Numerous amendments to tax legislation have been adopted
Pepeliaev Group advises that the next batch of numerous amendments to the Russian Tax Code (the “Tax Code”) has been adopted, including those related to the special military operation (“SMO”).[1]
All amendments can, for discussion purposes, be divided into several major blocks.
I. General changes
1. By Federal Law No. 52-FZ dated 9 March 2022 the Russian Government (the “Government”) has been vested with special powers in the tax sphere in 2022, namely: to implement measures to protect business (similar to those measures that were implemented in 2020 during the pandemic) and, specifically, to issue regulations that provide for an extension of various deadlines, such as for the payment of taxes, submission of tax returns and financial statements and others. The Government has exercised the right extensively.[2] Today, these powers of the Government have been extended for 2023.
2. Expenses of corporate taxpayers in the form of monetary funds and/or other property donated to mobilised persons, volunteers and persons doing military service under a contract may be included in non-operating expenses for profit tax purposes. A transfer of property to mobilised persons, volunteers and persons doing military service under a contract who are engaged in the SMO is not subject to VAT. Moreover, no such payments are subject to insurance contributions.
These legal provisions apply to transactions that were consummated starting fr om 1 January 2022.
Comment
the very possibility of deducting for profit tax purposes the value of donated property (including monetary funds), in other words, expenses that are obviously not economically justified for the purposes of article 252 of the Tax Code appeared already during the spread of the new coronavirus infection (article 265(1)(19.5) and article 265(1)(19.6) of the Tax Code). The legislature, as is evident, extends this approach to other situations when property is transferred free of charge for the public good. However, by contrast with that situation (article 171(2.3) of the Tax Code), the amendments which have been adopted now do not mention the right to deduct VAT on such property.4. Before 31 December 2018, constituent entities of the Russian Federation could establish reduced profit tax rates for certain categories of companies. The amendments were to be applied until their expiry date, but no later than 1 January 2024. The Law has extended the operation of such benefits until 1 January 2025.
5. A new category of bad debts has been added: amounts of monetary liabilities which have been terminated on the grounds specified in article 2 of Federal Law No. 377-FZ "On specific aspects of how obligations under loan (credit) agreements are to be fulfilled by persons called up for military service to the Russian Armed Forces and by persons taking part in the special military operation and by their family members, and also on amendments to individual items of Russian legislation” dated 7 October 2022. The above legal provision applies to legal relationships which have emerged since 24 February 2022.
6. It has been stipulated that former participants of consolidated taxpayer groups (if an agreement setting up a consolidated taxpayer group is terminated) are obliged to switch to paying monthly advance profit tax payments based on actual profit in 2023.
7. An increased profit tax rate of 34% is being established for the period of 2023-2025 for companies that produce liquefied natural gas and have exported at least one batch of liquefied natural gas by 31 December 2022 inclusive.
Comment
This is the first time that an increased profit tax rate for a specific industry has appeared in Chapter 25 of the Tax Code. In the case in question, this is evidently a method of collecting part of the natural resource royalty for the state budget. However, as the above-mentioned experience shows of the rules permitting the value of donated property to be booked as expenses, any legislative precedent may well be replicated in the future for other cases.
Comment
A similar legal provision was previously in effect, including in 2021. It has been established that, from 2022, the threshold value for the insurance contribution base set for previous year will be indexed based on the increase in average wages. The law was a response to the lag between the planned and actual growth of wages in 2021-2022 (by which the threshold base for insurance contributions will be indexed from 2022).
10. The law exempts from personal income tax and insurance contributions an increased daily allowance paid to public servants travelling to the new constituent entities of the Russian Federation (the “new constituent entities”) (established by the Russian President’s Decree No. 752 dated 17 October 2022 in the amount of RUR 8,480 for each day of a business trip).
Nor does taxation apply to unreported monetary amounts on additional expenses on such business trips, but not more than RUB 700 per day. These amounts may also be booked as expenses for profit tax purposes. The legal provisions apply to income which has been earned from 1 January 2022.
II. Benefits for mobilised, volunteers and persons doing military service under a contract
Benefits have been stipulated for persons called up for military service within the framework of mobilisation to the Russian Armed Forces or performing military service under a contract which has been concluded under article 38(7) of Federal Law No. 53-FZ “On military duty and military service” dated 28 March 1998 or who have concluded a contract to stay with paramilitary troops (to voluntarily assist in performing the tasks assigned to the Russian Armed Forces). Income in the form of monetary funds and/or other property received free of charge by mobilised persons, volunteers and persons doing military service under a contract as well as their family members is exempt from personal income tax, provided that such income relates to such persons' military service under mobilisation and/or to the contracts they have concluded.
The new legal provision applies to income which has been earned from 1 January 2022.
Comment
Since the Law refers to income "received free of charge" (albeit related to military service), it refers to cases when mobilised persons, volunteers, persons doing military service under a contract and their family members receive property and payments from employers, charities, regions and others. The amendments, apparently, do not apply to service pay and social payments which are granted specifically for performing the military service. As stated by the Russian Defence Ministry before the Law at hand was adopted, payments to the above categories of persons consisted of a monthly social payment and service pay of a member of the military (which depends on pay for the military post and the rank assigned to the member of the military and the length of service). Personal income tax is charged only on the service pay of the member of the military, while the monthly social payment (RUB 158,000) is not subject to taxation.
