- Jon Hellevig
- May 30, 2015
The following article is an excerpt from Awara Russian Tax Guide, the first comprehensive book offering a full overview of all Russian taxation laws and rules. Awara Russian Tax Guide provides insight into the general framework of the Russian tax laws, the Tax Code and its principles. It describes the general rules of the Tax Code Part I and each type of tax and tax regime of Tax Code Part II, among them: Profit Tax, VAT, Personal Income Tax, Property Tax, Employer’s Social Contributions. The book also covers the now so important case law and taxation principles set by court precedents.
The provisions on personal income tax for individuals are given in Chapter 23 of the Russian Tax Code.
Taxpayers for personal income tax purposes are both Russian Residents and Non-Residents, who receive income from Russian sources (art. 207).
Individual entrepreneurs are taxed with the personal income tax also for their business profits. However, the rules for deductibility of expenses for individual entrepreneurs is however determined in accordance with the rules for profit tax (art. 221). An, individual entrepreneurs may also opt to be taxed under a special tax regime (for more details please refer to chapter Tax Concessions and Subventions).
Employers or other payers of income are considered tax agents which have the obligation to calculate, withhold and remit the tax to the Government (art. 226).
A tax resident is a person who has actually spent at least 183 calendar days in Russia over 12 consecutive months. Under certain exceptional circumstances, the tax residency status is not lost due to short-term visits abroad in particular when a tax resident spends a maximum of 6 months abroad for educational or medical treatment purposes. A non-resident is a person staying in Russia fewer than 183 calendar days over 12 consecutive months.
Tax residency is determined by the actual days spent in Russia during any continuous 12-month period counted back from the date of receipt of the income subject to taxation (Ministry of Finance N 03-04-06/6-170 of 14.07.2011; N 03-04-06/6-169 of14.07.2011).
Tax rates and other tax obligations can vary significantly depending on whether an individual is conferred the status of tax resident or non-resident. It is therefore also important to consider the rules for calculating days of presence in Russia. According to the Ministry of Finance of Russia, an individual’s tax status is determined by taking into account all the days actually spent by the individual in Russia, including the day of arrival and day of departure without regard to how many hours were spent in Russia during those days of travel. This position is confirmed by the Ministry of Finance (Ministry of Finance N 03-04-06/6-324 of 29.12.2010; N 03-04-06/6-283 of01.12.2010). This has changed the earlier interpretations issued by the tax authorities (Federal Tax Service N 04-1-04/929 of 28.12.2005). Despite the authoritative interpretation by the Ministry of Finance, there has been court practice upholding the earlier interpretation of not including the day of arrival to calculate the number of days spent by an individual in Russia to determine the individual’s tax status (Federal Commercial Court of the Central Federal District on case N А54-3126/2009С4 of 11.03.2010).
The Russian law on personal income tax may contradict the laws of other countries and may in extreme cases result in tax residency simultaneously in Russia under Russian laws and in another country under laws of that country. For such cases a relevant double taxation treaty concluded between Russia and another country contains rules for determining the residency status and avoiding double taxation of personal income in the two treaty countries. (Read more on double taxation treaties in chapter Double Taxation Treaties).
Tax residents are taxed in Russia for their worldwide income, while non-residents are taxed for Russian source income only. Russian source income is income received in connection with duties performed in Russia (not necessarily paid in Russia) and a number of other types of income, including interest or dividends and income from disposal of property in Russia (see below for more details on Russian source income).
It should be noted that residency according to the Tax Code (tax residency) and residency as envisaged by civil law or currency and administrative regulations are different matters. In accordance with the Russian Civil Code the place of residence of a Russian citizen is his place of permanent or habitual living (art. 20). However, the Supreme Court has held that the special procedure of “registration” of individuals (including foreigners) in their place of living is only indicative, not determinative of their residency status (ruling of the Supreme Court of 22 June 2005 No. 93-Г05-7). It therefore appears that Russian civil law, currency and administrative regulations do not require that a person lives in Russia to keep their residency status. A foreign national may apply for a residence permit but it has in practice been very difficult to receive such. A tax residency, on the contrary, comes about automatically when a person spends 183 days or more in Russia during 12 consecutive months.
