Income Tax in Russia
Russian residents are liable to personal income tax (PIT) on their total worldwide income received in a calendar year. Non-residents are taxed on income received from sources in Russia. Some tax treaties provide for periods of exemption from Russian taxation on the Russian-source income of non-residents. Consequently, the details of any applicable tax treaty should always be examined before commencing work in Russia.
Income from Russian sources includes, but is not limited to, income received from property located in Russia, dividends received from Russian legal entities, and remuneration for activities performed in Russia (even if paid by a foreign legal entity from abroad).
PIT is payable in roubles at the rates applicable to certain income categories.
Earnings in any foreign currency are converted into roubles at the exchange rate of the Central Bank of the Russian Federation on each date the income is received/expenses are incurred.
Personal income tax rates:
Residents are liable to a flat PIT rate of 13% for all types of income received, except for the following:
· Excess interest income is taxed at 35%. See Interest income in the Income determination section for more information.
· The value of any awards and prizes received during contests, games, and other events conducted for the purpose of advertising goods, work, and services, in excess of set limits, is taxed at 35%.
As of 1 January 2015, dividends, which in previous years were taxed at a rate of 9%, are also subject to the general tax rate of 13%.
Non-residents are liable to a flat PIT rate of 30% for all types of income received from Russian sources, except for the following:
· Dividends from Russian companies are taxed at 15%.
· Income of highly qualified foreign professionals (see below) is taxed at 13%.
· Certain income of foreign nationals from non-visa countries (see below) is taxed at 13%.
· Income of refugees for work duties is taxed at 13%.
Highly qualified specialists (HQSs):
An HQS is a foreign national with work experience, skills, or accomplishments in a specific field who is employed in Russia at a monthly salary of at least 167,000 Russian roubles (RUB) (with certain exceptions).
Income earned from labour activity by non-resident individuals with HQS status is taxed at a rate of 13% instead of the 30% tax rate that applies to such income earned by non-residents who do not have HQS status.
Foreign nationals from visa-free regime countries:
Foreign nationals who have entered Russia under a visa-free regime (i.e. nationals of Commonwealth of Independent States [CIS] countries that are not members of the Eurasian Economic Union [EEU], e.g. Ukraine and Uzbekistan) and are employed by individuals under labour or civil contracts for the performance of work (provision of services) for private, domestic, and other similar needs unrelated to any business activity (e.g. as home care assistants, housemaids, gardeners), or by legal entities, sole proprietors, or other types of business entities based on work patents, are eligible to apply for special tax preferences. Moreover, nationals of EEU member countries (Armenia, Belarus, Kazakhstan, and Kyrgyzstan) working in Russia can also apply for special tax preferences.
Certain income earned by the abovementioned non-resident foreign nationals (nationals of CIS and EEU countries) is taxed at a rate of 13%, instead of 30%.
All income received in the course of a calendar year from employment is subject to PIT. This includes all earnings, bonuses, and other forms of payment or remuneration in cash or in kind.
For expatriates, taxable income includes allowances paid to employees living in Russia and compensation for food and travel by employees and their families on holiday, and other non-business purposes. Benefits in kind are taxed at their monetary equivalent (market price).
Employer’s contributions to Russian-licensed non-state pension funds and under pension insurance agreements (with a licensed insurance company) are not taxable for the employees, whereas the respective pension and insurance payments are taxable.
Stock options are a quickly developing area for both multinational and Russian companies doing business in Russia. However, there are currently no special rules for the taxation of stock option plans, and their tax treatment is based on the general provisions of the law, which may be subject to various interpretations. Generally, an individual is taxed at grant, based on modified Black-Scholes formula, and on exercising the option, on the difference between the fair market value of the shares at exercise and the exercise price.
There is no separate capital gains tax in Russia. Instead, gains from the disposal of property and assets are subject to income tax at the normal rate. The taxable amount is calculated as the difference between (i) sale proceeds and (ii) historical cost or application of a statutory exemption.
A statutory exemption is available for tax residents only. It is provided for all property sold during a calendar year and is limited to RUB 1 million in the case of real estate and RUB 250,000 for other property. The statutory exemption does not apply to gains on assets disposed of in the course of entrepreneurial activities. Additionally, the legislation sets special rules for transactions with securities and derivatives.
