Indirect Re-export & Foreign Trade Contracts in Russia

 

April 30, 2024

BRACE Law Firm ©

 

Conclusion of a foreign trade contract for the supply of goods is usually accompanied by the delivery of goods from the seller to the buyer according to an export/import scheme; however, in practice, contracts for the supply of goods without the actual crossing of the border of a particular state are becoming increasingly relevant. In this case, the goods are delivered from one country, such as the country of the manufacturer, to another — the buyer — without crossing the border of one of the participants, the mediator of the foreign trade transaction.

To implement such interaction between foreign partners, in practice, not just one foreign trade contract is concluded, but rather interconnected agreements are used for a specific supply of goods, consisting of:

• A foreign trade contract for the purchase of goods from a foreign seller without the procedure of their import into Russia;
• A foreign trade contract for the sale of goods to a foreign buyer without their export from the territory of Russia.

In foreign trade entrepreneurship, this interaction scheme is commonly referred to as "contractual tying". Several features can be highlighted when concluding foreign trade contracts for its implementation:

• Agreements for the purchase and sale of goods must contain conditions regarding the absence of their actual crossing of the Russian border;
• Both contracts must be regulated by the same legal field;
• When concluding such contracts, sections on payment terms for the supply of goods and the return of funds in case of breach of obligations must be clearly reflected;
• Often, the simultaneous submission of such contracts to the bank is required to comply with currency control legislation, etc.

In the current context of sanctions restrictions imposed by unfriendly countries,[1] "contractual tying" allows for the acquisition of necessary goods while complying with the established requirements of international and national legislation regarding mutual restrictions. "Contractual tying" can also be classified as a type of supply under a broker's contract, where the contract is concluded between the supplier and a third-party importer, but a mutual agreement is established regarding the risks and obligations under the contracts. Additionally, it should be noted that the supply of goods using "contractual tying" allows the initial purchase price of the goods to remain undisclosed to the buyer.

As a rule, when concluding foreign trade contracts under the "contractual tying" scheme for the supply of goods without their import into or export from Russia, the following conditions are included in the text of the contracts:

• The seller's obligation to transfer the goods to the buyer in the seller's country or another country designated in the contract, without importing the goods into Russia;
• Payment terms for the goods, considering transport and storage costs (if necessary);
• The moment of transfer of the goods and responsibility for their safety until the buyer receives them;
• The absence of a need to obtain permits for the import of goods into Russia;
• The absence of a need to carry out customs procedures related to the goods crossing the border.

To implement the possibility of using contractual tying, the following interaction schemes between foreign trade participants may be used:

• Purchase of goods under a foreign trade contract and supply under a similar contract to the buyer;
• Use of an agency scheme for the purchase and sale of goods, etc.

Regardless of the terms of the transaction, it is important to carefully reflect all conditions to exclude suspicion by regulatory authorities of illegal withdrawal of funds abroad.

Foreign Trade Contract for the Purchase of Goods Without Import into Russia

In most cases, the supply of goods without their import into the territory of Russia is carried out on the basis of a concluded foreign trade contract. It should be noted that in the case of contractual tying, such relationships are essentially neither import nor export from the perspective of customs legislation. [2] Despite this feature, foreign trade contracts are generally concluded taking into account the Incoterms international delivery terms in the edition selected by the foreign trade participants, which determine the fundamental aspects of the foreign trade contract: [3]

• The obligations of the seller and the buyer, and in the case of contractual tying, the mediator;
• The allocation of costs at the stages of cargo delivery (packaging of goods, loading and unloading, etc.);
• Responsibility for risks regarding the safety of the goods;
• Insurance costs during the delivery period;
• The allocation of customs clearance for the delivered goods;
• The transfer of risks from the seller to the buyer related to the goods, time, and place of delivery.

It is important to note that the Incoterms international rules are not a fully formalized foreign trade contract. These rules only simplify the determination of the terms of delivery of goods from the seller to the buyer and form a uniform approach to their understanding and use among participants in foreign trade activity. The Incoterms rules provide for various options for the delivery of goods, including the type of transport, the transfer of title to the goods, customs payments, and in some cases, cargo insurance, place of transfer of goods, etc. When using "contractual tying," it is important to carefully select the Incoterms delivery basis, as some bases cannot be used for concluding foreign trade contracts between the parties to a transaction, which is related, for example, to the need for customs clearance in the importer's country. Often, delivery bases are used under which the goods are typically delivered to the warehouse of a foreign carrier.

