puzzle will be added soon.

Read also: The first tax data sharing is expected in 2024: MPs open tax access to Ukrainians' accounts abroad

How ‘Cossacks’ Invested Abroad

It is a fact that some Ukrainian high-net-worth individuals (HNVIs) and ultra-high-net-worth individuals (UHNVIs) keep their funds abroad. The free movement of capital is one of the fundamental principles of the EU. Moreover, these funds often returned to Ukraine.

The foreign element is usually needed precisely to protect against raiding, guarantee the security of bilateral investment protection agreements, and provide flexibility in settling relations between partners by signing a shareholders' agreement (SHA) under English law.

How these funds ended up abroad is the subject of another article and discussion. In reality, not all individuals 'moved' funds from their cash in Ukraine to foreign bank accounts with the help of friends or specially trained individuals during the turbulent 2000s. A significant number of investors obtained licences from the National Bank and invested funds abroad before the introduction of NBU currency restrictions.

The issue of Ukrainian taxes frequently became a sticking point in this story. If an individual used to own or does own funds and receives income from bankable assets in a foreign bank, Ukrainian taxes could not be immediately ignored (although some may have managed to do so).

Respectable foreign banks usually require tax compliance confirmation from their client's tax advisor. In this case, the bank usually accepts tax compliance confirmation only from a reputable tax advisor.

If a foreign company owned the funds, everything seemed fine, and Ukrainian taxes were okay – there was no obligation to pay them. However, everything changed after January 1, 2022, as Ukrainian rules for controlled foreign companies came into effect.

Ukraine has already joined the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information (CRS Agreement).

Read also: No secret millionaires: Tax authorities are going to identify Ukrainians who receive the minimum wage "on paper", keeping millions in foreign banks

How does CRS work?

The Common Standard on Reporting and Due Diligence for Financial Account Information (the "CRS Standard") is an international standard that requires countries that implement it to collect information on financial accounts and share this information annually with exchange partner jurisdictions automatically.

The automatic exchange of information under the CRS works as follows:

• Financial agents in country A, such as banks, depository institutions, and investment and insurance companies, verify and identify reportable financial accounts held by non-residents.
• The information obtained is transmitted to the tax authorities in country A.
• Once a year, the tax authorities in country A send to the tax authorities in country B (in Ukraine, this is the State Tax Service of Ukraine) all available information regarding all residents of country B.

The collection, storage, and transmission of information are carried out exclusively in electronic form, which ensures a fast and systematic exchange.

Currently, 122 countries, including Ukraine, have joined the CRS Agreement. Moreover, the Ukrainian Verkhovna Rada has already adopted Bill No. 8131 of October 17, 2022, which was signed by the President on April 21, 2023. The draft law introduces the necessary changes to national legislation for the implementation of the CRS Standard.

However, for the automatic exchange under the CRS Standard to work, Ukraine must select specific jurisdictions with which it plans to exchange information. In turn, the selected jurisdictions must also include Ukraine in the list of countries with which they are willing to exchange information.

Therefore, mere accession to the CRS Agreement is not enough: the exchange will only take place if both countries have agreed to it.

The current list of countries participating in the exchange can be found in the "Activated exchange relationships for CRS information" sectionon the OECD website.

When will the inspections begin?

The first reporting period covers the period from July 1, 2023, to December 31, 2023.

From July 1, 2023, financial agents are required to commence conducting appropriate comprehensive inspections of non-residents' accounts.

Subsequently, financial agents will be required to submit a report on accounts to the supervisory authority every year by July 1.

Who is on the radar?

Tax authorities will collect and exchange information about the financial accounts of non-residents, including bank and payment accounts, securities accounts, and so on.

This information includes, in particular:

• the name (or designation) of the account holder, their address, the jurisdiction of residence, tax identification number, date, and place of birth;
• account number;
• balance or value of the account at the end of the reporting period;
• the total gross amount of income received into the account, including income from securities and other financial assets.

In order to determine whether an account is reportable, financial institutions must conduct a comprehensive due diligence review.

Individuals

Accounts of all non-resident individuals will be checked, but the thoroughness and timing of the review will depend on the type of account.

Depending on the total balance or value of the account at the end of the reporting period, individual accounts are divided into low-value (up to $1 million) and high-value (over $1 million) accounts.

When checking low-value accounts, information searches will be conducted in electronic databases. For high-value accounts, additional data analysis in paper form may also be conducted.

Legal entities

Accounts of legal entities whose total balance or value exceeds $250,000 are subject to review.

Reportable are considered those that:

• belong to one or more non-resident legal entities, or
• belong to one or more passive non-financial entities (NFEs) controlled by one or more non-residents.

The list of passive NFE characteristics is contained in the CRS Standard and is quite broad. Among other things, a passive NFE is an entity whose gross income from passive income sources exceeds 50% of the total gross income for the previous reporting period.

What to do?

Henceforth, at the request of financial agents, account owners must provide:

• self-assessment documents regarding themselves and controlling persons to verify the resident status of a particular jurisdiction.
• a report in terms of the international group of companies (if the person belongs to an international group of companies).
• information on ownership structure and ultimate beneficial owners (if a foreign company has a place of effective management in Ukraine or operates through a permanent establishment).
• notification of the conclusion and termination of a contract for the management or administration of a trust, financial statements regarding the trust, and other information (if the person is a manager or administrator of a trust).
• other information and documents necessary for verifying financial accounts and preparing reports.

If such documents are not provided, the institution may refuse to serve the client (e.g., open accounts or conclude agreements).

Read also: Track the money: Tax authorities will find out about the foreign accounts of Ukrainians

What could be the consequences?

The basic negative consequences for owners of reportable accounts may be:

• a fine of up to 670,000 hryvnias (100 times the minimum wage set by law on January 1 of the reporting year) for failure to comply with the rules of disclosing information about reportable accounts;
• a fine of 268,400 hryvnias for each reporting year (100 subsistence minimums) for failure to submit a report on CFC; and
• additional tax liabilities, a fine of 25% to 50% of these tax liabilities, as well as penalties, for failure to declare foreign income of a Ukrainian resident.

In addition, if the amount of unpaid taxes exceeds 3,720,000 hryvnias, criminal liability arises.

The potential penalties are:

• a fine of up to 425,000 hryvnias (25,000 untaxed minimum incomes of citizens);
• disqualification from engaging in certain types of activities for up to three years; or
• special confiscation of the property of the accused.

The statute of limitations for criminal liability is 5 years from the date of the offence (i.e. the date of failure to pay tax for a particular year). However, if the amount of unpaid taxes exceeds 8,680,000 hryvnias, the statute of limitations for criminal liability is 10 years from the date of the offence.

Nothing is secret, that shall not be made manifest 

Taking into consideration all the information described above, the majority of people will definitely think that it is not worth relying on the fact that Ukrainian tax authorities will not find out something. A much more effective strategy is to act with the presumption that all information can become known one way or another.

Romanian-American businessman Alexandru Bittner, for example, did not report his foreign assets for five years. However, when US tax authorities found out about it, they imposed a fine of $2.72 million on the businessman.

Of course, Ukrainian fines are somewhat lower, but the matter is still in the undeclared taxes and fines for such undeclarations.

Therefore, we advise you to study the new reporting rules well and prepare for the changes that the implementation of CRS will bring in Ukraine.