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Tax residency in Russia, everything you need to know

calendar 6/29/2020 8:00:00 AM
author Oleg Bartenev Investment
Choosing an adequate tax residency for you and your company is one of the most crucial business choices you’ll make.

The difference between right and wrong can end up doubling the amount of taxes you pay, barring you from new investments and greater freedom to handle your wealth.

Generally, the best tax residency options are small-sized, offshore jurisdictions, far away from your primary operations.

But they have two problems. First, they are considered tax havens, most don’t have many double taxation treaties, and many OECD countries will raise their eyebrows when they see you’re a tax resident in one of these jurisdictions.

That’s not a problem for many entrepreneurs (and, indeed, not for us), but others may want a more secure, onshore option.

And, believe it or not, Russia is one of those options.

Relocating your tax residency to Russia provides you with:

  • 13 % income tax rate and top 20 % corporate tax rate.
  • An extensive double tax treaty network with 80 agreements.
  • Access to dozens of different markets and regions (Eastern Europe, Central Asia, the Caucasus, the Balkans, Middle East, Far East, the North Pacific, etc.).
  • A fantastic, solid, and steady banking system (if you want to check out our banking services in Russia, read our article.
  • The 27th easiest country to do business on the planet with a swift incorporation process.

The Slav giant enjoys a fantastic tax system with a flat 13 % income tax rate and a top 20 % corporate tax rate. The overall tax burden is around 24 %, which is significantly lower than the OECD average, which is close to 40 %. Russia is low-key, one of the best onshore options in Eurasia for tax residency.

And that’s without counting its fantastic banking system and its geographical closeness to many different markets (Eastern Europe, Central Asia, Middle East, China, and the Far East) because Russia is the largest country on the planet and one of the main drivers of the world’s economy.

Sometimes you’re interested in doing business in a certain country or region, but relocating your tax residency to that place may not be too beneficial. That’s quite common when you do business in Europe.

But that’s not the case with Russia. If you have significant business interests in Russia or are a skilled high-level worker that’s required to move there, you can rest easy. It’s a terrific tax residency destination.

 

Tax residency in Russia

The criteria for tax residency in Russia is simple.

For individuals, it’s the physical presence in Russia for at least 183 days during a calendar year. Some double tax treaties may modify the criteria for tax residency, generally considering the following elements to determine it:

  • Permanent domicile
  • Personal, economic, and any other relevant relations
  • Nationality

For corporations,it’s a bit more complex. Generally, the presence of a branch or a permanent establishment is sufficient to satisfy the criteria. For example, if the company only opened a bank account, then there is no residency. “Permanent establishment” isn’t a univocal term, which means it is necessary to look at the presence of income from Russian sources as well as the agreements on the avoidance of double taxation. Russia will be recognized as the place of effective management if one of the following conditions applies:

  • An executive body of a foreign company carries out most of its management activities in Russia.
  • The chief executive officers carry out the executive management of the company in Russia.

If one of these criteria is satisfied in Russia and another jurisdiction, the company must also prove it does one of these in Russia:

  • Main bookkeeping and management reporting.
  • Primary HR management.

Non-resident individuals are taxed exclusively on their Russian-sourced income. However, it must be noted that for individual non-residents, income is taxed at 30 % instead of the regular 13 % for residents. We’ll explain that further ahead.

Residents are subject to taxation over their global income. However, they can benefit from its extensive double tax treaty network, which includes treaties with most European countries, the US, Canada, Japan, China, India, South Korea, and even some Latin American countries such as Argentina, Chile, and Mexico.

Non-resident companies are only taxed from their Russian-sourced income, which means that companies doing international businesses from Russia, and little-to-none business in Russia itself, are virtually tax-free.

 

The Russian tax system

The Russian tax system is relatively simple, as it has a fewer number of payments and processing times than the average OECD country.  Moreover, there aren’t many different individual taxes, as virtually all income is taxed at the same 13 % rate.

Individual taxes

The taxable income in Russia is all income from any sources for residents and only Russian-sourced income for non-residents.

As we said, all income is added to the income tax rate, meaning Russia doesn’t apply distinctive capital gains, dividends, interests, or rental income, taxes at different rates. Everything is taxed at 13 % and must be included in the federal income tax declaration.

For residents, the following income is taxed differently from the normal 13 % tax rate:

  • Interest income over five points above the Central Bank’s interest rate for deposits in rubles or 9 % over the annual interests for deposits in foreign currency (35 %).
  • Income from awards and prizes won from contests, games, and similar affairs (35 %).

