FATCA – why the American brokers don’t like Russian investors


As we’ve previously reported– an investor can get on the American stock exchange in three ways: to open an account with a domestic investor, which has “daughter”, to open an account with an offshore intermediary that has a relationship with an American broker and open an account directly with US broker. The first method is disadvantageous due to the necessity of obtaining the status of a qualified investor (more about this in another article), the second method is the risk of sub-brokers and large commissions. The third method is optimal, but only a few US brokers are willing to work with our investors. The reason is FATCA law, about this the speech below.

FATCA is a stumbling block for Russian investors

One of the largest online brokers of the USA TD Ameritrade in 2012 refused to work with traders from Russia. In 2014, his decision echoed the other brokers — Charles Schwab, Zecco (Tradeking), and Firstrade. The reason — the entry into force of FATCA.

In accordance with the laws of the United States any person having the nationality of the country have to pay taxes in whichever country he was. That is, physically he could live in any country, but must pay taxes.

  • In Russia, the law is the opposite: if a person does not live in the country for more than 183 days, you may not pay taxes of the Russian Federation.

In 2010 the FATCA was developed, which came into force as of 2013 year (Russia acceded to it in  July 1, 2014). Its requirements: all banks must register with the American tax authority (IRS), after which all information about the accounts of U.S. citizens must be sent to the IRS. By the way, it’s not only banks but also other financial institutions.

the agreement between the U.S. and tax services

The scheme of work in accordance with the FATCA provides two options:

  • direct connection of financial institutions with the IRS (i.e., direct control of the tax authorities of the United States — not everyone agrees to this);

  • the conclusion of the interstate agreements, in which the central tax authority accumulates data from its financial institutions and sends it to the IRS.

The second option is more acceptable – to FATCA joined more than 20 countries, including Japan, Mexico, Norway, part of EU countries. Moreover, banks that do not join the system, will be fined up to closing of correspondent accounts.

So the first problem is to work with investors that do not cover operating costs. According to the representative of Firstrade, the Russian investor will be of interest only if the amount of the invoice of over 50 thousand dollars, and at number of trades per year of more than 50 (that is, the broker received an adequate commission).

With Russia the situation was more complicated. Initially, with the accession to FATCA there were no problems. But due to geopolitical vicissitudes the direct agreement was impossible. However, Russia in mid-2014, did not acknowledged that the problems with the IRS arose from the issues with Crimea and Ukraine. Representatives of NSFR commented on the possible gap with the US internal revenue service the fact that of the 800 banks in Russia with American citizens have connection less than 100, and therefore the cost is unreasonably high.

It is logical that because of the reluctance of the Central tax authorities of the Russian Federation to work with the US indirectly affected the Russian investors. If Russia and the Russian brokers (the banks) refuse to work with US, what is the reason to separate brokers of the USA to attract problems from the IRS?

And yet part of the problem was solved. Not wanting to lose the American market, which seeks wealthy investors, Russian brokers have gone on the first way — has signed individual agreements with the IRS.

Summary. Domestic investors find it hard to break into the US stock market not only because of the high entry threshold. FATCA and sanctions imposed on Russia significantly complicate the economic relationship. Cooperation between Central tax authorities will be enough to resolve this issue. So far, only individual brokers of the United States and Russia cooperate in the framework of the requirements of the IRS. This explains the high fee, limited choice of US brokers and a high entry threshold.

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