The key changes are aimed at reviewing the progressive scale of personal income tax (PIT) and introducing new tax rates applicable depending on the amount of the individual’s annual income. Among others, the changes include a review of the approach to calculating PIT on the fixed profit of controlled foreign companies (“CFC”), a change in the profits tax rate and adjustments to the simplified taxation system (“STS”).
The draft laws are expected to be passed by the State Duma in its current session and will enter into force on 1 January 2025.
In this overview, we will look at the developments proposed by the Ministry of Finance in more detail.
Changes to PIT rates depending on the amount of income earned
Currently, PIT is paid at the rate of 13% and if income exceeds RUB5 million per year, then at the rate of 15%, but only in relation to the amount that exceeds the specified threshold. The approach proposed by the Ministry of Finance impliesArticle|
Income (RUB) |
PIT rate |
How tax has increased |
|
Up to RUB2.4 million per year (up to RUB200,000 per month) |
13% |
The upper threshold for applying the 13% rate has been lowered |
|
From RUB2.4 million to RUB5 million per year (from RUB200,000 to RUB417,000 per month) |
15% |
+ 2% on annual income in excess of RUB2.4 million per year but less than RUB 5 million |
|
From RUB5 million to RUB20 million per year (from RUB417,000 to RUB1.67 million per month) |
18% |
+ 52,000 per year +3% on annual income in excess of RUB5 million per year but less than RUB 20 million |
|
From RUB20 million to RUB50 million per year (from RUB1.67 to RUB4.17 million per month) |
20% |
+ 502,000 per year +5% on annual income in excess of RUB20 million per year but less than RUB50 million |
|
Above RUB50 million per year (above RUB4.17 million per month) |
22% |
+ 2,002,000 per year +7% on annual income in excess of RUB50 million |
As can be seen from the table above, new income thresholds have been added. Within the limits of these thresholds a corresponding increased PIT rate will apply. Also note that the lower threshold of annual income taxable at a basic rate of 13% has been reduced to RUB2.4 million (instead of the former threshold of RUB5 million).
As before, the corresponding increased PIT rate will apply only to the amount in excess of the threshold and within the limits of the established annual income threshold.
Changes in the PIT assessment procedure in relation to gains from the sale of securities, dividends and interest on deposits
In the current version of the draft law, tax rates that are applicable to gains from the sale of securities, as well as dividend income and interest on bank deposits and deposit accounts have been maintainedArticleAs we understand, in its current version the draft law proposes abolishingArticle
Considering the abovementioned parameters of the new progressive PIT scale, a question arises as to whether the introduction of the five-tier scale may testify that the Russian progressive PIT system has taken its final shape. Or whether this a transitional phase and whether, after its adaptation, there will be any adjustments to PIT rates or an upward review of PIT rates and/or the introduction of new threshold values (considering, for example, the inflation rate) and even higher tax rates applicable thereto.
These parameters and factors must be taken into account by taxpayers (especially, by high-net-worth individuals) for tax planning purposes.
Changes to a fixed tax charge regime in relation to a CFC’s profit
The draft law changesArticleHowever, according to the newly proposed procedure, the amount of PIT payable on the fixed profit of a CFC will be a multiple of the number of CFCs controlled by it. Therefore, the taxpayer will be imputed the fixed profit of each of the foreign companies controlled by it and the amount of PIT payable on this basis will increase in proportion to the number of foreign companies.
We further note that if the taxpayer begins to pay PIT on the fixed profit of a CFC, the taxpayer will be obliged to apply such regime for at least five years. This provision is expected to be left unchanged.
Practical implications
- As practice has shown, with several CFCs, the transition towards paying PIT on fixed profit was reasonable from a practical (considering a number of easements, including the submission of supporting financial statements) and financial standpoint. The proposed changes require more thorough analysis to make a weighed-up decision as to whether it will be reasonable to apply this regime for calculating tax liabilities in relation to CFCs.
- Taking into account this new approach (which is generally unfavourable for controlling persons) to calculating PIT on the fixed profit of a CFC, it is not clear whether such new procedure will be treated in the sense of article 227.2 (4) of the Russian Tax Code as a change resulting in an increase in PIT on the CFC’s fixed profit. It is this circumstance that is the basis for giving notice, to the tax authority, of a refusal to pay PIT on fixed profit before the expiry of the mandatory five-year period and, accordingly, for switching to the payment of tax on actual profits (if any).
- If it becomes possible to not pay PIT on the CFC’s fixed profit on the basis referred to in article 227.2(4) of the Russian Tax Code, this will impose an additional burden on controlling persons to restore the financial statements and audit reports in relation thereto over the periods when this regime was in place (if such were not prepared, which is acceptable under article 25.14-1 of the Russian Tax Code).
From a practical perspective, this may be time- and effort-consuming and the impossibility to provide such documents to the tax office in the future will create financial problems for the taxpayer, as the failure to submit such documents results in a fine on the controlling person of RUB1 million for each set of documents (i.e. in relation to each CFC controlled by such person).
Other proposed changes
-
Changes to corporate profits tax rates:
- The draft law providesArticle
2(43)(a) of the Draft Law for an increase in the corporate profits tax rate, from 20% to 25%. This change is not expected to affect the terms of application of various favourable tax incentive regimes such as investment protection and support agreements, special investment contracts, benefits for residents of special economic zones, territories of advanced development, etc. - The Draft Law also providesArticle
2(43)(d) of the Draft Law for the cancellation of the 0% tax rate for IT companies. According to the Draft Law, in 2025-2027 the tax rate will be set at 5%. - The Draft Law further providesArticle
2(43)(e) of the Draft Law for a tax rate increase in relation to personal trusts, from 15% to 22%.
-
Adjustments to the STS:
- The Ministry of Finance is attempting to legislatively combat abusive tax structures in the form of “splitting a business” techniques by reviewing the STS. More specifically, the draft law provides for an increase in the thresholds for applying the STS of up to RUB450 million (compared to RUB265 million in 2024) and the imposition of an obligation on the taxpayers to pay VAT on income in excess of RUB60 million.
Taxpayers will be given a choice in relation to the payment of VAT: paying tax at standard rates and keeping the right to tax deductions or applying the 5% and 7% tax rates depending on the amount of income, but without tax deductions.
We will comment on these and other changes proposed by the draft law in more detail in our subsequent updates.
The Denuo team possesses a wealth of experience in advising clients and structuring deals from the perspective of international and domestic PIT and other tax implications. We would be pleased to assist you with the abovementioned matters, including to assess the tax risks and give recommendations on structuring business processes and deals between individuals and various for-profit organisations.