This means relocating your personal tax residency to Russia can bring significant benefits. For example, earning $200k in employment income in Russia would mean $26k in taxes, before even considering exemptions, which are varied and can lower the total taxable income significantly. That same income would mean $73k in income tax in the UK, which isn’t even among the most tax heavy countries in Europe. And that’s even before considering other taxes that in Russia are also taxed at 13 %: capital gains (18%-28%), dividend income (32%-38%), among others.

Being a non-resident in Russia is not too beneficial, as they must pay a 30 % income tax rate for any Russian-sourced income. The following income is taxed differently:

  • Dividends from Russian companies (15 %).
  • Income of highly qualified foreign professionals with a monthly salary of over 167k rubles, or refugees (13 %).

 

What income is tax-exempt?

  • Reimbursements for expenses regarding work-related change of domicile and business travel.
  • Compensations for injuries and diseases contracted in work.
  • Severance payments.
  • Income from Russian state pensions.

What deductions are available?

  • Pension contributions to licensing plans up to 120k rubles per year.
  • Charitable contributions up to 25% of the taxable income.
  • Educational expenses of the taxpayer (up to 120k rubles) and their children up to 50k rubles per child.
  • Expenses to buy or build a residence (two million rubles) and payment of loan interests (three million rubles). This can only be done once in a lifetime.
  • Medical expenses for the taxpayer and direct relatives.
  • 1.4k rubles per month for the first two children and 3k rubles per month from the third child.
  • Foreign tax relief up to the amount payable in Russia.
  • Income from the sale of property that has been owned for at least five years.
  • Particular exemptions under double tax treaties (for example, Israelite citizens have an exemption over selling securities).

 

Corporate taxes

All income of a company is taxable. There are no specific capital gains, interests, orroyalties taxes but one single corporate tax rate, meaning almost all income is taxed at the same rate. The applicable corporate income tax is 6-7 % for the simplified tax system (for certain SMEs with revenues under 150 million rubles, which is about 2.5 million dollars) and 20 % for most companies in the general tax system. The revenues from the tax payment are distributed as follows: 3% for the federal government and 17 % for the regional government, which can reduce the tax rates for specific categories of companies.

You’re probably wondering what’s the case with different corporate structures such as representative offices, sole traders, and LLCs. Let’s explain some of that:

Representative office: These structures don’t conduct business in Russia. They only undertake representation, marketing, and similar activities, meaning they only carry out expense transactions, and they don’t make any profit. Thus, they don’t pay any taxes in Russia.

Sole traders: Foreigners can be sole traders/individual entrepreneurs in Russia, and they fall under the special income tax regime, meaning they pay 6% or 7% in taxes (depending on the case). A residence permit and registration are requiredto obtain the individual entrepreneur status.

If you want to know more about how Russia as a business center, please visit our Country Focus.


LLC: Foreigners who own a Russian LLC pay a 15 % income tax rate from the company’s dividends, but the rate can be reduced if there are double tax treaties. For example, many countries, such as Cyprus and Austria, have a 5% rate. These provisions also apply for foreigners who are UBOs of a PIF.

There are two significant taxes aside from the corporate tax. First, the property tax rate, which is a maximum of 2.2%. Second, the dividend income earned from Russian companies, which is taxed at 13%, instead of the regular 20% for corporate income.

Capital gains have an amazing exemption as sales and redemption of shares in Russian entities can leadto a full tax exemption under certain circumstances.

There are also tax relieves for foreign taxes up to the Russian tax liability of the company.

There are also some fantastic tax incentives for companies in Russia. Many different regions offer incentives for large investors in priority industries. Most of them are in the form of special economic zones, or advanced development zones, which have the following benefits:

  • 0 % corporate tax rate on the federal portion of the tax for five years.
  • Reduced regional portion of the corporate tax.
  • Reduced social contributions (7.5% instead of 30%) for ten years.

 

Who are we, and what can we do for you?

In Mundo, we have 25 years offering top financial, immigration, and corporate advice all over the world.

We have an exceptional team of experts in Russia that can help you with moving your tax residency to this economic giant and offer tax advice if you have economic interests in Russia.

Russia is a terrific tax residency relocation destination. It offers a comfortable lifestyle with a deep culture, one of the biggest markets in the world with access to numerous regions, an extensive tax treaty network, and a personal income tax rate that’s more than three times less than in several western countries.

Establishing your business’ tax residency in Russia can also help you reduce your taxes thanks to the varied special zones in the country and the simplified tax system.

In any case, Mother Russia can bring significant tax relocation benefits while you can keep your western comfort and work from one of the main business centers on the planet.

If you want more information about the Russian tax system and tax residency, all you need to do is contact us right now.

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