Russian Tax Rules: Key Changes

02.12.2020

Legal Update No 813

Bryan Cave Leighton Paisner (Russia) LLP (formerly Goltsblat BLP in Russia) advises that, this November, the Federal Assembly of the Russian Federation has passed the following tax laws:

  • Federal Law No. 368-FZ dated 9 November 2020 “On Amending Parts I and II of the Tax Code of the Russian Federation”;

  • Federal Law No. 372-FZ dated 23 November 2020 “On Amending Part II of the Tax Code of the Russian Federation with Respect to Personal Income Tax Exceeding RUB 5 m for the Tax Period”;

  • Federal Law No. 374-FZ dated 23 November 2020 “On Amending Parts I and II of the Tax Code and Certain Legislative Acts of the Russian Federation”.

These Laws change significantly the corporate and personal tax rules, particularly the approaches to taxing holding companies.

Below are the key changes we believe materially affect taxpayers in Russia.

Cancellation of the zero tax on dividends paid by a Russian company to its Russian parent company through a foreign company

The tax amendments actually cancel the zero profit tax under the “pass-through” approach for the tax on dividends paid by a Russian company to its parent company through “interim” foreign companies in an ownership chain. So, Russian companies receiving dividends through “interim” foreign companies will not be able to apply the zero rate even if they meet the conditions prescribed by the Russian Tax Code. Such dividends will be taxed at 13%.

At the same time, a transition period will be introduced from 1 January 2021 through 31 December 2023.  The right to the zero tax rate will be preserved in established cases provided the Russian Tax Code requirements are met.

Additional conditions have been set for applying the zero rate during the transition period. These include the requirement that dividends be credited to Russian accounts of foreign companies. The zero rate will be unavailable in the transition period if the country (territory) of incorporation (state registration) of the foreign company receiving or paying the dividends is on the offshore zone list approved by the Russian Ministry of Finance.

Importantly, the current wording of the amendments, unlike the original versions posted for discussion, suggests that, from 2024, the right to use the zero tax on dividends of all foreign companies with Russian tax resident status be cancelled, even if the status has been obtained at their own discretion rather than in a compulsory manner.

Changes in the conditions for applying the zero profit tax when shares (interests) are sold after being held for five years

The conditions for applying the so-called “5-year relief” in selling shares (interests) are also changed.

The zero rate may potentially apply, including if a taxpayer sells shares (interests) in foreign companies, provided that the Russian Tax Code requirements are met. The zero rate will not apply if the shares (interests) sold are in foreign companies permanently located in a country (territory) on the offshore zone list approved by the Russian Ministry of Finance.

At the same time, the zero rate requires that not more than 50% of the assets of the companies selling their shares (interests) consist, directly or indirectly, of properties located in Russia. The 50% property test must be met at the end of the month preceding that in which the shares (interests) are sold.

This test will not apply to shares in Russian companies that, when sold:

(i) are recognised as publicly traded and

(ii) are shares in a high tech (innovative) sector of the economy.

The new laws clarify that the share (interest) ownership term will not discontinue if either the taxpayer selling the shares (interests) or the company whose shares are sold by this taxpayer changes its tax residence or domicile.

It is also specified that the ownership term of shares (interests) obtained by a taxpayer-successor through reorganisation will start running from when they are acquired by reorganised companies, i.e., the term will not discontinue and will not start running from when they are obtained by the taxpayer-successor from the legal predecessors. The tax authorities may disallow the zero rate to be used if tax controls establish that the key purpose of the reorganisation is to apply the beneficial tax rate.

The amendments to Chapter 25 of the Russian Tax Code relating to changes in applying the zero profit tax directly affect tax exemption of personal income received from selling shares in either Russian or foreign companies.

Funds contributed to companies’ property may be deducted from the proceeds from sale of interests (units) in their authorised capital (unit fund)

The Russian Tax Code amendments permit taxpayers to reduce proceeds from sale of interests (units) in the authorised capital (unit fund) of companies by funds contributed to such companies’ property. At the same time, monetary contributions returned to the taxpayer when it sells interests (units) will not be recognised as costs reducing the proceeds from sale of interests (units) in the authorised capital (unit fund).

It is also clarified that the contribution to a company’s property that may be deducted from the proceeds from sale of interests (units) in its authorised capital (unit fund) will be calculated pro rata the sold interests (units) in the total volume of interests (units) owned by the taxpayer.

Proceeds from trust management of unit investment fund property equated to dividends and a 50% Russian property test introduced for assets of any investment fund

For Russian tax purposes, the Russian Tax Code amendments equate proceeds from management of unit investment fund property received by a foreign company-unit holder from a Russian source to dividends.

In addition to proceeds from sale (redemption) of investment units in annuity or property funds, proceeds from sale (redemption) of units in combined and other funds whose assets consist, directly or indirectly, of property located in Russia are recognised as proceeds from a Russian source subject to 20% withholding tax.

