Russian Income Taxation of Individuals
In Russia the income of individuals is taxed only on federal level. The states (regions) have no authority to levy on income. The Tax code sets forth flat 13% rate for the income of Russian tax residents and 30% flat rate for non-residents. The dividends paid by the Russian companies to nonresidents are taxed at 15% flat rate. Tax residents are the persons, who spend at least 183 calendar days in the next 12 consecutive months. Nonresidents pay taxes only from the sources in Russia.
The tax period is one calendar year, though some groups of taxpayers (self-employed taxpayers and foreign workers who work under employment patent) have to calculate and may installment payments.
The Tax code contains extensive list of types of income exempted from taxation, which are available only to tax residents and does not apply to gains on assets disposed of in the course of business activities, unless otherwise stipulated in the international treaty. Also the taxable income may be reduced on the amounts of allowed itemized deductions, but only if such income is taxed at 13% rate. Consequently, nonresidents, whose income mostly taxed at 30% rate, in most situations do not qualify for claiming deductions.
The Tax code contains a list of available deductions, naming standard, social, investment, property,, professional and two types of losses rollover deductions. Each deduction is associated with plenty limitations and subject to extensive documenting requirements.
If the amount of the claimed deductions increases the amount of the tax liability, the tax liability will equal zero. The income tax losses, arisen after deductions, predominantly are not refundable and, unless emerge from securities transactions losses or few other types of losses, may not be rolled over to the following or previous tax periods.
The income of tax residents derived from the disposition of real estate may be exempt from taxation if the property held for the minimum period of 3 years for real property and such property was:
transferred to the taxpayer as a legacy or under the contract with a family member or a close relative or
obtained from the state due to the privatization or
transferred under the lifetime maintenance contract.
In other situations the minimum period of ownership is 5 years.
The income from the disposition of movable (non-real) property may be exempt from taxation if such property is owned at least 3 years. This provision does not cover the disposition of securities and property, used for business.
There is no separate capital gains tax. Gains derived from the disposition of property and assets are subject to income tax at the standard rate.
Tax return filing is made by employers, who calculate, withhold and remit taxes. Self-employed taxpayers taxpayers, who have capital gain, and the taxpayers, who claim deductions, file tax returns by themself. There is no possibility of filing joint tax returns.
Although Russia taxes the income of its tax residents from domestic and international sources, there are numerous international treaties which eliminate double taxation.
Taxpayers are entitled to a foreign tax credit against their Russian tax liabilities if provided for by an international treaty of the Russian Federation. The credit cannot exceed the amount of tax payable in Russia. To claim the foreign tax credit, the taxpayer is obligated to provide the Russian tax authorities with supporting documentation along with the tax declaration within three years after the reporting period.
The details of any applicable tax treaty should always be examined before commencing work in Russia. Mr. Kutuzov's income tax practice is aimed to reducing overall tax burden of the Russian income taxation and complying with all filing requirements.
Business Taxes in Russia
Corporate profit tax. The corporate profit tax is a direct federal tax with the standard rate of 20%. There are also several reduced rates:
15% rate on the income in the form of dividends received by a foreign organization on shares of Russian organizations, as well as dividends from participation in the organization’s capital in another form;
13% rate on the income in the form of dividends received from Russian and foreign organizations by Russian organizations and the income in the form of dividends received on shares, the rights to which are certified by depositary receipts.
10% rate on the income of foreign organizations not related to activities in the Russian Federation through a permanent establishment from the use, maintenance or rental of mobile vehicles or containers in connection with the operation of international transport
The taxable profit is the result of subtracting the expenses from the income of the organization. The taxpayers of this tax are
all Russian legal entities (LLC, Corporations, JSC, etc.);
foreign legal entities that work in Russia through permanent representative offices or which simply receive income from a source in the Russian Federation;
foreign organizations recognized as tax residents of the Russian Federation in accordance with an international tax treaty - for the purposes of applying this international treaty;
foreign organizations whose place of actual control is the Russian Federation, unless otherwise provided by international tax treaty.
Taxpayers applying special tax regimes, the taxpayers who are tax payers for gambling business, and the participants of the project the Innovation Center "Skolkovo" are exempted from the corporate profit.
The deductible expenditures are reasonable and documented costs of the enterprise. They are classified into costs associated with production and sales (salaries of employees, the purchase price of raw materials, depreciation of fixed assets, etc.) and non-operating expenditures (negative currency exchange difference, court and arbitration fees, etc.). In addition, there is an exhaustive list of non-deductible expenditures, such as accrued dividends, contributions to the authorized capital, repayment of loans, etc. Direct costs are deductible only upon the sale of products (works, services), for which production they are taken. The taxpayer independently determines a list of direct costs associated with the production in the taxpayer’s accounting policies. The amount of indirect costs for production and sales made in the reporting period are fully attributable to the expenses of the current reporting period.
Estimated payments of the tax shall be made monthly. Organizations that have incurred a loss in the previous reporting period are entitled to reduce the tax base of the current period by the entire amount of the loss they have received or by a part of this amount. During the reporting periods from January 1, 2017 to December 31, 2020, the tax base for the relevant period can be reduced by losses of previous periods by no more than 50%.