Another capital gains provision is available only for Russian tax residents. Under this provision, proceeds received from the sale of real estate are excluded from taxation if the property is owned for three years or more. For property obtained from 2016, the term of possession for exemption was generally increased for five years.
Dividends received by residents from both Russian and non-Russian sources are taxed at 13%.
Dividends received by non-residents from Russian companies are taxed at 15%.
Interest income from deposits outside Russia is included in taxable income. Interest and gains from deposits in banks and other credit institutions in Russia (above set limits) are also included in taxable income.
A tax rate of 35% is applied to interest income in excess of (i) the amount calculated based on the Central Bank’s current interest (key) rate increased by five points for deposits made in roubles or (ii) 9% annual interest for foreign currency deposits.
The positive difference between a notional interest amount calculated with reference to a benchmark rate set by the Russian legislation and actual interest paid on all loans is also taxable at 35%.
Rental income from leasing property, both in Russia and abroad, is included in taxable income.
Royalties from the creation, publication, performance, and use of works of literature, art, and science, as well as from inventions, discoveries, and industrial prototypes are included in taxable income (subject to deductions).
In addition to the exemptions mentioned above, the following income is not taxable to an individual:
· Reimbursement by an employer for expenses arising from a work-related change of domicile (in limited circumstances).
· Payments by an employer in compensation for injury or damage to health incurred in the performance of employment duties.
· Severance gratuities payable upon dismissal (within established limits).
· Reimbursements by an employer for business travel expenses (within established limits) if certain documentary requirements are met.
· Income from Russian state pensions (currently, the statutory pension age is 60 years for men and 55 years for women, but many groups of employees have a right for early retirement, which is usually five or ten years earlier than the standard retirement age).
Individual – Residence:
According to the tax residence rules, effective from 1 January 2007, an individual is a Russian tax resident if one spends at least 183 days in Russia during any period of 12 consecutive months (instead of 183 days within a calendar year under the previous rules). However, the Russian Ministry of Finance letters imply that the ‘final’ tax residence status of an individual taxpayer shall still be defined by counting the number of days spent in Russia within the relevant fiscal year (i.e. calendar year) for Russian tax purposes. This position was confirmed by the Constitutional Court of the Russian Federation. Therefore, the approach for determining residence remains the same as under the previous legislation. In order to benefit from the 13% resident rate, a taxpayer should spend at least 183 days in Russia in a given calendar year.
Note that both the day of arrival in Russia and the day of departure from Russia should be considered as days spent in Russia.
The determination of residence status is often modified by the provisions of double tax treaties (DTTs). Most treaties use various tests to determine in which of the two countries an individual is resident for treaty purposes. Usually, the following factors are considered when determining a place of residence:
· Permanent home.
· Personal and economic relations.
Individual - Tax administration:
There is no provision for a taxable year other than the calendar year.
Tax in respect of employment earnings and certain other payments must be withheld at source by the entity making the payment, if this entity is a tax agent. This includes tax on income from the performance of labour under civil law contracts. Individuals receiving income from foreign sources and some other types of income from which tax is not withheld at source (unless tax agent properly reported under withholding tax to tax authorities) are responsible for the declaration of taxable income and payment of Russian tax.
Declarations of income must be submitted no later than 30 April following the reporting year. Joint returns for a husband and wife are not permitted.
In the case of termination of a foreign national’s activities in Russia, declaration of actual income received during the period of stay in Russia must be made one month prior to permanent departure from Russia.
Payment of tax
The PIT payment is generally due no later than 15 July of the year following the reporting year. The payment needs to be made either in cash or from the taxpayer’s personal Rouble account opened with a Russian bank. It is not possible to make payments in a foreign currency. Tax overpaid may be, at the taxpayer’s request, either refunded or credited against future liabilities.
A self-employed individual is obligated to make three advance payments: on 15 July, on 15 August, and on 15 November. The balance of the tax due is to be paid on 15 July.
If the tax was not withheld at source by a Russian tax agent and the agent properly informed tax authorities on this issue, then the tax shall be paid no later than 1 December of the year following the reporting year on the basis of tax assessment issued by tax authorities.