Foreign diplomats do not pay personal income tax in Russia, if their home country extends the same exemption to Russian diplomats (art. 215).
The tax rates for various kinds of income are listed in below table (art. 224).
|Income tax for tax residents||13%|
|Dividends received by Russian tax residents||9%|
|Income tax rate for non-residents, exept for the following:||30%|
|Interest on savings in bank and benefit on below-themarket interest rates on credits||35%|
|Lottery winnings, etc. (under certain circumstances
and when exceeding set limits)
|Interest from mortgage bonds issued prior to January 1, 2007||35%|
|And other cases||35%|
For more details on taxation of dividends, please see Chapter 37 “Taxation Aspects of Russian Investment”.
All income received by non-residents is subject to a tax rate of 30% regardless of how it is earned (art. 224). The Tax Code provides for only a few exceptions to this rule. For instance, the income of foreign nationals working in Russia with the migration status of a so-called highly qualified-specialist is subject to a tax rate of 13% regardless of the time of actual stay in Russia (tax residency or not). Foreign nationals are conferred the status of a highly qualified specialist in connection of successful application for the relevant work permit confirming this status.
From July 01, 2010 the procedures for employing foreigners as a highly qualified specialist were considerably simplified. Previously, all categories of foreign nationals could obtain a work permit only for one year. Now, highly qualified specialists may obtain a work permit and a work visa for up to 3 years.
The law efficiently provides for only one criterion defining foreign nationals as highly qualified specialists. In the normal case this criterion is that the annual salary paid by the Russian employer amounts to at least 2 million rubles per annum (approximately EUR 50 thousand euros).
For certain kinds of professions the annual salary thresholds are lower, as follows:
- RUB 1 million for scientists or teachers, invited for research or teaching at universities, colleges, research centers (higher educational institutions with relevant state accreditation).
- RUB 1 million for professionals invited to work at certain special economic zones.
- Without any minimal salary limit for foreign nationals working at the Skolkovo innovation center.
Russian Source Income
Russian source income is mainly income received for work performed in Russia, capital gains and rent from property in Russia, interest from deposits in Russia and dividends from Russian companies. The definition of Russian source income is relevant for determining the tax rates for income earned by Residents, and for determining the overall liability of non-residents to pay tax in Russia (art. 208).
Any compensation (or economic benefit) associated with a Russian operation is considered as income received for work performed in Russia and it is not of importance whether payment is actually executed in Russia or not. Any compensation charged back to a Russian company or a foreign company’s separate subdivision in Russia is considered as Russian source income. Directors’ remuneration and other similar compensation to directors received from a Russian company or a foreign company’s separate subdivision are also considered as compensation of work from a Russian Source. Any compensation from a company managed from Russia, regardless of the location in which managerial duties are actually performed or
paid for, also falls under this category.
The below table provides a detailed list of what kind of income is considered as Russian source income.
|Russian source income
Some types of income are specifically excluded from the definition of Russian source income (art. 208(3)). Such non-source income is, for example, director’s remuneration paid to Russian tax residents who are directors of a foreign entity, regardless of the place where the managerial duties were actually performed. Non-source income also includes pensions, benefits, scholarships and other similar payments payable under foreign laws. The Ministry of Finance is empowered to solve the uncertainties as to the origins of a particular income – whether it has been derived from Russian sources or from abroad, and the exact proportion of each kind of income (art. 208(4)).
Income is taxed regardless of the form in which it is received. This can be income in money, in-kind income or even a right of disposition. The inclusion of a right of disposition is an anti-avoidance measure, aiming at taxation of such income that the person could have earned, but has voluntarily deferred. If any deductions are made from the taxpayer’s income on his instructions, or based on a court order, or imposed by other authorities, then such deductions do not reduce the tax base (art. 210).
As a rule, reimbursements of business expenses are not subject to taxation (sometimes within set limits). However, daily allowances (per diem) exceeding the limits set by the Government are considered taxable income (art. 217; for more details, see below regarding business travel and expense reimbursements). Reimbursements of business expenses are generally not taxed, although sometimes normative limits for deduction may be applicable. Daily allowances (per diem) within the limits set by the Government are not taxed as income (art. 217).