As a general rule, for the drafting of foreign trade contracts using "contractual tying," all work in this direction is divided into several stages:

• Determining the main conditions of the foreign trade transaction;
• Legal analysis of the transaction and possible risks in the performance of contracts;
• Preparation of the draft contract;
• Negotiating the terms of the contract with the counterparty and the mediator;
• Conclusion of foreign trade contracts between the seller and the mediator, and between the mediator and the buyer.

To conclude a foreign trade contract for the purchase of goods without their import into the territory of Russia, it is important to consider several significant aspects of such a transaction:

• The goods do not move across the Russian border;
• It is important to reflect the initial location of the goods or the place of their storage, the entire supply scheme, as well as the moment of transfer and the transfer of title to them;
• Payment terms, including the cost of the goods, their storage, and delivery;
• It is necessary to reflect the responsibility of the parties for the safety of the goods before and during their transfer to the other party of the foreign trade contract;
• The rights and obligations of the parties, including in the case of a change in the location of the goods.

In accordance with Russian customs legislation, the re-export procedure is a customs procedure under which foreign goods are exported from the customs territory of the EAEU without payment of import customs duties, taxes, special, antidumping, or countervailing duties and (or) with a refund (offset) of the amounts of such duties and taxes, and EAEU goods are exported without payment of export customs duties, provided the conditions for placing the goods under this customs procedure are met. [3]

At the same time, a foreign trade transaction for the purchase of goods without importing them into the territory is called indirect re-export, where the goods are sent directly to the buyer, bypassing the condition of crossing the border of the resident's country. The use of the indirect re-export procedure allows for:

• Reducing the costs of transporting goods to the buyer, which reduces overhead and lowers the cost of the goods for the buyer;
• Reducing the delivery time of goods from the manufacturer to the buyer;
• Reducing tax obligations due to the absence of an object of taxation;
• Currency control without importing goods is carried out in terms of verifying non-cash settlements, due to the lack of regulations for currency control of re-export.

When drafting foreign trade contracts under contractual tying conditions, it is important to reflect all necessary conditions so that the performance of one contract is possible upon the performance of another, as well as the conditions under which the performance of the second contract is suspended or terminated if the first agreement cannot be performed.

It should be noted that under conditions of a possible illegal withdrawal of funds from Russia, operations under fictitiously concluded contracts are becoming an increasingly common occurrence. In this regard, transactions for the purchase and sale of goods without their import into the territory of Russia attract increased attention from banks conducting settlements for foreign trade transactions and may be considered by the bank as suspicious operations or as objects of currency control. At the same time, it should be noted that suspicious operations include operations carried out by clients of credit institutions that are of an unusual nature and show signs of lacking obvious economic sense and apparent legal goals, which may be conducted for the withdrawal of capital from the country, financing of "grey" imports, the transfer of funds from non-cash to cash form and subsequent tax evasion, as well as for the financial support of corruption and other illegal purposes.[4] For the purpose of qualifying operations as suspicious, signs indicating the unusual nature of the transaction specified in the Appendix to the Bank of Russia Regulation No. 375-P dated March 2, 2012, On the Requirements for the Internal Control Rules of a Credit Institution for the Purpose of Countering the Legalization (Laundering) of Proceeds from Crime and the Financing of Terrorism, are also used, which include, for example:

• The complicated or unusual nature of the transaction, which has no obvious economic sense;
• The client's refusal to submit documents requested by the credit institution;
• Remote control from one device (mobile phone, laptop, etc.) of operations on the accounts of legal entities registered in different countries or not having a common founder or beneficial owner;
• The client's operation is related to the commission of a crime or the funds received in the client's account were obtained as a result of the commission of a crime, etc.