Tax audit process
In chamber audit shall be performed within three months after the tax return filing.
The tax authority in Russia is the Federal Tax Service.
Statute of limitations
The statute of limitations is three years.
Corporate income tax (CIT):
Russian legal entities pay tax on their worldwide income (credit relief is available for foreign tax paid, up to the amount of the Russian tax liability that would have been due on the same amount under Russian rules).
The maximum CIT rate for all taxpayers in the Russian Federation has been set at 20%. In the period 2017 through 2020, a new allocation proportion applies: 3% of CIT revenues is allocated to the federal budget, whereas 17% is allocated to the budgets of the relevant constituent regions (in 2016 the allocation proportion was 2% and 18%, respectively). Individual Russian constituent regions may bring their CIT rates down to 12.5%; thus, the total minimum tax rate may be reduced to 15.5%.
Foreign legal entities (FLEs) pay tax on Russia-source income derived through a PE at 20% and are also subject to withholding tax (WHT) on income from Russian sources not related to a PE (at rates varying from 10% to 20%, depending on the type of income and the method used to calculate it).
FLEs managed from Russia can be recognised as Russian tax residents. Russian tax residency means that the worldwide income of such entities is taxable in Russia.
The tax residency rules set basic and additional criteria for determining the place of management. Moreover, the rules specify those situations that do not affect residency status (e.g. preparation of consolidated financial statements in Russia). Nevertheless, when assessing the risk of a company being deemed a Russian tax resident, it is advisable to evaluate all relevant facts and circumstances, even if the company’s activities carried out in Russia would technically qualify for such exemptions.
The rules also specify four situations when a company may be deemed a Russian tax resident only on a willing basis. These situations are when a company is:
· a party to a production sharing agreement (PSA)
· an 'active' foreign holding or sub-holding company (subject to compliance with certain conditions)
· an operator of a new subsea field (or a direct shareholder of such an operator), or
· engaged as its core activity in offering for lease or sublease marine or mixed river-ocean vessels and/or the international transportation of goods, passengers, and their baggage, and providing related services.
Permanent establishment (PE):
A 'permanent establishment' is broadly defined in the RTC as 'a branch, division, office, bureau, agency, or any other place through which a foreign legal entity regularly carries out its business activities in Russia'.
The accounting period in Russia is the calendar year. Different periods are not permitted. The taxable base is calculated on an accrual basis (only small-scale taxpayers are still allowed to use a cash basis).
Taxable income is to be calculated following the rules and principles established in the RTC. Taxpayers must maintain tax accounting registers. Statutory accounts may be used for computing tax items for which accounting methods are the same. In practice, most taxpayers use statutory accounts as a basis and apply adjustments so as to arrive at their taxable income.
Inventory can be valued using one of the following methods: first in first out (FIFO), average cost, and individual unit cost.
Capital gains are subject to the same 20% CIT rate and are added to ordinary income in order to arrive at the taxable income.
There are two tax baskets for taxpayers performing operations with securities and derivatives: (i) general and (ii) results from operations with non-listed securities and non-listed derivatives. A loss on the second basket cannot be offset with profits on the first basket (however, the opposite offset is possible). It is worth noting that, starting from 2016, prices charged in transactions with securities and derivatives should be compared with the market price only if a transaction is controlled under transfer pricing rules.
Gains from the sale of fixed assets and other property are equal to the difference between the sale price and their net book value for tax purposes. Losses resulting from the sale of fixed assets should be deducted in equal monthly instalments during the period, defined as the difference between their normative useful life and the actual time of use.
A significant exemption is available for capital gains from the sale or other disposal (including redemption) of shares in Russian entities (interests in Russian entities’ charter capital). One of the following conditions must be met in order to apply the 0% tax rate:
1. The shares have been non-listed securities over the entire period of the taxpayer’s ownership.
2. The shares are listed securities, and the company issuing shares has been active in the high-tech/innovation sector of the economy over the entire period of the taxpayer’s ownership.
3. As of the date of acquisition by the taxpayer, the shares qualified as non-listed securities and, as of the date of their sale by this taxpayer or of another disposal (including redemption) by this taxpayer, they are listed securities in the high-tech/innovative sector of the economy.