Losses and rights to deductions that have not materialized during the year are not carried forward to the following year. All possible tax deductions are only applicable to income that would otherwise be taxed at a rate of 13% (which means that they are not available for non-residents). Income earned or expenses incurred in a foreign currency are calculated in rubles at the exchange rate of the Central Bank of Russia on the date of actual receipt of income or payment of expense (art. 210).
Timing of Income
Monthly salary income is deemed received on the last day of the month to which it refers regardless of the actual date of payment. If employment is terminated before the end of a calendar month, then the income is deemed to have been received on the last day of work. Other income paid in cash is considered received when it is paid out. In-kind income is considered received upon transfer and material benefits are deemed received upon actual receipt of the contribution (or when interest is paid in case of material benefit in the form of credits, art. 223).
Income can be received in-kind in the form of goods or services, as well as rights to property (in-kind income). Such income is assessed at market value. The evaluated price also includes value added tax, possible excise tax, but excludes partial payment of the cost of goods received, work performed, or services rendered. Hereby the tax authority as the right to contest the prices applied by the parties and regulate them according to market prices (art. 211).
In-kind income includes, in particular:
- Payment of salary in-kind
- Goods and services, including public utilities, meals, recreation and training, provided for free of charge or at a discount by another party
- Goods received or services rendered as gifts, free of charge, or against partial payment
The law makes a distinction between in-kind income and material benefit. In a broad sense, material benefits are also in-kind Income, but for taxation purposes they are defined separately. However, in-kind income and material benefits are generally taxed with the same tax rates. In this Awara Guide a reference to in-kind Income, if otherwise not indicated, will also generally include a reference to material benefit.
Material benefits include:
- Benefit in form of lower-than-market interest rates for loans (determined in accordance with art. 212(2)), except for;
interest free limits on banking cards (debit and credit cards)
Benefit in form of lower-than-market interest rates on loans for the use of borrowed funds provided for new construction or purchase of housing (apartments) in Russia, land plots on which are located residential buildings for sale or provided for individual housing construction, as well as benefit derived from savings on interest upon re-financing (consolidation) of loans (credits) received for the above purposes (art. 229 (1)1);
- Benefit in form of above-the-market discounts on goods or services from related parties
- Benefit in form of below-the-market purchase of securities, financial instruments of future transactions.).
Benefit in form of lower-than-market interest rates for loans is taxable to the extent that the interest is less than 2/3 of the refinancing rate of the Central Bank (the refinancing rate set by the Central Bank of Russia amounted to 8% on June 1, 2012). Lower-than-market interest rates on credits denominated in foreign currency are taxed as material benefits to the extent that the interest rate is less than 9% (art. 212(2)).
When income is received as material benefit in form of lower-than-market discounts on goods or services from related individuals, organizations and individual entrepreneurs, the tax base is determined by comparing the prices to similar goods (services) sold at arm’s-length by related parties to non-related parties (art. 212(3)).
When income is received as material benefit from the purchase of securities, financial derivatives (options, futures, etc), the tax base is determined by comparing the market value of securities, financial instruments of future transactions to the actual purchase cost paid by the recipient of material benefit (art. 212(4)).
Taxation of Stock Options
Personal income taxation of options involves the following considerations:
(i) Taxation of granting of option
(ii) Taxation of shares received when option is executed
(iii) Taxation of trade with options on an organized market
In this section we will especially emphasize the tax considerations concerning employee stock option plans.
Before the taxation rules may be understood, it will be necessary to determine what is meant by an option under Russian law. Broadly in common parlance ‘option’ means a contract conveying a right to buy (acquire) or sell in the future an asset at predetermined terms. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. In finance, an option is a derivative financial instrument that specifies a contract between parties for a future transaction of an asset at pre-stipulated terms.
