The Private Wealth & Private Client Review: Russia
One of the advantages of the Russian tax system is the flat and low tax rate for personal taxation.
There are a lot of individuals with significant wealth; however, most of them have taken the international route for investing. For example, they establish entities in Russia and also worldwide, opening bank accounts for investing both in Russia and worldwide.
An individual is considered a Russian tax resident if he or she spends 183 days or more during 12 months (calendar year) in Russia; and a Russian tax non-resident if the period of staying in Russia is less than 183 days.
Based on the general rule that Russian tax residents are taxable on their worldwide income, Russian tax non-residents are taxable on their Russian-sourced income only.
In the Russian Federation, personal income tax (PIT) is a tax imposed on various income sources, such as:
- income from financial assets, such as dividend and interest income, capital gains;
- income from the realisation of property (movable and immovable);
- rental income;
- material benefit: income on low-rate loans;
- interest income on deposits;
- investment income on insurance instruments;
- gifts and inheritances;
- income from the liquidation or sale of shares of companies; and
- profits from controlled foreign companies (CFCs).
A flat income tax rate of 13 per cent applies for Russian tax residents on all types of income, with some exceptions, including the following:
- a 9 per cent tax rate established with respect to the income from mortgage-backed securities emitted before 1 January 2007 and also to the income of settlers of trust mortgage collateral received on the basis of the acquisition of the mortgage participation certificate issued by the trustee of the mortgage collateral before 1 January 2007; and
- a 35 per cent tax rate is applied for:
- the cost of prizes, and prizes received in competitions, games and other activities held with the purposes of advertising goods, works and services, in the part exceeding the amounts stated in the Russian Tax Code (RTC);
- interest income (bank accounts) in the part exceeding the amounts stated in the RTC; and
- amounts of economic gain on interest when the taxpayers receive borrowed funds in the part exceeding the amounts specified in the RTC.
A flat income tax rate of 30 per cent (unless reduced under double tax treaty (DTT) provisions) applies to the Russian-source income of Russian tax non-residents with some exceptions, including the following:
- a 15 per cent tax rate applies to dividends received from Russian companies;
- a 13 per cent tax rate applies to nationals of foreign countries who are highly qualified specialists under the special regime; and
- a 5 per cent tax rate applies in respect of dividends on shares of international holding companies under certain conditions.
The tax on the above-mentioned income is calculated as a percentage rate, which is applied to the tax base. Specific rates (reduced or standard) can be applied based on specific criteria.
Personal income is generally taxed at a 13 per cent tax rate and may be reduced by using certain tax deductions, such as social, investment and property. All the deductions are calculated based on expenses related to medical treatment, expenses related to education (both for individuals and relatives), or expenses related to property bought or investments.
From the 2021 tax year, the personal income tax rate has been increased to 15 per cent for a tax base exceeding 5 million roubles for each tax period.
A tax rate of 13 per cent is applied for a tax base that does not exceed 5 million roubles, while income above this limit will be taxed at a tax rate of 15 per cent.
For example, if the amount of an individual's income in 2021 is 7 million roubles, then 5 million roubles will be taxed at a rate of 13 per cent, and the other 2 million roubles will be taxed at a rate of 15 per cent. The total amount of personal income tax will therefore be 950,000 roubles.
However, regardless of the amount of income received, the following sources of income will be taxable at a flat tax rate of 13 per cent: income from the sale of property (except securities) and shares in it; receipt of property as a gift (except securities); and taxable insurance payments under insurance contracts and pension payments.
Inheritance and gift tax existed in the Russian Federation before 1 January 2006, but has been abolished since. However, personal income tax may be payable by individuals receiving property by way of gifts, depending on the type of the property and its source. However, certain property received by individuals by way of gifts is included in the base of personal income tax depending on the property type and its source.
The market value of gifts received from organisations by individuals is generally used for personal income tax purposes.
Transactions between close relatives (i.e., spouses, parents and children, grandparents and grandchildren, brothers and sisters) are exempt from PIT.