Corporate property tax, or tax on fixed assets, is assessed on year-averaged book value of fixed assets excluding land (which is subject to land tax). Radioactive waste storage facilities, space satellites, church property and other itemized assets are specifically exempt from taxation. The maximum rate is 2.2 percent; regional authorities can vary rates depending on types of taxpayers and assets. This provides a method to establish disguised individual preferences, which are outlawed by the Code.
Tax on mineral resource extraction is the second largest source of federal revenue regulated by the Code; most of it is paid by oil companies. Tax rates for oil (per metric ton) are set by the government; its formula refers to world market prices (same for all domestic producers) and a "depletion factor", specific to each oil field. The latter has been regularly criticized as a source of corruption and unfair competitive advantage. New oil fields in Sakha, Irkutsk Oblast, Krasnoyarsk Krai are exempt from MRET altogether.
Rates for other mineral resources are set in the Code as a fixed percentage of their market value (from 3.8 percent for potassium salts to 17.5 percent for gas condensate) or, in case of natural gas, at a fixed amount per unit volume. The tax is paid monthly based on physically extracted tonnage, not sales. A related but separate Water tax is paid by organizations physically extracting surface or subterranean fresh water, as well as by hydroelectric powerplants and timber rafting loggers.
Expense deductibility limitations were gradually eliminated in the years following enactment of Chapter 25, and as of August, 2008 practically all business expenses are fully deductible. The Code retains a principal statement that deductible expenses must be "economically justified and properly evidenced with documents". The tax authorities manage the specifics. Taxpayers resolve disputes through court litigation; resolutions of upper-tier Arbitrage Courts, clarifying gray areas of tax accounting, form a separate layer of tax environment that augments the Code.
Double taxation of dividends is completely eliminated when a Russian shareholder owns at least 50 percent of Russian or foreign subsidiary paying dividends (excluding foreign entities located in tax haven jurisdictions) for at least 365 days and the investment is worth more than 500 million roubles. All other dividends received by Russian shareholders are subject to 13 percent tax, up from 9% before 2015.
Excise tax is levied on manufacturers of raw and refined alcohol, alcoholic drinks stronger than 1.5 percent by volume, including beer; gasoline and diesel fuel, motor oils; passenger cars and motorcycles with engines in excess of 150 h.p.; tobacco products. The Code specifies strict licensing rules for oil refineries and alcohol distillers. Rates increased until 2010; by 2010, excise taxes of a typical cigarette pack will reach 15–30 percent, which is less than its European counterpart. Since 2007, cigarettes have been taxed based on a percentage of manufacturers' suggested retail price (MSRP). This approach made MSRP mandatory and quickly led to government-induced retail price fixing.
Unified social tax is accrued on all employer-to-employee payments which are deductible for profit tax purposes; non-deductible payments like dividends or charity are not subject to UST. Pensions, severance pay, and travel expenses are not taxable. The schedule is regressive: annual income up to 280,000 roubles is taxed at 26 percent; marginal rate for income above 600,000 roubles is 2 percent. Rates in agriculture and in special high technology parks are lower. Note that a significant part of mandatory contributions to Pension Fund is not included in UST.
Land tax is the only local tax in Russia: its rates are set by municipal authorities (excluding the federal cities of Moscow and Saint Petersburg, where the rates are set by city legislators). The maximum rate is 0.3 percent on lands zoned for agriculture, housing and dachas, and 1.5 percent on other lands. Forest reserves and bodies of water are exempt. Land values are periodically assessed by land registrars and kept substantially below market prices. Unlike corporate property tax, land tax is paid by individual taxpayers.
Vehicle tax is levied annually on owners of motor vehicles and trailers, ships, and aircraft. Commercial ships and aircraft operated by transportation companies, agricultural, military vehicles and ambulances are exempt. The Code establishes maximum rates tied to engine power. Rates increase steeply with increasing horsepower. For example, in 2009 fiscal year the city of Moscow levies 700 roubles on a 100 h.p. passenger car, 2400 roubles on 120 h.p., 12,000 roubles on 200 h.p. and 45,000 roubles on 300 h.p. Taxation does not depend on emission levels.
Value-Added Tax in Russia
Value-added tax (or just VAT) is the most significant source of revenue for the budget of the Russian Federation. The percent of disputes involving VAT is the greatest among all tax litigations, since the refund of export VAT has become a major source of fraud. Most of the case law is associated with refund eligibility and reporting issues.
VAT is the indirect refundable federal tax added to the price of goods, works or services. Unlike the sales tax, which is charged from the final consumers (mostly individuals), the VAT is added each time the product changes hands. The seller of the product while paying VAT to the budget (input VAT) is entitled to deduct from it the amount of VAT paid to his supplier (output VAT). The final consumer may not deduct VAT.
There are two types of VAT exemptions: exemptions from the status of taxpayer (when the person does not have to pay any input VAT) and VAT exempted transactions (when only the particular transaction is VAT-free).