We have to keep in mind these general definitions of ‘option’ when we consider the Russian taxation rules of such. In particular it should be acknowledged that a particular definition of ‘option’ in one or another law does not yet cover all the possibilities of what the parties may mean by it. Following these premises we may recognize in Russian law three categories of ‘options’:
(i) An issued option (“opzion emitenta”)
(ii) An option as a financial instrument as a future contract (“option as a futures contract”, Russian
(iii) Other and any contracts which stipulate terms that may be categorized as options
In Russian law there are specific taxation rules which concern the first two of above categories. An ‘issued option’ is defined in the law “On Securities Markets” (Law No.39 – ФЗ of 22.04.1996). According to this law an ‘issued option” constitutes a security and may be issued by a joint stock company The issuance of such “issued options” requires registration with the Russian securities commission (“FSFR”).
An “option as a futures contract” is any kind of futures contract were the underlying instrument can be shares, other securities, currency or goods (commodities) but it does not itself constitute a security (Law on Securities Markets of 22.04.1996). Such futures contracts may be object of trade at an exchange. A typical option under an employee stock options program would most likely constitute some other form of contract than “issued option” or “option as a futures contract”, that is, a contract concluded under the principles of freedom of agreement and which does not represent any standardized form.
In principle any contract concluded between parties based on basis of their freedom to contract may constitute an option. In this connection (our subject being personal income taxation of options) it is important to recognize options often are concluded between a shareholder (shareholders) of a company and an employee with the aim to commit the employee to future work with the firm by promise to award shares conditional to certain activities in the future, for example, commitment to diligent work under certain KPIs during a certain period.
Of special concern here is how employee stock options are taxed, and in particular whether the mere granting of an option may be taxed as a material benefit before the option is exercised. With amendments enacted in 2009, the scope of taxable material benefits has been extended to cover “issued options” and “option as a futures contract” so that the material benefit in form of the difference between the granting price (value) and the market value is taxed (art. 212 (1)). Previously such options had a taxation consequence only when sold or exercised, that is, when the option was utilized to acquire the shares at the pre-stipulated terms or by requiring the cash equivalent between the exercise price and market value of the share. But other forms of option contracts (those made in free form) would not to our opinion be taxed under these rules.
The transaction of acquiring the shares upon exercise of an option is taxed as a material benefit when the striking price is less than the market value ( art. 212). Hereby the taxpayer may deduct the cost of an option or the value of the corresponding material benefit if it was earlier duly taxed.
The tax rate for taxation of material benefits (and cash settlements) as per above is 13% for residents and 30% for non-residents.
Insurance and Voluntary Pension Plans
Employer’s contributions to insurance programs or pension plans are not taxed as employee’s income in case of: (i) compulsory (state) pension plans; or (ii) voluntary pension plans and voluntary personal insurance under the conditions detailed below:
- Insurance contributions to compulsory pension insurance paid by employers in accordance
with Russian law;
- Savings component of compulsory retirement pension;
- Pension contributions under private pension agreements (including when contribution paid by
employer or other individual)
According to the general rule pensions paid out under private pension saving plans constitute taxable income but the law establishes that certain forms of compensations (reimbursements) derived from insurance programs and pension plans are not taxable.
Compensation received from all compulsory insurance programs is not taxed as income.
Compensation stemming from voluntary insurance and pension plans is not subject to taxation (art. 213-
213.1) in cases detailed below:
1. Compensation derived from voluntary life insurance in the event that (i) compensation is due under the condition that insured person attains a certain age or a specific period is reached, or (ii) a particular contractually determined event occurs. In such cases the payments are not taxable if (i) the taxpayer has contributed the corresponding insurance contributions ,and (ii) the insurance compensation does not exceed the funds contributed by the taxpayer and yield on investment that stays within a limit calculated as the average annual refinancing rate of the Central Bank. In other cases, the difference between these amounts is taxed at source.
2. Under voluntary health, medical and life insurance
• Pension saving plans when compensation is paid upon reaching the statutory age of retirement.
In connection with premature termination of a voluntary pension savings plan, the repayment of contributed capital and the yield is taxed at source.
Other insurance compensations such as third-party liability and property insurance are not taxed when reimbursement is made within the limits of real damage. Compensation exceeding the real damage would be taxable.
Under Russian law, taxpayers may make certain deductions from their taxable income. Such deductions are, however, granted only to tax residents, and only from income taxed at the general tax rate of 13%. These deductions are grouped into standard tax deductions, social deductions, property-related deductions and occupational deductions.
