Russian Ministry Of Finance To Introduce Changes To Individual Income Tax Laws

Changes will impact Russian employers and staff based overseas

The Russian Ministry of Finance proposes to make several adjustments to the individual income tax, according to the appendix to the Main Directions of the Budgetary, Tax and Customs Tariff Policy for 2022 and the planning period of 2023 and 2024.

It is planning to oblige Russian companies to pay personal income tax on behalf of foreign employees working overseas, In addition, it is planned to expand the number of applicants for standard and social tax deductions, and to oblige the DIA to provide the Federal Tax Service information on the interest paid on deposits in the event of a bank liquidation, and to the Pension Fund of Russia – on the owners of the capital.

Russian nationals based overseas

The Ministry of Finance plans to increase the tax burden on some groups of individual employees. One of these proposals concerns overseas employees of Russian businesses. The directions state:

“Securing in legislation the peculiarities of taxation of remuneration in the performance of labor duties remotely outside of Russia. It is supposed to establish that such payments are related to income from sources in the Russian Federation for tax purposes”

This means that foreign tax residents (people who spend less than 183 days a year in Russia) working remotely for a Russian company may be required to pay personal income tax in Russia, with the Russian employer responsible for tax deductions. According to the current legislation, they are not required do this. The situation therefore requires Russians based overseas – and their employers – to investigate Russia’s respective Double Tax Treaty documents, which cater for the provision of double taxes in two jurisdictions and alleviate the problem. Nevertheless, it creates an additional tax administration issue for both. See Russia’s Double Tax Treaty Agreements here.

Income obtained from gambling

Another initiative is related to the tightening of fiscal control over winnings at bookmakers. Today, if the amount of such receipts exceeds Rubles15,000; the bookmakers themselves act as tax agents. However, if the winning are less, citizens are required to pay personal income tax on their own. The Ministry of Finance proposes to place all responsibility on Russian nationals to comply with the law back onto the gambling establishments. That means that all winnings will have tax deducted by the bookmakers prior to payment.

It is also planned to strengthen control over the use of maternity capital, which are a form of mandatory saving certificates in Russia and supposed to be used for property purchases. The Ministry of Finance has proposed obliging the FIU to send to the tax information about the owners of the certificates, who disposed of its funds, as well as about the amounts used. This will make it possible to automate the supervision of the legality of the provision of property tax deductions, which are not required when buying a home with funds from the capital.

The Ministry has also proposed that Russia’s Deposit Insurance Agency will be obliged to provide data to the Federal Tax Service concerning interest paid to depositors in the event of liquidation or bankruptcy of a bank. This is necessary due to the lack of the possibility of transferring such information by the credit institutions themselves, according to the document of the Ministry of Finance.

Remote working tax reductions

However, several changes are aimed at reducing the fiscal burden. For example, to be exempt from taxation, there will be limits on compensation payments that employers make to their telecommuting employees for organizing work.

When an employee works remotely, they incur certain expenses to work properly – for equipment, auxiliary materials, etc. The employer reimburses them and, according to the plan of the Ministry of Finance, such compensations will not be subject to personal income tax, provided these do not exceed a certain threshold.

Inheritance and gifts

Another measure to individuals tax burden is related to the disposal of shares in the authorized capital of companies received as a gift or inheritance. The Ministry of Finance proposes to establish the right of its owner, upon retirement, ill-health or due to corporate liquidation, to reduce taxable income by the amount with which the contribution was paid when it was acquired by the donor or testator.

The point is that when an individual did not purchase an asset or capital, but inherited it or accepted it as a gift, there is nothing to attribute any expenses to reduce the taxable base. After adjustments by the Ministry of Finance, along with the share, the right to use the donor / testator’s expenses will also pass to such citizens to reduce the tax burden.

Medical expenses while in education

In addition, the Ministry plans to expand the list of recipients of tax deductions. It is proposed to increase the age limit for children of taxpayers who claim a social deduction (to pay for medical services and medicines) to 24 years if they are studying full-time. At the same time, the standard tax deduction will become available to citizens who are in the care of children or wards who have been declared incapacitated.

Property taxes

The third measure relates to tax deduction, allowing individuals to reduce taxes when acquiring property rights and reducing the amount of taxable income by the amount actually incurred. Should the relevant tax deduction have a specific limit, then the new option is limited only by the amount of income from the sale of property.

The Ministry of Finance also proposed to adjust the procedure for accounting for expenses when families with children sell real estate acquired with state support. It will be produced in proportion to the share of each family member in the ownership of the dwelling. 

Digital assets

Finally, there is the consolidation of the peculiarities of taxation of transactions with digital financial assets (the draft law on this has already been adopted by the State Duma in the first reading) as well as giving responsibility to foreign IT companies to collect and remit taxes due by their employees for their income.

These proposed measures are due to requirements of systematically revising Russia’s Tax Code both in terms of deductions / benefits and in terms of determining the tax base.

These changes in the taxation of overseas employees reflect Russia’s need to reduce the movement of labor from Russia. This trend began to develop in connection with the spread of remote work amid the Covid-19 pandemic.

The main directions of budgetary, tax and customs-tariff policy are a document that is submitted to the State Duma together with the draft federal budget and other documentation. Its purpose is to determine the conditions used in the formation of the budget, its main characteristics, and forecast parameters. We will bring readers further updates of these proposals as they become available.

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