An inheritance is generally exempt from tax; however, payments made to heirs in relation to an author's remuneration for inventions or arts would be taxed at the flat tax rate applicable to the individual tax residency status.
i Amendments to international DTTs
Russia is revising its double taxation agreements with popular foreign jurisdictions. In 2020, changes affected its DTTs with Cyprus, Malta, Luxembourg and the Netherlands. The essence of the amendments is the termination of withdrawing money to companies incorporated in foreign states where there are determined low income tax rates in accordance with a DTT.
According to the new version of the DTTs, the ordinary withholding tax rate on dividend and interest payments has been increased to 15 per cent (applied if the recipient is a beneficial owner of the interest income).
A reduced 5 per cent tax rate is applied for the following: where a company's shares are listed on a registered stock exchange, provided that at least 15 per cent of its voting shares are in free float; and where a company holds directly at least 15 per cent of the capital of the company paying the dividend or interest throughout the year.
It should be noted that the Netherlands did not approve these amendments, and in May 2021 the President of the Russian Federation signed a law abolishing the DTT with the Netherlands. The Russia–Netherlands treaty will cease to be in force with effect from 2022.
ii Russian CFC rules
A Russian tax resident (CFC rules apply both to an entity and an individual) is taxed annually on the retained profits of CFCs at a rate of 20 per cent if the controlling person is a legal entity, or 13 per cent if the controlling person is an individual.
The CFC provisions are triggered in cases where a Russian tax resident has an interest of more than 25 per cent (jointly with spouses and minor children – also considered as a controlling party of a CFC); or 10 per cent (jointly with spouses and minor children) if the total participatory interest of all Russian tax residents in a CFC is over 50 per cent.
However, regardless of the participation interest, a person can be recognised as controlling if he or she has the ability to have a decisive influence on decisions about the distribution of profits (income) of such organisation.
This recognition of a Russian tax resident as a controlling person of a CFC entails an obligation to report on a foreign company to the tax authorities of the Russian Federation. This is the submission of a notification about occurrence, change or termination of participation in a foreign company, the filing of annual CFC notifications and the submission of tax returns and payment of personal income tax if the CFC's profits exceed 10 million roubles.
The taxable profits of CFCs can be calculated by using one of the following options:
- if the CFC is registered in a jurisdiction that has entered into a DTT with Russia and provides Russian tax authorities with relevant tax-related information, then its profit is calculated based on its financial statements made in accordance with the legislation of its origin jurisdiction (the financial statements must be subject to audit); and
- the profit of CFCs is calculated in accordance with the RTC provisions. The general provisions can be applied at the taxpayer's discretion (this approach must be applied for five consecutive tax periods if chosen).
Foreign taxes paid on a CFC's profits may be offset against the Russian tax liabilities charged on the CFC's profits should Russian legislation or the laws of a foreign jurisdiction include such provisions.
A CFC's taxable amount may be reduced by the dividend amount paid from such profits during the tax year in which they were formed and the subsequent 12 months.
As of 1 January 2020, it is possible to withhold and pay tax in Russia only once in cases where income is paid from a Russian legal entity to a CFC and the latter pays it to a Russian controlling tax resident.
From the 2020 tax year, individuals can change the regime of taxation of their CFC's profit. CFC profit will be considered as fixed, which will make the amount of tax on such profits also fixed. The new regime allows a controlling person to pay a flat tax of 5 million roubles regardless of the actual amount of undistributed profits of the company, as well as the number of companies owned by the taxpayer.
To apply this regime, the taxpayer must submit a claim to the Russian tax authority by 31 December of the year following the CFC financial year (e.g., if a person wants to use a fixed CFC tax for the 2021 tax year, they should submit a claim by 31 December 2021).
If the taxpayer transits to the new regime in 2020 or 2021, the minimum period of application of the regime is three years. If a taxpayer chooses this regime in 2022 or later, it should be applied for at least five years.
In cases where the company receives losses during the period of application of fixed tax, they can be transferred to future periods after the revision to the regular regime.
The taxable CFC profits when applying the regime are fixed in the following amounts:
- for the 2020 tax period: 38,460,000 roubles (personal income tax at a rate of 13 per cent will amount to 4,999,800 roubles); and
- from the 2021 tax period: 34 million roubles (personal income tax at a rate of 15 per cent will amount to 5 million roubles).
iii Special administrative regions in Russia
At present, it is possible to redomicile (relocate) a company from a foreign jurisdiction to the Russian Federation to special administrative regions (SARs). The SARs include the territory of Russky Island (Primorsky territory) and Oktyabrsky Island (Kaliningrad region).