III. Amendments concerning taxpayers located in the new regions of Russia
1. Taxpayers that were located in the new constituent entities when they became part of Russia assess VAT according to the computational method using the reduced rates of 9.09% and 16.67% instead of the general rates of 10% and 20%. This applies to situations when a taxpayer, while producing or selling goods, uses goods that had been purchased before Russian legislation on taxes and levies had started to be applied. The problem is thereby being solved of not being able to claim a deduction of an input VAT on goods that had been purchased before the Tax Code came into force in the new constituent entities.
Comment
Under article 15 of Federal Constitutional Laws Nos. 5-FKZ, 6-FKZ, 7-FKZ and 8-FKZ dated 4 October 2022 on the accession to the Russian Federation of the new constituent entities, Russian legislation on taxes and levies applies in these territories from 1 January 2023. The above amendment also applies starting from 1 January 2023.
Thus, taxpayers of the new constituent entities will apply reduced tax rates starting from 1 January 2023 until all goods purchased before that date are exhausted.
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a contract concluded prior to 5 October 2022 with a Russian public or municipal authority or a public institution, a cross-border or a state-run corporation or a state-owned enterprise fr om the new constituent entities;
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a contract concluded prior to 5 October 2022 with a legal entity which receives funds either from the federal or regional budget to be spent on the performance of work (provision of services) in the new constituent entities;
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a contract (irrespective of the date on which it was concluded) wh ere the taxpayer is a sub-contractor (co-service provider) under the above contracts;
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a contract concluded prior to 31 December 2022 for the performance of work (provision of services) in the new constituent entities, provided that the work was performed (services were provided) before 31 December 2022 and the payment is made before 25 January 2023.
Comment
The procedure that was applied previously for determining the place of the performance of work (provision of services) implied that in most cases such place would not be the territory of Russia and, hence, transactions would not be subject to VAT.
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road transport services for goods, provided that the point of departure or of destination is located in the new constituent entities, while the contract was concluded and the services were provided before 31 December 2022;
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for taxpayers fr om the new constituent entities, if goods are delivered to a destination point in such new constituent entities under contracts concluded before 5 October 2022, provided that customers are Russian public or municipal authorities or state institutions, cross-border or state-run corporations or state-owned enterprises from the new regions;
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and also if goods are delivered to a destination point in the new constituent entities under contracts concluded before 31 December 2022 under transactions with companies from the new regions or a foreign entity, provided that the goods were shipped before 31 December 2022 and the payment was received before 25 January 2023.
A different set of documents has been stipulated for each case to substantiate that the 0% tax rate has been applied lawfully.
4. For taxpayers from the new constituent entities, the initial value of fixed assets in tax accounting is determined, for profit tax purposes, as the product of costs on acquisition, construction, manufacture, delivery and bringing a fixed asset into the condition in which it is fit for use, completion, retrofitting, reconstruction, modernisation, or technical re-equipment which are supported by source accounting documents. A taxpayer determines the depreciated book value of a fixed asset at the moment when Russian tax legislation has started to be applied, by reducing the initial cost by depreciation that has been accrued on a straight-line basis.
The above mentioned taxpayers should determine the useful life of their fixed assets by the rules of the Tax Code, starting from the date when such fixed assets are put into operation.
5. Until 31 March 2023, taxpayers from the new constituent entities are to make an inventory of the assets, property rights, claims and liabilities that they have at their disposal. The results of the inventory should be documented in an inventory report and inventory sheets, which are sent to the tax authority.
6. The Law exempts citizens in the new constituent entities from state duty for having Russian passports, driving licences, registration documents and vehicle licence plates, for registering legal entities and individual entrepreneurs in these territories, and for state registration of rights to immovable property.
7. Corporate taxpayers in the new constituent entities are entitled to reduce, for profit tax purposes, revenues from the sale of property by its value (which is indicated in the inventory sheet) if such property had been acquired before Russian legislation started to be applied.
8. The import of goods into Russia will be exempt from VAT and excise duties wh ere a taxpayer acted as a declarant with respect to such goods and the goods were imported into the unified customs territory of the Eurasian Economic Union from 30 September 2022 to 10 November 2022.
9. Taxpayers from the new constituent entities may submit to tax authorities, both electronically and in hard copies, tax returns (calculations) for the periods from 30 September 2022 to 31 December 2023 inclusive, as well as the ledger of invoices received and issued, and in addition other documents the submission of which is stipulated by the Tax Code. The Government may extend the above deadline.
10. The specific aspects have been established of how transactions with shares will be taxed of taxpayers who come from the new constituent entities.
What to think about and what to do
Companies that provide assistance to mobilised persons, volunteers, persons doing military service under a contract and their family members (including their employees) will need to take into account the amendments introduced by the law at hand.
For those doing business in the new constituent entities of the Russian Federation, there are nuances to be taken into account as the taxation procedure in the new constituent entities may differ from the general procedure.
Help from your adviser
Pepeliaev Group’s lawyers have substantial experience of advising on taxation issues and representing taxpayers before tax authorities.
Our experts are keeping up to date with the latest developments in tax legislation and are ready to provide recommendations on how to apply them in practice.
[1] Federal Law No. 443-FZ “On amending article 4 of Part I and Part II of the Russian Tax Code and individual items of Russian legislation” dated 21 November 2022.
[2] https://www.pgplaw.ru/analytics-and-brochures/alerts/prodlen-srok-uplaty-martovskogo-avansovogo-platezha-po-nalogu-na-pribyl/