Standard Tax Deductions
A taxpayer is entitled to certain tax deductions when determining the tax base in situations where he or she is deemed to possess a special status related to certain health conditions, recognition of participation in military operations and under other such circumstances.
The available standard tax deductions are presented in the below table.
|ELIGIBLE PERSONS||DEDUCTIBILITY LIMITS|
|Chernobyl victims, and other victims of nuclear radiation catastrophes,
war veterans, individuals with certain state awards, and others
|RUR 500 and RUR 3,000 per month|
|Parents, spouse, adoptive parents, guardians, foster parents, spouse of an adoptive parent (until taxpayers’ income for a calendar year exceeds RUR 280,000)||RUR 1,400 for the first and second child, RUR 3,000 for the third child
and each subsequent child and RUR
3,000 for each child up to the age of
18 if the child is disabled or studies
full-time as post-graduate, resident
physician, inter, student under the
age of 24, if he/she is not disabled
group I or II
The standard deduction for child care can be applied for each child up to the age of 18, as well as for fulltime students, post-graduate, resident physician, intern, and military student up to the age of 24.
Tax deductions are extended in an amount twice the usual for single parents. A couple that has the right to the deductions may also decide that both deduction rights will be concentrated to one of the parents in a double amount.
In case when the child does not reside in Russia, the right to deduction must be supported with documents certified by the appropriate authorities of the country in which the child resides (article 218(1)4).
Standard tax deductions are effectuated by one of the tax agents (such as an employer) as selected by taxpayers. The taxpayer must present to the selected tax agent a certain set of documents confirming the right to such tax deductions.
In case when the standard tax deductions have not been effectuated to the full amount in the course of the year, the tax authorities must in connection with the final tax return upon application recalculate the tax base considering the unused limit of these standard tax deductions (article 218(4).
The main forms of social deductions are presented in below table.
|TYPE OF ELIGIBLE
|Charitable contributions||Actual contributions, but not exceeding 25% of gross income|
|Medical care costsContributions to a voluntary pension
|Actual expenses, with upper limit of RUB 120,000. For expensive treatments (according to a list approved by the Russian
Government)- in the amount of the actual expenses.
|Additional contributions to the savings component of mandatory retirement pension||Actual expenses actually incurred, with upper limit of RUB 120,000.|
|Education costs for personal benefit||Actual expenses actually incurred, with upper limit of RUB 50,000.|
|Education cost for benefit of child||Actual expenses actually incurred, with upper limit of RUB 120,000.This deduction is available for both parents per child each child.|
Charitable contributions can be made as financial aid to science, culture, education, health and welfare organizations (approved and partially funded by the Government), sports organizations, as well as educational and preschool institutions.
Medical care costs of taxpayers and their immediate family, including children under the age of 18 may be deducted. Medical expense deductions are granted for prescription drugs and treatment in hospitals or clinics in Russia, and for prescription drugs and medical services specified by law.
Contributions to voluntary pension saving plans are deductible when they are made for one’s proper benefit, and for benefit of spouse, parents, adoptive parents, disabled children, adoptive children or children under guardianship.
Additional contributions to the savings component of mandatory retirement pensions are deductible to the extent of actual costs but not more than 120 RUB per year.
Education costs for both personal benefit and the benefit of one’s children up to the age of 24 may also be deducted. The right to tax deductions also applies to siblings up to the age of 24 when one sibling pays for the full-time education of another at a licensed school.
These so-called social deductions cannot be taken into consideration by the employers for the purpose of decreasing the withholding of tax during the year. The deductions are only available upon filing a tax return after the end of the year (art. 219(2)). However, employees that only receive income from tax agents (e.g., their employers) do not have an obligation to file a tax return, but may do so in order to claim a social deduction.