For the redomicilation of a foreign company in the Russian Federation, the company should be recognised as an international company, which requires the following conditions to be simultaneously observed:
- the company must be recognised as a commercial corporate organisation;
- the company must have entrepreneurial activity in several jurisdictions, including in the Russian Federation (directly or indirectly controlled entities or through branches);
- the company should be registered in a jurisdiction that is a member of the Financial Action Task Force or Moneyval (the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism);
- the place of registration of the company should be one of the territories that are included under the SAR regime;
- an application for the conclusion of an agreement on the implementation of activities as a participant in an SAR should be submitted; and
- an obligation of the investment in the Russian Federation in the form of capital investments or investments in the authorised capital or contribution to the property of Russian society of at least 50 million roubles must be made within six months of registration.
For the provision of tax benefits, the international company must be recognised by an international holding company, which requires the following conditions to be simultaneously observed:
- a redomiciled foreign organisation must have been created before 1 January 2018;
- the controlling parties of the international company must have become controlling parties of the foreign company before 1 January 2017; and
- within 15 days from the date of the redomicilation registration of a foreign company, the following documents should be submitted to the tax authorities of the Russian Federation regarding the international company:
- the audited financial statements of a foreign organisation for the last financial year that ended before the registration date; and
- information about the controlling parties of the international company.
On 3 August 2018, a set of special provisions was introduced for international business entities registered in SARs located in the Kaliningrad region and Primorsky territory (islands named Russky and Oktyabrsky).
An SAR participant can be a foreign legal entity (non-credit financial institutions, credit organisations, payment systems operators and operators of payment infrastructure services, as well as companies registered in certain offshore jurisdictions, are exempt).
An SAR foreign legal entity needs to enter into an agreement with a SAR management company, and needs to be registered as an international company that redomiciles to the Russian Federation and is included in the participants' register of the SAR by the management company. Additional requirements may apply.
An international company may obtain international holding company status providing certain tax benefits in the Russian Federation as follows:
- a zero per cent tax rate for dividends received (in the case of holding at least 15 per cent of a distributing company for at least 365 days; the distributing company must not be registered in a jurisdiction specified in the Russian blacklist of offshore territories and jurisdictions);
- a zero per cent tax rate for the income gained from the realisation or another form of alienation of foreign and Russian companies' shares in certain cases; and
- a 5 per cent withholding tax rate for dividends distributed by international holding companies to foreign residents and an exemption of CFC profits from Russian taxation is applied for tax periods prior to 1 January 2029.
iv Submission of Russian tax returns to Russian tax authorities
Typically, personal income tax returns (the 3-NDFL form) should be submitted to the tax authority of the Russian Federation no later than 30 April following the expired year of receipt of income. The tax payment deadline is 15 July following the expired tax period. However, in 2020, because of the worldwide pandemic situation with covid-19, the deadline for filing 2019 3-NDFL forms was extended from 30 April for a period of three months. However, the deadline for tax payments under 2019 tax returns remains unchanged. Personal income tax, which is calculated based on the submission of a Russian tax return, should be paid by 15 July 2020.
Under Russian tax legislation, there are also tax agents. They are responsible for the calculation of personal income tax for individuals and the submission of the relevant tax forms (the 2-NDFL form). This rule applies only to certain kinds of Russian-source income (employment income, investment income from the Russian brokers of other financial institutes, etc.). In this regard, in some cases, such as those mentioned above, tax agents quarterly calculate the personal income tax of individuals, complete the special form, and withhold the appropriate personal income tax based on the kind of income and tax residency status. As a result, the Russian taxpayer receives a net amount of income and has the ability to exclude this income from the personal income tax return 3-NDFL form.
Within three months, starting from the date when the tax return was accepted by the tax inspector, the procedure of the desk tax audit begins. This process is carried out in respect of the taxpayer and the submitted tax return. In the case of a taxpayer finding out that information has not been disclosed or has not been fully disclosed in a tax return that has been submitted to a tax authority, or finding mistakes that could be the result of an understatement of the amount of tax payable, the taxpayer shall be obliged to make necessary amendments to the tax return and to submit a revised tax return to the tax authority. In this respect, a revised tax return that has been submitted after the expiry of the established time limit for the filing of a tax return shall not be considered to have been submitted late. However, the three-month period will be recalculated from the day when the revised tax return was received by the tax authorities.
