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Fundamental changes expected to Personal Taxation

Fundamental changes expected to Personal Taxation

The Government has introduced in the State Duma a draft federal budget for 2020-2022 along with the MATP (the Main Areas of Budgeting, Tax, Customs and Tariff Policy up to 2022).

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Donat Podnyek

Partner, Tax & Legal, People Services

KPMG in Russia

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The Government has introduced in the State Duma a draft federal budget for 2020-2022 along with the MATP (the Main Areas of Budgeting, Tax, Customs and Tariff Policy up to 2022). According to this document, as we approach 2022 we can expect changes to tax residency rules for individuals and a reduction in the personal income tax (PIT) rate from 30% to 13% for individuals who are not tax residents of the Russian Federation.

 

The changes to tax residency rules are based on the concept that, to become tax resident, it will be enough for an individual to spend 90 or more calendar days in the Russian Federation, instead of the current 183 days that individuals have to spend in Russia. In addition, it is proposed that an additional criteria be added: to look at whether an individual’s centre of vital interests lies within the Russian Federation for recognition as a Russian tax resident, even if the individual’s stay in the Russian Federation does not exceed 90 days. This basis for recognising individuals as tax resident is expected to take into account several criteria including whether the person has real estate, personal and economic relations, the person’s place of residence, and whether they are a citizen of the Russian Federation. The parameters for assessing these criteria are supposed to be specified in the relevant draft law that will be introduced if the State Duma approves the MATP.

These proposed changes may significantly influence the tax liabilities of the owners of CFCs – controlled foreign companies and non-corporate structures (trusts, partnerships, etc.). This may affect people who are not recognised as Russian tax residents under existing rules but who do spend more than 90 days in the calendar year in the Russian Federation, or who will be recognised as having their centre of vital interests as being in the Russian Federation after the new rules are brought into effect. In particular, under certain circumstances, this will require reporting to the Russian tax authorities on CFCs and paying tax on CFCs’ profits in the Russian Federation.

The proposed changes are favourable for members on the boards of directors of Russian companies who are not Russian tax residents, as well as for non-residents receiving income in the Russian Federation (e.g. from selling property in the Russian Federation), as thanks to the lower rate, they will have to pay less tax on the relevant income in Russia. 

These changes may also have a significant impact on the expenses of companies operating globally with respect to their mobile personnel. For example, Russian citizens working abroad who, under the new rules, will be recognised as having their centre of vital interests as being in the Russian Federation, will have to report their income received outside the Russian Federation to the Russian tax authorities (currently, individuals spending fewer than 183 days in the Russian Federation in a calendar year are not obliged to declare this income). As Russia has double taxation treaties with many countries, this change will not bring significant amounts of additional tax revenue to the Russian budget, but will increase the tax burden for taxpayers and the workload for tax authorities.

It should be noted that due to the time constraints inherent in the law-making process, the new rules are unlikely to be enacted before 2021, so there is time to analyse the issues related to their application and evaluate tax liabilities, taking into account the specific situation of individual potential taxpayers.

Please note that, according to clarifications of the Russian Ministry of Finance, the MATP is not a regulation though serves as grounds for the preparation of draft changes to tax laws by federal executive authorities, and for those changes to be introduced by the Russian Government.

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