The forms of property-related deductions are presented in below table.
|TYPE OF INCOME||DEDUCTION LIMITS|
|Capital income from sale of residential housing (houses, flats,
rooms, cottages etc.) and land plots, as well as part ownership
in the listed kinds of objects, when the objects have been held
in ownership for more than three years.
|amounts up to RUB 1,000,000|
|Income of sale of other property held for fewer than 3 years||amounts up to RUB 250,000|
|Expenses on construction or purchase of houses and residential land plots, as well as
part ownership in the above. (excluding purchases from related individuals)
|Up to RUB 2,000,000 (excluding
interest on loans)
Property-related deductions are only available upon filing a tax return at the end of the year (art. 220). Thus employers (tax agents) may not apply the deductions in connection with withholding of tax. The only exception to this rule is in regard to deductions of expenses on construction or purchase of houses and residential land plots. This kind of deduction may be effectuated during the year by the employers (or other tax agent as the case may be). Providing that the taxpayer presents to the employer a relevant confirmation issued by the tax authorities of the right to this deduction.
Instead of having the expenses deducted from the annual income, the taxpayer may upon sale of the residential asset deduct the expenses from the capital gain at future sale (art. 220(1)1). Deductions that have not been fully utilized in the tax year may be carried over to the next year.
Sale of a Share in Property Held in Joint Ownership
The rules on property-related deductions for capital gain on sale a share in residential property held in joint ownership (without physically allotting the space to separate owners) are not quite clear in view of tax administration and court practice. The tax authorities have interpreted such property to relate to the category of ‘residential property’ (Ministry of Finance Letter N 03-04-05/7-623). From this follows that according to the tax authorities the maximum permissible deduction of RUB 1 million would be allowed for such property when held for less than 3 years. However, according to a resolution of the Constitutional Court this kind of property in joint ownership should, however, be treated as ‘other property’ subject to a maximum deduction of RUB 250,000 (ruling N 5-П of 13.03.2008). The position of the Constitutional Court is thus such that only a share that is physically distinguished, such a house, a flat, or as a room in an apartment, can be regarded as ‘residential property.’
Another point of contestation is whether the deduction is available in full (RUB 1 million) to each of the co-owners or if the maximum allowance is divided proportionally among the co-owners.
The applicability of the property-related deduction to capital gain on sales of shares in a Limited Liability Company (LLC, “OOO”) is not quite clear in view of court practice.
The problem is connected with conceptual definitions of the Russian Civil Law according to which ‘property’ and ‘property rights’ should be considered as separate legal categories. Some judges want to apply this distinction to the question of deductibility arguing that as the capital of an LLC is not divided in to stocks (shares that circulate as securities) then an ownership share in the LLC cannot be considered as ‘property’ and only a ‘property right.’ And this misguided method of conceptual interpretation would then supposedly lead to a rejection of the right to the deduction as the law in this connection only refers to ‘other property’ (review of legislation and court practice of Supreme Court for the 3rd quarter of 2007; rulings of Supreme Court N 5-В10-5 of 29.01. 2010, N 18-В10-53 of 04.08.2010, N 5-В10-77of 20.10. 2010). The Commercial Courts, which in general are less bound by the old misguided methods of conceptual jurisprudence, have on the contrary allowed the deductibility as evidenced by some cases (Federal Commercial Court of North-West Federal district N А21-516/2007 of 29.10.2007 on case; Federal Commercial Court of Moscow Federal District N КА-А40/15099-09 of 26.01.2010 and N А40-83081/08-80-312).
When considering these rights to deductions it should be born in mind that according to the Tax Code the taxpayer may alternatively deduct the actual costs providing their sufficient documentation of them (Art. 220.1; to note that this options seems not to be available for non-residents)
Property-related tax deductions do not apply to individual entrepreneur’s capital gain from sale of property connected with business activities (article 220(1)1).
Tax deductions of carry-forwards of losses on securities, derivatives and participation in an investment partnership
A taxpayer who has incurred a loss in the previous tax year on transactions on securities, derivatives (quoted on a recognized exchange), participation in an investment partnership, may deduct the entire loss (or a part of it) in the present period. The rules for these kinds of deductions are presented in below table.
|TYPES OF INCOME||DEDUCTION LIMITS|
|Transactions with securities traded on a
recognized securities exchange
|Actual accumulated losses from profit of
similar transactions (i.e. within the same tax
base art. 220.1. (2))
|Transactions with derivatives on a
|Actual accumulated losses from profit of
similar transactions (i.e. within the same tax
base article 220.1(1))
|Participation in an investment partnership||Actual accumulated losses within a given
tax bases (for various types of financial
instruments separately; art.220.2 (2)).
