Tax Matters in Russia
A Meeting with Marina Kushnerova, Peter Arnett and David Maltby
David Maltby: I am back again at the offices of Scheglov and Partners, where I earlier met with Marina Alekseevna Kushnereva for the article titled ‘Immigration – the facts and an insight into the current immigration scene’ http://www.russiaknowledge.com/2017/10/24/immigration-the-facts-and-an-insight-into-the-current-immigration-scene/ . Marina has introduced me to Peter Arnett, a UK expat who has been in Russia since 1996, and who is currently advisory partner with Alinga Consulting Group. Peter has specialised in taxation during a career spent in the UK, Russia and Singapore over more than thirty years and I am here to pick his brains on Russian taxation as it affects the expatriate community.
Peter Arnett: I think it is very important when talking about taxation in any country not to launch immediately into a list of headline tax rates and special rules. One must first step back and consider the tax system of the country in a worldwide context and see where it is trending. This is particularly true for Russia.
Although the country currently receives much negative publicity overseas on the political front – sadly often the only prism through which this great country is viewed by outsiders – the recent development of its tax system is a much happier story. Led by pragmatic thinkers in the Ministry of Finance, Russia has gradually over the past twenty years been adopting tax principles common in other developed countries so that its tax regime is converging with international norms. The Russian government has also been participating with over 100 other countries in a common fight, called by the acronym BEPS, against worldwide tax avoidance and the use of tax havens. The effect of BEPS is already being felt by businesses and wealthy individuals and is an interesting subject which merits a separate discussion.
It would be fair to say that the result so far is that Russia today is a moderate tax country. The kind of taxes levied are similar to those in other countries, the headline tax rates are at or below average levels for industrialised countries, and compliance obligations are manageable. There are still areas where Russia scores poorly – for example, its court decisions on tax law are sometimes unpredictable, illogical, inconsistent or incompatible with international practice – but overall an expatriate arriving here should find tax to be reasonable and not one of life’s major worries.
Peter Arnett: An individual is tax resident in Russia if he is actually in Russia for not less than 183 calendar days over 12 consecutive months. The period of time for which an individual is deemed to be in Russia is not interrupted by brief trips outside Russia for short-term (less than six months) medical treatment or education.
Because the tax year is the calendar year, it follows that you are tax resident in Russia for the tax year if have actually spent (or deemed to have spent) 183 days or more in Russia during the calendar year. If you travel a lot, ‘days of presence’ can come down to your arrival and departure days. To avoid disputes as to whether these count or not, it is sensible to stay well above the 183 day limit if you want to be certain of getting the advantages of Russian tax residency. If you fall into the visa category of ‘Highly Qualified Specialist’, however, the 183 day rule does not apply.
David Maltby: The 183 day rule is also linked to residency status. As we discussed previously, in the article titled ‘Immigration – the facts and an insight into the current immigration scene’ http://www.russiaknowledge.com/2017/10/24/immigration-the-facts-and-an-insight-into-the-current-immigration-scene/ , being out of the country for this period also puts residency status at risk.
Marina advises careful management of trips outside Russia, and to seek advice if you think there could be issues. Peter, what are the advantages of being Russian tax resident?
Peter Arnett: Russian tax residents are taxable at a flat rate of 13% on their worldwide income, whereas non-residents are taxable at 30% on their Russian source income. There are also some income tax deductions available to a tax resident but not to a non-resident. That’s the broad picture – there are a few other tax rates and exceptions to the general rule.
The table below neatly summarises the “Residence Basis of Taxation” principle and shows how Russia taxes individuals on their ‘normal’ income depending on their residence status and where that income arises.
|Russian Tax Resident||Not Russian Tax Resident|
|Russian source income||Taxed at 13%||Taxed at 30%|
|Non-Russian source income||Taxed at 13%||Not taxed|
Note the important exception that foreigners holding the Highly Qualified Specialist (“HQS”) work permit pay Russian income tax at 13% even if they stay in Russia for less than 183 days in a tax year.
A non-HQS expat receiving most of his income from his work in Russia will normally be better off being tax resident here. However, a non-HQS expat who receives most of his income overseas in jurisdictions that tax more lightly than Russia, or not at all, might prefer to stay non-resident so that Russia does not tax his overseas income, even if that means paying more income tax on his Russian salary. Visa issues, social taxes and capital taxes add further complications beyond the scope of this article. In short, expats should seek early advice on the effects of tax residence on their particular circumstances, ideally before they move to Russia.
David Maltby: How does this residence basis of taxation compare with other countries?
Peter Arnett: Russia is with the majority of countries in using a residence-based system. The only large country that does not use such a system is the USA, which is almost unique in taxing its citizens wherever they are resident. Interestingly the Soviet Union and its allies also used to tax their citizens on worldwide income and the fact that Russia and all of the former states in the Soviet sphere of influence have since 1991 moved to the residence-based system is a good example of the convergence towards international norms that I mentioned earlier.