Application of Currency Legislation Norms When Using "Contractual Tying" for the Supply of Goods

In accordance with Federal Law No. 173-FZ dated December 10, 2003, On Currency Regulation and Currency Control (the "Currency Regulation Law"), receiving currency proceeds into the company's currency accounts, their spending, and use as a means of payment are currency operations. [5]

Currency operations between residents and non-residents are carried out without restrictions, except for prescribed currency operations established for the purpose of preventing a significant reduction in gold and foreign exchange reserves, sharp fluctuations in the ruble exchange rate, as well as for maintaining the stability of the Russian balance of payments. [6]

In essence, the above norms of currency legislation do not prohibit settlements for the purchase of goods outside Russia and their resale without being brought into the customs territory of Russia.

Regarding foreign trade contracts when formalized within "contractual tying" and in compliance with currency legislation norms, it is important to note that to pass currency control, it is necessary to provide both contracts to the bank simultaneously. In this context, the bank must ensure there are no signs of illegal withdrawal of funds abroad, which is one of the risks of transactions in the credit and financial sphere, [7] which in the field of foreign trade activity can include, for example, the following:

• Risks of conducting operations (transactions) in the credit and financial sphere:

• Conducting fictitious financial and economic activities;
• Transfer of non-cash funds into shadow cash circulation;
• Illegal withdrawal of funds and other assets abroad;
• The management and employees of credit and financial organizations conducting illegal activities directed against the interests of these organizations and their clients, including creating conditions for the legalization (laundering) of proceeds from crime;

• Risks of conducting operations (transactions) in the field of international relations:

• Escalation of international tension, including through the unilateral imposition of restrictive economic measures by some states against other states;
• The application by individual states of national legal norms against persons and organizations of other states based on the principle of extraterritoriality;
• Attempts to politicize the activities of international expert structures;
• Obstruction of the economic activities of Russian residents and their foreign counterparties in foreign jurisdictions, including the return of capital to Russia.

To simplify passing currency control when using "contractual tying", it is recommended to use the services of a single bank. This is due to the fact that it becomes quite difficult to confirm the expediency of currency operations when conducting settlements under a contract for the purchase of goods in one bank and for the sale of goods in another.

Given that there is no movement of goods across the border, currency control is carried out without registering the contracts; unique numbers (UKN) are not assigned to the contracts.[8] In this case, the bank conducts control only at the stage of receipt and debiting of funds for the execution of foreign trade transactions linked by contractual tying. At the same time, the following currency operation codes are indicated in the statements: [9]

• 12050 – settlements by a non-resident in favor of a resident for goods sold outside the territory of the Russian Federation without their import into the territory of the Russian Federation;
• 12060 – settlements by a resident in favor of a non-resident for goods sold outside the territory of the Russian Federation without their import into the territory of the Russian Federation.

The closing of a foreign trade transaction and the confirmation of its economic justification are carried out by submitting copies of certificates of transfer and acceptance of goods to the bank, which confirms the closing of the transaction and its justification.

It should also be noted that in the case of indirect re-export, any documents may be submitted for currency control of the transaction, as there is no legally established list of documents that can confirm the transaction. At the same time, currency control authorities will not register a delay in the crediting of currency proceeds as a violation because such operations do not fall under the scope of the Currency Regulation Law.[10]

Meanwhile, Bank of Russia Ordinance No. 6406-U dated April 10, 2023, On the Forms, Deadlines, Procedure for Compiling and Submitting Reports of Credit Institutions (Banking Groups) to the Central Bank of the Russian Federation, as well as on the List of Information on the Activities of Credit Institutions (Banking Groups), defined Form 0409402, Information on Settlements between Residents and Non-residents for the Performance of Work, Provision of Services, Transfer of Information, Results of Intellectual Activity, Non-trade Operations, and for Goods Not Crossing the Border of the Russian Federation, which reflects settlements between residents and non-residents for transactions related to the performance of work, provision of services, transfer of information and results of intellectual activity, for non-trade operations, as well as under contracts for goods acquired (sold) outside Russia without their import into the territory of Russia, and for goods acquired (sold) on the territory of Russia without their export from the territory of Russia, including those carried out within agency agreements.

At the same time, it should be noted that for a violation of the currency legislation of the Russian Federation, [11] administrative liability is provided in accordance with Article 15.25 of the CAO RF:

• Illegal currency operations;
• Failure to submit a report on money transfers to the tax authority;
• Failure to submit a notification on opening a bank account in a bank located outside the territory of Russia;
• Failure to fulfill the obligation to receive foreign currency into one's bank accounts in authorized banks, etc.

