A set of amendments have been adopted regarding the tax on excess profit

Pepeliaev Group comments on the law on the tax on excess profit and the associated amendments to the Tax CodeFederal Laws Nos. 414-FZ “On the tax on excess profit” and 415-FZ “On amending Part I and Article 270 of Part II of the Russian Tax Code” dated 4 August 2023.
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The draft law was discussed rather intensely [1]. We are commenting on the result that has been achieved.

I. General provisions

1. The law calls the tax on excess profit a tax of a one-off nature. It is a federal tax and it is remitted to the state budget in full. It is specified that the law will come into force starting from 1 January 2024 but the provisions of the law on a security payment (see below) may be applied earlier.

2. The legal elements in the composition of the tax are determined in a separate law, rather than in the Tax Code.

II. Payers of the tax

1. The law names three categories of payers

• Russian companies
• foreign companies conducting activity in Russia through permanent establishments
• foreign companies that are recognised as Russian tax residents

2. The Companies that are not payers of the tax have been selected based on different criteria:

• based on the time they were created / started to be active:
• Russian companies created after 1 January 2021 (save for those created further to a reorganisation) and foreign companies that started performing activities in Russia through permanent establishments after 1 January 2021.
• based on the scale or results of their activity:

a) companies included in the register of SMEs as at 31 December 2022;

b) companies that did not generate any income in 2018 and 2019 for profit tax purposes.

• based on their attribution to an industry

a) companies that in 2022 were involved in the extraction of hydrocarbons;

b) companies that in 2022 were involved in the processing of oil raw materials and that released products for at least 6 months (the law uses a more complex wording);

c) all companies that in 2022 were members of a consolidated group of taxpayers which included companies specified above in paragraphs a and/or b;

d) companies that in 2022 supplied services including the processing of oil raw materials to clients specified above in paragraphs a and/or b;

d) companies that, as at 31 December 2022, directly owned membership interests of at least 75 % in companies specified above in paragraphs a and/or b;

e) companies that are manufacturers and/or exporters of liquefied natural gas;

f) companies that were involved in the extraction of hydrocarbons in 2022;

g) companies that paid unified agricultural tax continuously through 2018-2022;

h) financial institutions that, as at 1 January 2023, conducted bankruptcy prevention activities with the involvement of the Bank of Russia or the Deposit Insurance Agency;

i) developers implementing projects with funds of individuals being raised on escrow accounts, that have not paid dividends in 2021 and 2022.

3. With respect to members of consolidated groups of payers the following rules apply:

• companies that are specified above in clause c) are not payers;
• members of consolidated groups of taxpayers that included in 2022 coal mining companies (apart from miners) pay the tax independently under the general rules;
• companies that used to be members of consolidated groups of taxpayers as at 31 December 2022 (save for those mentioned above) only pass the necessary information to the responsible member of a consolidated group of taxpayers that, in turn, performs the obligations of a taxpayer in the entire consolidated group of taxpayers;
• companies that were members of consolidated groups of taxpayers in 2018, 2019, 2020, 2021 and/or 2022, but not as at 31 December 2022 perform the obligations of a taxpayer independently.
  

III.The taxable item

1. The law states that the taxable item is excess profit, in other words, the difference between the arithmetic average rate of return (which is subject to profit tax) for the period of 2021-2022 and 2018-2019.

2. When profit is determined account is not taken of dividends received, as well as of some (but not all) of the types of tax base that are taxed at reduced ratesarticles 284(1.6), 284(1.14), 284(3), 284(4), 284(4.1), 284(4.3), 284(4.4) and 284(5) of the Tax Code.
:

• controlled foreign companies’ profit
• profit under agreements to promote and encourage capital investments (APECI)
• profit under certain APECI
• profit under certain types of debt obligations
• profit under certain types of income of international holding companies

3. When profit is determined, account is taken of losses carried forward under the rules of article 283 of the Tax Code.

4. If the taxpayer has provided adjusted profit tax returns for 2021 and/or 2022, then the adjusted data is taken into account for the calculation of excess profit.

5. If additional profit tax is assessed further to a tax audit, then the product of such additional profit tax assessed further to the audit and the coefficient of 5 is added to the profit for the relevant year that is included in the tax base for excess tax purposes.

IV. The tax base

1. The base is the monetary value of excess profit, in other words, the difference between the arithmetic average rate of return for 2021-2022 and 2018-2019.

• if the difference between the profit for 2021-2022 and 2018-2019 is negative,
• if the arithmetic average profit for 2021 and 2022 does not exceed 1 billion.

3. If the tax base has exceeded half of the profit for 2022 and at the same time the balance sheet value of assets as at the end of 2021 and 2022 increased as compared with the values of 2018 and 2019 to a greater degree than the arithmetic average rate of return then the tax base is recognised as equal to half of the profit for 2022.

V. The tax rate

1. The tax rate is 10%. Yet, the arrangement for its calculation and payment is designed in such a way that most taxpayers will prefer to actually pay half the amount of tax - see below.

VI. The procedure for calculating and timeframes for paying the tax. A tax deduction

1. The general procedure: the tax is calculated at the rate of 10% of the tax base and is paid on or before 28 January 2024.

2. However, taxpayers will be able to reduce the amount of tax if they make a security payment to the state budget between 1 October and 30 November 2023.

3. This payment cannot exceed half of the excess profit tax calculated under the general rules. It actually affects the amount of the tax obligation twice:

• first, the security payment is recognised as a tax deduction that reduces the amount of tax that is payable;
• second, starting from 28 January 2024, the amount of the security payment is deemed an amount of tax that has been paid.

VII. Tax return

1. The tax return (of which the form has not yet been approved) is filed no later than 25 January 2024 to the inspectorate at the company’s location (in the case of major taxpayers, to the inspectorate for major taxpayers).

2. If the tax base is equal to zero, no declaration is filed.

What to think about and what to do

We recommend that companies study the new rules carefully, especially if there are nuances in their specific situation.

For instance, if the excess profit according to the company’s information is close to the minimum “threshold” of RUB 1 billion, it would be prudent to check carefully whether the profit tax base for 2021-2022 has been determined correctly, whether all possible expenses have been booked, etc. Sometimes it would be prudent to provide adjusted profit tax returns for past periods.

It is also required to analyse thoroughly whether a security payment is advisable and what the optimum amount of such payment might be.

Help from your adviser

The lawyers of Pepeliaev Group have extensive experience of advising clients on all tax matters.

We will be happy to help you on issues connected with the calculation and payment of the tax on excess profit.