Proceeds from property rights transferred free of charge are listed as proceeds exempted from taxation under Sub-clause 11, Clause 1, Article 251 of the Russian Tax Code

The list of proceeds not recorded for tax purposes under Sub-clause 11, Clause 1, Article 251 of the Russian Tax Code includes those consisting of property rights received free of charge, provided that the interest of the company transferring (receiving) such property rights in the receiving (transferring) company exceeds 50%.

Please note that, for proceeds consisting of property rights received free of charge to be tax exempt, the company’s interest in another company is determined as per Article 105.2 of the Russian Tax Code. So, both direct and indirect participation by one company in another should be considered when the given interest is calculated.

It is specified that the proceeds (property rights) exemption under Sub-clause 11, Clause 1, Article 251 of the Russian Tax Code does not apply if (i) a Russian company participates indirectly in the foreign company from which the property (property right) is received; and (ii) the country (territory) in which such company is tax resident is on the offshore zone list approved by the Russian Ministry of Finance.

Increase in PIT from 13% to 15% on income exceeding RUB 5 m

An increased 15% PIT rate is established for all personal income for which no other rates are introduced. This 15% rate applies only to the part of proceeds in excess of RUB 5 m per calendar year. Proceeds not exceeding this amount will still be taxed at 13%. So, in fact, progressive taxation of personal income is introduced in Russia.

The 13% PIT rate continues to apply to the following incomes of individual tax residents of Russia, irrespective of the amount (even if above RUB 5 m):

i. income from sale of property (other than securities) and/or interest(s) therein;

ii. income consisting of property (other than securities) received as a gift;

iii. income consisting of insurance payments under insurance policies and pension funding.

The right to offset input VAT on marketing and advertising services purchased for use in transferring software rights to foreign partners

In 2019, the Russian Tax Code was amended to entitle taxpayers to offset input VAT on goods (works, services) and pre-emptive rights purchased for performing work (services) at a place of delivery other than Russia under Article 148 of the Russian Tax Code. At the same time, an exception was made for work (services) also exempted from VAT as per Article 149 of the Russian Tax Code. These amendments came into force on 1 July 2019.

The Russian Tax Code amendments entitle taxpayers to offset input VAT on marketing and advertising services purchased for use in transferring software rights to foreign partners exempted from VAT under Sub-clause 26, Clause 2, Article 149 of the Russian Tax Code.

Extended list of financial platform operator transactions exempted from VAT

Federal Law No. 211-FZ dated 20 July 2020 “On Making Financial Transactions Using a Financial Platform” came into force on 20 July 2020.

The amendments to the Russian Tax Code extend the list of transactions exempted from VAT under Article 149 of the Russian Tax Code to include the following services:

  1. services of financial platform operators to facilitate cooperation between financial platform participants via the Internet to perform financial transactions;

  2. services of financial platform operators to identify financial platform participants under Law No. 211-FZ;

  3. services of financial platform operators to provide information support for cooperation between financial platform participants for transactions by platform participants as per Law No. 211-FZ in the manner established by rules of the relevant financial platform;

  4. services for individuals to place (buy up) sovereign bonds rendered by authorised organisations, including via a financial platform;

  5. services of financial platform operators directly relating to the services listed above (according to the list approved by the Russian Government).

Recognition of tax returns as not filed with the tax authorities

Tax returns (calculations) will not be recognised as filed with the tax authorities if a desk audit identifies any of the following circumstances on the basis of the given tax return (calculation):

  1. the tax return (calculation) is signed by an unauthorised person;

  2. the individual authorised to act on behalf of the taxpayer without power of attorney is disqualified and as of the tax return (calculation) date such disqualification has not expired;

  3. the individual dies before the tax return (calculation) is signed with their advanced qualified electronic signature;

  4. before the tax return (calculation) is submitted, an entry is made in the Companies Register about the information relating to the person authorised to act on behalf of the taxpayer without power of attorney and signing the tax return (calculation) being incorrect;

  5. an entry is made in the Companies Register about dissolution of the legal entity (through reorganisation, liquidation or exclusion of legal entities from the Companies Register by decision of the registration authority) before the legal entity submits the tax return (calculation) to the tax authority;

  6. the tax authority identifies that the indices of the submitted tax return are inconsistent with the controlling references on the list approved by the Russian Tax Service.

Most of these tax amendments are expected to come into force on 1 January 2021, though some of them will become effective later.

The above overview is limited to certain legal provisions we believe to be of most importance for the general public while the laws in fact introduce a huge number of specific changes. We recommend that you assess their impact on your business, while we are ready to provide you with the necessary support and assistance in this matter.

Contact details

Subscription

If you would like to receive our legal alerts and updates highlighting current legal issues relevant to your areas of interest and providing expert commentary by our lawyers, please click on "Sign Up" and fill out the form.