Warnings and fines are used as measures for bringing to liability for offenses in the field of currency legislation; in rare cases, such violations lead to criminal liability.[12]

International Contract for the Sale of Goods Without Export from the Territory of Russia

The export of goods from the customs territory of the EAEU is recognized as the performance of actions aimed at exporting goods from the customs territory of the EAEU by any method, including mailing in international postal shipments, the use of pipeline transport and power lines, including crossing the customs border of the EAEU. [13] However, in practice, situations occur where the sale of goods is carried out by a Russian manufacturer to a foreign company located on the territory of Russia; in this case, the possibility of supplying goods without exporting them from the territory of Russia using contractual tying is also used, by concluding two foreign trade contracts.

Both foreign trade contracts are drafted according to the general rules for drafting foreign trade agreements, which include: a preamble, the subject of the transaction, the obligations of the parties, payment terms, the transfer of title, quality of the goods, details, and other conditions.

The formalization of contractual relationships for the supply of goods without actual crossing of the Russian border raises many questions both for the participants in the foreign trade transaction and for the regulatory authorities, particularly currency control authorities. Incorrect formalization of the purchase and sale of goods may show signs of capital flight, to avoid which it is necessary to carefully work through all sections of the foreign trade contracts.

Taxation upon the Sale of Goods Without Their Import into Russia

Taxation of goods is a mandatory component of foreign trade activity when importing goods into Russia; however, in trade, not all goods are sold with the necessity of crossing the customs border, and not all goods are subject to taxation. Thus, in accordance with tax legislation, [14] the following operations are recognized as objects of VAT taxation:

• The sale of goods (works, services) on the territory of Russia, including on a gratuitous basis;
• The transfer of goods on the territory of Russia for one's own needs, the costs of which are not accepted for deduction when calculating corporate income tax;
• Performance of construction and installation work for own consumption;
• Import of goods into the territory of Russia.

VAT is charged if the sale of goods (works, services) is carried out on the territory of Russia and belongs to taxable operations. At the same time, the territory of Russia is recognized as the place of sale of goods if one or more of the following circumstances exist: [15]

• The goods are on the territory of Russia and are not shipped or transported;
• The goods are on the territory of Russia at the time the shipment and transportation begin.

Taking these tax norms together, it follows that in the absence of the import of goods into the territory of Russia, no object of VAT taxation arises.[16] This position is reflected in the following letters:

• Letter of the Ministry of Finance of Russia No. 03-07-13/1/44019 dated July 30, 2015;
• Letter of the Ministry of Finance of Russia No. 03-07-08/14651 dated March 18, 2015;
• Letter of the Ministry of Finance of Russia No. 03-07-13/1/21711 dated April 12, 2017;
• Letter of the Federal Tax Service of Russia No. SD-4-3/7850 dated April 24, 2019.

It is also important to note that the sale of goods to a foreign buyer that were purchased in another foreign state is not recognized as an object of VAT taxation if the delivery of the goods to the buyer is carried out through the territory of the RF under the customs transit procedure. [17]

Regarding customs transit, it should be noted that by a Decree of the Government of Russia, [18] a ban has been established on international road transport of goods through the territory of Russia by freight vehicles belonging to foreign carriers registered in foreign states that have introduced restrictive measures in the field of international road transport of goods against Russian citizens and Russian legal entities, which applies to:

• Bilateral transportation;
• Transit transportation;
• Transportation from the territory or to the territory of a third state.

The list of states banned from international road transport includes:

• Member states of the European Union;
• The United Kingdom of Great Britain and Northern Ireland;
• The Kingdom of Norway;

Sanctions restrictions have significantly expanded the need for the use of contractual tying in practice. To enable the purchase and sale of goods, the conclusion of two foreign trade contracts allows for the delivery of goods from unfriendly countries that have directly expressed a ban on the supply of goods to Russia.