The VAT taxpayers are legal entities, entrepreneurs, and persons (both legal entities and individuals) who transfer the goods over the border of the Russian Federation. Unless registration of electronic services provider, there is no separate VAT registration in Russia. The legal entity or entrepreneur, with several exceptions, may apply for the VAT-exempt status if for the three preceding consecutive calendar months, the amount of revenue from the sale of goods (works, services) of these organizations or individual entrepreneurs excluding tax did not exceed in total two million rubles.
There are three flat rates of VAT in Russia: standard 20% rate, 10% rate for specific basic products like grocery, books, products for children and medicine, and 0% rate for the particular exported goods, international transportation services and other types of goods like license, postage stamps etc.
VAT shall be paid quarterly. The tax base shall be calculated on the earliest of the following dates:
the day of shipment (physical transfer) of goods (works, services), property rights;
the day of payment, installment payment for the upcoming deliveries of goods (execution of works, rendering services), transfer of property rights;
the transfer of ownership for the purposes of this chapter is equal to its shipping;
when a taxpayer sells goods transferred to them for storage under a “warehouse storage contract” with the issuance of a warehouse certificate, the moment for determining the tax base is defined as the day of issue of the warehouse certificate;
the day of assignment of a monetary claim or day of termination of the corresponding obligation.
The input VAT invoiced by the suppliers is deductible. If the amount of VAT deductions exceeds the total VAT liability, the resulting difference is refundable to the taxpayer. There are three defund requirements:
the products, for which the input VAT has been paid, should be used in transactions subject to VAT. Using the products in VAT-exempted transactions disqualify the refund. Also the paid amount of VAT that has not yet materialized into services or goods cannot be credited against current tax liability;
acquired products should be properly bookkeeped;
the taxpayer has a properly issued VAT invoice (similar to the U.S. form 1099-MISC) for these transactions and the supporting documentations (contracts, accomplishment acts). The tax regulation establish a standard form of VAT invoice, which should be issued to the payer within 5 days after the supply has occurred.
The output-VAT-exempt transaction does not entitle the taxpayer to refund the input VAT. Instead, the amount of non-refundable input VAT is in most cases deductible over corporate income tax brakes.
After the taxpayer has submitted a VAT tax return, the tax authority checks the legitimacy of the refund claim during an office tax audit. Within seven days after the audit is finalized, if no violations were revealed, the tax authority is obliged to make a refund decision. In case of violations relieved, the audit resolution should be transferred to the head (or deputy head) of the tax authority office for further review. Based on the results of the review, the head (or deputy head) of the tax authority office makes a decision to prosecute the taxpayer for noncompliance or to issue one of the following decisions:
full denial in refund.
If the taxpayer has any tax arrears, including the arrears in regard to the other federal taxes, penalties and fines to be paid or levied, the tax authority shall deduct the amount of such arrears from the refund.
Overall analysis of the Russian VAT system reveals fundamental similarities to the VAT regulation of the European Union.
Mr. Kutuzov's VAT practice is aimed to reducing overall tax burden of the Russian VAT taxation and complying with all filing requirements.
Expanding to the Russian market may be challenging. On June 17, 1992 the United States of America and the Russian Federation signed the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. This document covers
The new Convention provides for exemption from tax at source of interest and royalties. Dividends would be subject to tax at source at a maximum rate of 10 percent, reduced to 5 percent in the case of dividends paid by a subsidiary corporation in one country to its parent corporation (in this case defined as a more than 10 percent ownership interest) in the other country. The 5 percent rate would also apply to branch profits. Capital gains on assets other than real property would be taxable only in the country of residence of the person deriving the gain. (Such gains are dealt with in the residual article on "other income" which provides for exclusive taxation at residence of income not effectively connected with a place of business in the other country.) Gains with respect to real property may be taxed where the property is located.
Under the Convention if a construction site or drilling rig is maintained by a resident of one country in the other country for a period longer than 18 months, the site or rig would constitute a “permanent establishment", and become subject to profits tax in the other country. Business profits in general are taxable in the other country only to the extent attributable to a permanent establishment there, and then only on a net basis with deductions for business expenses.
The Convention provides conditions under which each country may tax income derived by individual residents of the other country from independent personal services or as employees, as well as pension income and social security benefits. Special relief is granted to visiting students, trainees, and researchers. The provision in the existing treaty of a two year exemption for visiting teachers and journalists is not retained. Any person who prefers the existing treaty may continue to have it applied in its entirety for one year after the new Convention enters into force. Items of income not specifically dealt with may be taxed only in the country of residence. The benefits of the Convention are limited to residents of the two countries meeting certain standards designed to prevent residents of third countries from inappropriately using the Convention.
Planning international tax burden is the key practice of Mr. Kutuzov's firm. We handle all sorts of double taxation issues, including recognition of foreign losses, amortization and depreciation of foreign assets, using Foreign Tax Credit and foreign tax deductions, developing corporate structure with the reduced overall tax burden, establishing and managing international trusts and other tax-exempt vehicles.