The categories of tax bases for similar type of transactions are as follows:
- listed securities trade with derivatives on a recognized market securities trade of investment partnerships on recognized markets securities trade of investment partnerships beyond recognized markets derivatives trade of securities trade of investment partnerships on recognized markets beyond recognized markets
- purchase (investment) and sale of investment partnerships of unlisted shares
- other operations with financial instruments of investment partnerships
A loss-carry forward option is available from one year to another within the same tax bases for 10 yearsfrom the year of the loss.
The available tax deductions which are connected with professional activities are presented in below
|Individual entrepreneurs||Deductions are made according to the general
rules for profit tax. When expenses actually
incurred are not documented, 20% of the
income is deductible
|Civil contractors Actual expenses deductible when duly
(freelancers,individual consultants, etc.)
|Actual expenses deductible when duly
|Actual expenses deductible when duly
documented. When expenses not properly
documented they are deductible in accordance
with set norms (for a detailed list, refer to art.
Business Travel and Expense Reimbursements
Expenses for business travel and reimbursements for other expenses incurred in connection with performance of one’s work duties are, in principle, not taxed as income (art. 217(3)). However, certain restrictions apply, for example, in regards to daily allowances for business trips. Normally the deductibility also presupposes that the expenses have been properly documented.
For example, the following kinds of expenses are not subject to taxation when duly documented:
• Daily allowances (per diem) within the limits set by law
• Accommodation expenses
• Expenses for transfers to airport, railway stations, etc.
• Travel expenses (plane ticket, train ticket, etc.)
• Airport fees
• Commission charges
• Communication costs
• Fees for issuing (obtaining) and registering foreign passports
• Fees for obtaining visas, currency exchange fees
The rules for compensation of business travel expenses also apply to directors’ expenses (Board members and other executives) in connection with travel to attend official meetings. Such expenses must be supported by relevant minutes from the meetings, or other similar document. Daily allowances (per diem) are not taxed as income within set legal limits (art. 217 (3)). Presently the limit for domestic travel is RUB 700 per day and for foreign business travel RUB 2,500. There are also normative limits for the rent of accommodation during business trip or work at a remote location which apply in case when the rent expense is not properly documented. In case of proper documentation, the expenses are fully deductible.
In cases when an employee is sent to work abroad for a longer period a question arises concerning the taxation of his income for that period. The question is whether such income should be treated as Russian source income or not. According to the general rule remuneration for work performed outside the territory of Russia is not qualified as Russian source even in the case when the income is paid from Russia (art. 208(6)3)).
There are no precise limits in the Tax Code for determining what duration of the work outside Russia would qualify for the corresponding income to be considered as non-source income. The Ministry of Finance has tried to fill this gap by issuing its guidelines for determining under what conditions remuneration for work on a foreign business trip would be deemed as non-source income (Ministry of Finance, N 03-04-06-01/178 of 08.06.2007; N 03-04-05/6-430 of 20.06.2011; N 03-04-06/6-73 of 05.04.2011; N 03-04-06/6-48 of 24.03.2010). According to these guidelines there are two conditions (i) the business trip should be for an extended period (while again no amount of days or months is specified) and (ii) the employee performs specified work duties (according to a job description or similar) at a determined workplace abroad.
The Ministry of Finance has taken the stance that reimbursement of an employee’s travel expenses and daily allowances during an extended stay abroad are to be treated as in-kind income from Russian sources This interpretation is motivated by the claim that such reimbursements should be considered as Russian source income insofar as they may not be treated as compensation for work (which latter condition would motivate their treatment as non-source income). From this it would follow that these expense reimbursements would be taxed as income (Ministry of Finance, N 03-04-06/6-136 of 10.06.2011).
The law exempts certain kinds of income from taxation. The table below lists some of the items of such exempt income (art. 217).
|Exempt income connected with employment
|Exempt income not connected with employment:
Interest on bank deposits in rubles is exempt from taxation for the part of interest that does not exceed the refinancing rate of the Central Bank increased by 5 percentage points (art. 217(27)). Interest on amounts denominated in foreign currency is exempt from taxation when the interest rate does not exceed 9% per annum.