Impact of Sanctions Restrictions on the Supply of Goods to Russia

The imposed sanctions and logistical restrictions have undoubtedly influenced foreign trade activities; however, the adaptation of Russian entrepreneurship to the prevailing circumstances occurred quite rapidly. The supply of goods is carried out through countries such as Turkey, Kazakhstan, Georgia, the UAE, and Armenia, but it is important to note that such delivery has resulted in an increase in the transport component.

To reduce the additional logistics costs that have arisen, a scheme for the delivery of goods via indirect re-export is used. Contractual relationships are formed in this case as follows:

• A foreign trade contract is concluded for the supply of goods by the supplier to a mediator company from a country friendly to Russia;
• At the transportation stage, a second foreign trade contract is concluded between the mediator company and the buyer from Russia.

In such an interaction, the goods do not enter the territory of the mediator country; the goods are sent directly to Russia. During transportation, the first contract is replaced by the second, and the goods are imported into the RF already from the mediator supplier located in a country friendly to Russia. The scheme for the delivery of goods via indirect re-export is of a temporary nature, related to the imposed restrictions.

In conclusion, it should be noted that the use of "contractual tying" allows for:

• The supply of goods to different countries;
• Bypassing the imposed sanctions restrictions without violating national and international legislation;
• Significant savings on the delivery of goods without the need to transport them to the country of one of the participants in the transaction and export them from that country for delivery to the final buyer;
• Reducing costs for the payment of customs duties and fees in the absence of import/export of goods, etc.

However, despite all the possibilities for concluding foreign trade transactions on the principle of "contractual tying," when concluding such agreements, it is important to carefully work through the terms of the contracts to exclude violations of the law and possible adverse consequences associated with the performance of foreign trade contracts.

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References

[1] Government Decree No. 430-р dated March 5, 2022, On Approval of the List of Foreign States and Territories Committing Unfriendly Actions Against the Russian Federation, Russian Legal Entities and Individuals.

[2] Article 2 of the Customs Code of the EAEU.

[3] Article 238 of the Customs Code of the EAEU.

[4] Letter of the Bank of Russia No. 172-Т dated September 4, 2013, On Priority Measures in the Exercise of Banking Supervision.

[5] Article 1 of the Currency Regulation Law.

[6] Article 6 of the Currency Regulation Law.

[7] Concept for the Development of the National System for Countering the Legalization (Laundering) of Proceeds from Crime and the Financing of Terrorism, approved by the President of Russia on May 30, 2018.

[8] Clause 5.5 of Bank of Russia Instruction No. 181-И dated August 16, 2017, On the Procedure for the Submission of Supporting Documents and Information to Authorized Banks by Residents and Non-residents During the Performance of Currency Operations, on Uniform Forms of Accounting and Reporting for Currency Operations, and the Procedure and Deadlines for Their Submission.

[9] Appendix No. 1 to Bank of Russia Instruction No. 181-И dated August 16, 2017, On the Procedure for the Submission of Supporting Documents and Information to Authorized Banks by Residents and Non-residents During the Performance of Currency Operations, on Uniform Forms of Accounting and Reporting for Currency Operations, and the Procedure and Deadlines for Their Submission.

[10] Article 19 of the Currency Regulation Law.

[11] Federal Law No. 173-FZ dated December 10, 2003, On Currency Regulation and Currency Control.

[12] Article 193 of the Criminal Code of the Russian Federation.

[13] Article 2 of the Customs Code of the EAEU.

[14] Article 146 of the Tax Code of the Russian Federation.

[15] Article 147 of the Tax Code of the Russian Federation.

[16] Resolution of the FAS of the North-Western District dated December 8, 2009, in Case No. A52-282/2009. During the consideration of the case, the court declared invalid the decision of the IFNS on the additional assessment of VAT to the company and rejected the inspectorate's position on the failure to include the cost of the equipment in the tax base, since the goods were supplied by the company to the buyer from the territory of the Republic of Latvia, in connection with which the territory of Russia was not the place of sale of the indicated equipment and the company did not have an object of VAT taxation.

[17] Letter of the Ministry of Finance of Russia No. 03-07-13/01-49 dated October 12, 2012.

[18] Government Resolution No. 1728 dated September 30, 2022, On Measures for the Implementation of the Edict of the President of the Russian Federation No. 681 dated September 29, 2022, On Certain Issues of International Road Transport of Goods.