David Maltby: You mentioned other tax rates for individuals. What are they?
Peter Arnett: The most important tax rates for individuals are as follows:
6% Individual entrepreneurs, on turnover.
13% Tax residents, on their worldwide income.
15% Dividend income of non-residents
30% Non-residents, on their Russian sourced income
35% On interest saved where loans are at a preferential rate; taxation of prizes.
David Maltby: Many expats receive generous benefits packages. What is the taxation of these?
Peter Arnett: The general rule is that benefits are taxed on the basis of the market value of the benefit. Often this value will be clear, for example where your employer pays you a cost of living allowance or meets your housing or medical insurance costs, or continues to pay into an overseas pension scheme, or pays for an annual air ticket home. But you can imagine how subjective the situation gets when one considers the market value of, say, a company car owned by your employer. Your chief accountant may well have written the car off in terms of book value, but the car is probably still worth something, and the convenience of not having to deal with the car ownership issues may be the most valuable aspect to you. One word of caution on benefits: be very careful about receiving low-interest loans as the benefit (the interest “saved”) can be taxed at 35%.
David Maltby: So, if that’s the tax I pay, what can I claim against my tax?
Peter Arnett: There are a few allowable deductions available to tax residents. Be warned though that the documentation can be onerous and (except for the property deduction) the limits are rather low.
If you have children – A very small standard deduction per child from income, but only whilst your cumulative annual income is below 350,000 RUR.
Donations to charity – A deduction is available, subject to limits and to the charity being a registered Russian charity. Not as valuable or as wide ranging a deduction as in many other countries.
Educational and medical costs – A more useful deduction; can be used for deducting costs paid to licensed Russian medical and educational establishments in respect of your own treatment or education, or that of close family, but the total deductions are limited to 120,000 RUR per year.
Property (sales) – This is the important one. Broadly speaking, where a tax resident sells property (including residential real estate) that he has owned for more than five years, the income received will effectively be exempt from Russian income tax. There are separate rules where the property is securities. Where real estate has been held for less than five years, essentially the gain (sales proceeds minus documented costs) is taxed.
Property (purchases) – Where a tax resident buys or constructs residential property, he can claim a tax deduction of up to 2 million RUR for the costs incurred. Interest on loans used to finance the purchase is also deductible up to a generous limit.
David Maltby: What are the tax filing obligations?
Peter Arnett: Tax on Russian employment income is normally withheld at source and the employee receives a tax deduction certificate after the year end. If that is his only income, and he does not have any special circumstances to notify to the tax authorities, then he would not need to file a tax return.
But many expats have some overseas income, even if it is only bank interest in the home country. Rental income from letting out a former home overseas is also very common. Many expats continue to be paid through their home country payroll. In such cases, as well as if he needs to claim deductions not automatically given through his Russian employer’s payroll, an individual must file an annual tax return no later than April 30th of the following year. Any additional Russian income tax due must then be paid by July 15th.
David Maltby: Are there any other taxes on individuals?
Peter Arnett: Obviously we all pay VAT here (the fact that Russia introduced VAT in the 1990s is yet another demonstration of the convergence of the Russian tax system with international norms). The standard rate of VAT has been 18% since 2004, broadly similar to rates in the EU. Like personal income tax (13% / 30% since 2001) the standard rate of VAT has remained unchanged for a long time.
There is also a property tax on real estate owned by individuals and a transport tax on cars owned.
However, the most significant taxes in this area are the payroll taxes, paid by Russian employers comprising contributions to the State Pension Fund, Social insurance Fund and Medical Insurance Fund. Although liability for these falls on the employer, not the individual, the cost still adds to the wage bill of a company and so affects the amount of salary that the company can afford to pay. So these are economically an indirect tax on the employee and they are fairly significant. The rates and thresholds seem to change every year, but as a rough rule of thumb payroll taxes amount to about 30% of salary up to about 800,000 RUR per annum and about 15% on annual salaries above this. However, foreigners holding a HQS work permit are exempt from these.
David Maltby: I think we will have to leave it there, but there is a lot of extremely useful information on the practical level. I would like to follow this with another article on the global level contexts – in fact, where we began. There are a few relevant projects and initiatives happening which will no doubt surprise many readers who only perceive the bad news coming out of Russia. Once again many thanks for your time, it is much appreciated.
Peter Arnett is a partner at Alinga Consulting Group, where he specialises in in taxation – both local and international – with over thirty years’ experience. He has worked in Russia for eighteen years, solving clients’ business issues. Peter can be reached via firstname.lastname@example.org
Marina can be reached at www.advokats.ru
David Maltby is a self-employed Moscow resident, business consultant, part time writer, British Business Club Board Member, and student of psychology. His company Quantum Business Partners provide technical, supply chain and general management professional services. He can be reached at David.Maltby@quantumltd.ru