To note, that income from the sale of property by non-residents and sale of securities and property used in business is subject to taxation regardless of such assets’ duration of ownership (art. 217 (17)1).
Individual Tax Declarations
Refund of overpaid tax due to change of tax status
Since different tax rates are set for the taxation of income from work performed by residents or nonresidents, the Tax Code provides for the possibility of refunding overpaid tax due to the change of tax status from non-resident to resident.
When an employee becomes a tax resident during a calendar year, the employee’s income received from his/her employer is taxable at a rate of 13% from the beginning of the year. Since a non-resident’s income from work in Russia is subject to an income tax of 30%, the employer has actually withheld excessive income tax amounts for the period prior to the acquisition of the status of tax resident during the calendar year. According to the amendments to the Tax Code effective as of 01.01.2011, as soon as they become tax residents, employees may apply for a tax refund after recalculation of the amount of tax payable for the relevant fiscal period. Tax refund applications must be submitted to the tax office with which the employees were registered (art. 231(1)1). Such applications are filed together with tax returns and the documents confirming the employees’ status of tax residents. The law does not provide for any exceptions to this rule.
Tax agents calculate at the end of each month the amounts of payable tax on an accrual basis from the beginning of the year for all income taxed at a rate of 13% deducting the tax withheld in the previous months of the current fiscal year (art. 226 (3)). However, if the employee continues to work with the same employer, the first option would be to offset the tax earlier charged with 30% against future income charged at 13%. No additional tax would be charged before the average effective rate for the annual income would be 13%. The Ministry of Finance of Russia interprets this provision as the employers’ right to offset the tax withheld at a rate of 30% from the salaries received by employees before they acquired the status of tax resident, against the payable tax at a rate of 13% on the salaries received from the beginning of the fiscal period (letter of the Ministry of Finance of Russia N 03-04-06/6-263 of 11.06.2011).
In principle all taxpayers have to file tax returns for income tax no later than April 30 of the year following the year following the tax year (art. 229(1)). Declarations may be filed in person or by proxy. Tax Residents file declarations in respect of their world-wide income, while Non-Residents file declarations in respect of income received from Russian sources.
If a foreign individual finishes the activities from which income was derived and for which a tax return must be filed, when such individual leaves Russia, this person must at least one month before leaving Russia file a tax return for the income actually received during the current calendar year (art. 229(3)).
In case when a taxpayer receives income exclusively from parties that have the obligation to withhold tax as tax agents (such as employers), there will be no obligation to file a tax return. In certain cases such individuals may choose to submit a tax return in order to claim tax deductions, for example, for: Individuals must file tax returns in any event in the below listed cases (arts. 227, 228):
- Individuals who received income from other individuals or organizations, which do not act as tax agents
- Tax residents who receive income from non-Russian sources
- Other individuals from whose income no tax is withheld by tax agents
- Individuals receiving taxable income as donations from other individuals
- Individuals receiving income in cash equivalent for real estate or securities transferred to top-up the special-purpose capital of non-commercial organizations
- Individual entrepreneurs
- Private notaries and other independent service providers
- Individuals who received income from other individuals и организаций who are not tax agents (including трудовые договоры, rent agreements and sale of property и имущественных прав)
- Tax residents of Russia who receive income from non-Russian sources
- Other individuals from whose income no tax was withheld by tax agents
- Individuals receiving taxable gifts from other individuals Individual Entrepreneurs
- Private notaries and other independent service providers
Non-submission of tax returns due may lead to the following sort of penalties (art. 119): A penalty (surcharge) in the amount of 5% of the tax subject to payment for each complete or incomplete month of delay, but not more than 30% of the original tax due (and not less than 100 RUB)
If the delay lasts for more than 180 days, then a fine is imposed in the amount of 30% of the original tax due together with a 10% fine for each complete or incomplete month from the 181st day of delay
Under the Criminal Code of Russia criminal sanctions may ensue from failure to duly file tax returns.