During a desk tax audit, the tax authority has the right to request the documents necessary for verification (for example, documents confirming the expenses that are accepted by the taxpayer as a reduction in the tax base). In the case of recognition of errors or inconsistencies, the tax authority may also send a request for clarification or amendments to the tax return. However, after three months, the tax authority should complete a desk audit.
If a violation is discovered, the tax authority will draw up a tax audit report. If the tax return does not contain errors, the tax authority will have to create a receipt for the payment of the calculated personal income tax.
v Common reporting standard rules
The Russian Federation amended the Russian Tax Code for the purposes of the Common Reporting Standard (CRS) at the end of 2017.
Russian tax authorities are able to obtain information on Russian tax residents' financial accounts from the tax authorities of partner jurisdictions.
Generally, financial institutions have an obligation to submit CRS reports related to foreign tax-resident beneficiaries or clients annually by 31 May of the year following the reporting period.
According to the Organisation for Economic Co-operation and Development website, the Russian Federation receives tax information from 95 jurisdictions and sends tax information to 68 jurisdictions.
There are no special or unusual rules for succession in Russia.
Wealth structuring and regulation
Business operations can be conducted in the Russian Federation by using one of several organisational forms.
The most common entities for assets structuring used in the Russian Federation include the following:
- limited liability companies;
- open joint-stock companies;
- closed joint-stock companies;
- public and religious organisations (associations);
- partnerships; and
There are separate business and non-profit organisations for conducting a specific type of business activity (for example, insurance companies, credit institutions, stock exchanges) that are not able to participate in other types of activities.
Traditional trusts do not exist in Russia; however, the Russian Civil Code includes the concept of fiduciary property management contract.
Generally, the tax liability of a business entity depends on the activity type and the chosen system of taxation (a simplified taxation system may be applied) and not on the organisational or legal form or ownership structure.
A foreign entity may conduct business in the Russian Federation through affiliates, branches, permanent establishments and other separate subdivisions. An affiliate or branch of a foreign company created for conducting an activity may be operational in the Russian Federation only after receiving the proper accreditation.
A foreign entity must register with the tax authorities should it plan to work in the territory of the Russian Federation for more than 30 calendar days a year.
Affiliates, representative offices and other separate subdivisions of a foreign company (if registered with tax authorities) are subject to all types of tax imposed by Russian legislation.
Taxation of partnerships and cooperatives is the same as taxation of other commercial companies. There is no transparency regime; the tax is paid by the partnership itself.
Non-profit organisations are subject to tax and charges imposed by current legislation. These organisations must include a report on their activities and management bodies, the use of funds and other property including the assets received from foreign entities in their accounting statements.
The principal legal act aimed at anti-money laundering in Russia is Federal Law No. 115-FZ 'On Combating Money Laundering and the Financing of Terrorism' (AML Law), which became effective on 1 February 2002.
The AML Law imposes certain requirements on credit, insurance and other entities. These companies must perform due diligence procedures with respect to clients (including foreign public officials and their sources of assets) and beneficiaries, and ask for certain types of information on payers in payment orders.
The designated entities are obliged to identify and report transactions of a suspicious nature to the Federal Financial Monitoring Service. These transactions include transactions (both cash and non-cash) of at least 600,000 roubles as well as real property transactions of at least 3 million roubles or their equivalent in foreign currency.
Outlook and conclusions
Starting from 2015, significant changes in the Russian tax system have made it more similar to worldwide practice. There are currently some new SARs that could be 'offshore zones' in Russia. This development could be attractive to new investors from abroad.
Because of the situation with covid-19, there should now be more steps taken towards changing the Russian tax system: changing DTTs with jurisdictions that are popular for Russian investors a new rate of PIT for high-net-wealth individuals and new rules for the taxation of investment income.
1 Alexander Golikov is a partner and Anastasiya Varseeva is a senior associate at BGP Litigation.