4. Real estate in Russia accounts for less than 50% (directly or indirectly) of the total assets of the company issuing shares.
The benefit is available provided that shares have been continuously held by a taxpayer for more than five years for bullets 1 and 4 and more than one year for bullets 2 and 3. One more criteria applies to bullets 1 and 4: shares have to be acquired by a taxpayer after 1 January 2011.
Dividends earned by Russian legal entities from Russian legal entities or FLEs are taxed in Russia at a 13% flat rate.
Dividends earned from 'strategic investments' are exempt from Russian income tax. An investment is considered strategic when:
· the owner (recipient of dividends) owns at least 50% of the capital of the payer of dividends or owns depository receipts entitling it to receive at least 50% of the total amount of dividends paid out, and
· the shares or depository receipts have been owned for at least 365 calendar days on the date the dividends are declared.
Dividends from companies domiciled in offshore zones with preferential tax regimes are not eligible for this tax exemption. The Ministry of Finance maintains a list of offshore zones.
Tax on dividends from abroad withheld in the source country may be credited against Russian tax.
The standard 15% tax rate is applicable to dividends paid by Russian legal entities to FLEs. The tax should be withheld by the Russian legal entity paying dividends. The tax may be reduced based on a relevant DTT, usually to 10% or 5%.
Interest income is taxed on an accrual basis. A standard tax rate of 20% is applied to interest income, except for interest on government and municipal securities, which are taxed at 0%, 9%, or 15%, depending on the type of security.
The WHT rate on interest income paid abroad equals 20% and may be reduced (typically to zero) under relevant DTT.
The level of interest income recognised for tax purposes may be subject to control.
There is no separate tax on royalty income. A standard CIT rate of 20% applies.
Exchange gains and losses:
Foreign exchange gains and losses are recognised for tax purposes on an accrual basis only.
Russian legal entities pay tax on their worldwide income. Credit relief is available for foreign taxes paid up to the amount of the Russian tax liability that would have been due on the same amount under Russian rules.
Current tax legislation does not contain provisions that allow tax deferral with respect to foreign income.
All taxpayers are required to obtain tax registration and be assigned a taxpayer identification number, irrespective of whether their activities are subject to Russian taxation.
The taxable period runs from 1 January to 31 December.
An annual CIT return must be filed by 28 March of the year following the end of the reporting year.
Payment of tax
Companies pay advance CIT payments on a monthly or quarterly basis. The final payment for the year is due by 28 March of the following year.
Tax audit process:
Tax dispute resolution at the pre-trial (administrative) stage
Tax disputes happen quite frequently in Russia. Most corporate taxpayers have to go through the tax litigation process at least once while doing business in the country.
At present, if taxpayers seek to challenge decisions and other documents/actions (or failure to act) of the tax authorities in court, before going to court, they must first contest such decisions/actions with the relevant higher tax office.
In recent times, tax disputes have been increasingly resolved at the pre-trial (administrative, superior tax office) stage. However, taxpayers cannot formally negotiate tax audit results or enter into formal settlement agreements with the tax authorities at the pre-trial stage. So, in many cases, they still must litigate in order to uphold their rights.
Tax dispute resolution in court
Taxpayers can file claims against the tax authorities through arbitrazh courts (i.e. courts that review and resolve economic disputes mainly among legal entities/entrepreneurs or between legal entities/entrepreneurs and state authorities, including the tax authorities). Claims may be filed with a court within three months after a contested decision takes effect or within three months after a taxpayer discovers that its rights have been violated (provided that the taxpayer has already sought redress through the mandatory pre-trial stage mentioned above).
Courts of the first instance (first level) initially review disputes and issue decisions. Decisions of a first instance court can be appealed to appellate courts (second instance or level) and cassational courts (third instance or level). If litigation goes through all three instances (levels), the process usually takes up to a year.
Resolutions/decisions of courts at these three levels may be appealed to the Russian Federation Supreme Court (as a supervisory authority). However, in practice, very few such disputes are actually heard by the Supreme Court.
Statute of limitations:
The statute of limitations is established for three years. For example, tax authorities may examine 2016, 2015, and 2014 CIT returns by conducting a site tax audit in 2017.
Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.