The Tax Code will be amended drastically to reflect the measures aimed at supporting business during sanctions
General measures
In 2022 and 2023, penalty for the breach by companies of deadlines for paying taxes and duties will be assessed at the rate of 1/300 of the rate of the Russian Central Bank (the ‘Central Bank’) regardless of the length of the delay (the increased rate of the penalty starting from the 31st day of the delay does not apply);VAT
VAT at a 0% rate is being introduced for services involving renting out, using or granting another right to a tourist industry facility, as well as services of providing accommodation at hotels and other lodging facilities.
To apply the 0% rate, tourist industry facilities must be commissioned after 1 January 2022 and be included in the register the procedure for maintaining which is yet to be approved by the Russian Government. The reduced rate is granted for 20 quarters. As regards hotels and other lodging facilities, the wording is more complicated: there is no condition regarding commissioning starting from 2022; it is established, however, that the 0% rate will be applied not longer than for 20 quarters after such hotels and lodging facilities have been commissioned. In other words, if a hotel was commissioned in December 2020, the 0% rate can be only applied for 15 quarters, starting from April 2022 (excluding five quarters for 2021 and the first three months of 2021).
Companies that seek to apply the 0% VAT will in any case be required to arrange for separate accounting of income which is subject to the 0% rate. This means that a company will have to clearly determine what services to include.
Profit tax
For those IT companies that now qualify for the 3% profit tax rate, a 0% profit tax rate is being established for 2022-2024.
This support measure for the IT industry is envisaged by the Russian President's new Decree No. 83 dated 2 March 2022. No other tax measures of the Decree which are aimed at supporting the IT industry have been included in the draft laws.
In 2022, income from forgiven loans which were received from foreign companies prior to 1 March 2022 will not be included in the tax base.
The question of the taxation of transactions involving the writing off of debts has a long history. At some point, it was permissible to forgive obligations to shareholders (members) without accruing any taxes on it. Then this was cancelled. The non-taxable debt forgiveness can return today, but in a new form, namely when a creditor is a foreign company. The advantage is that in the scenario proposed it is irrelevant what kind of foreign entity is forgiving debt, it can be a shareholder or another company (i.e. a financing company of an international group). The disadvantage is that non-taxable forgiveness applies only to loans (credits) and does not apply to the forgiveness of loans by Russian lenders.
To apply ‘thin capitalisation’ rules to debt obligations which emerged prior to 1 March 2022, the amount of the controlled debt in foreign currency will be determined at the exchange rate of the Central Bank as at the last date of the reporting period. The exchange rate should not, however, exceed the Central Bank’s exchange rate set on 1 February 2022. Consequently, the tax burden should not increase owing to the growing value of foreign currency.
The same rules for adjusting calculations relating to ‘thin capitalisation’ were used during the previous surge of exchange rates of foreign currencies in 2014 (article 2(1) of Federal Law No. 32-FZ dated 8 March 2015). Therefore, when practical questions arise regarding the application of the proposed new developments, we can rely on the previous practice.
A right is provided to companies to make monthly payments of corporate profit tax based on the actual profit. The change in the procedure for calculating advance payments should be recorded in the company's accounting policy. In order to use this right, a taxpayer must notify the tax authority at the company’s location (at the location where it is registered as a major taxpayer) not later than on the 20th day of the month when the reporting period ends, starting from which the taxpayer moves to making monthly advance payments based on the actual profit.
There is an extension of the enlarged ‘safe’ interval of interest rates that is used in transactions between related entities when income/expenses under debt obligations are booked for tax purposes.
Essentially, this means the extension for two more years (2022 and 2023) of those ‘safe’ intervals which were established previously for the period of 2020-2021 (for example, as regards to rouble loans between Russian related companies, tax authorities cannot challenge the interest rate ranging from 0% to 180% of the rate of the Central Bank).
Income/expenses in a form of positive/negative exchange rate differences which arise in the periods from 2022 to 2024 and from 2023 to 2024 respectively under claims (liabilities), the value of which is expressed in foreign currency (except for advance payments) are booked as of the date when the corresponding claims (liabilities) are terminated (discharged).
Personal income tax
Individuals will not have to pay taxes on interest income from their deposits with Russian banks which they received in 2021 and 2022.
The general taxation rules for interest income will also change: the non-taxable interest income on deposits will be equal to the amount of interest calculated as a product of RUB 1 million and the maximum key rate of the Central Bank out of the rates which were in effect as at every first day of each month in the relevant year (rather than as at the first day of the year). This amendment will help to reduce the tax due if the key rate of the Bank of Russia (Central Bank) grows over a year.Consequently, the provision which was introduced in practice last year will not be operable for now. Moreover, considering current circumstances, the Government has decided to exempt from taxation excess profits on loans which individuals received in 2021, which will help to reduce the amount of taxes due this year.
Income received by individuals in the form of a financial benefit from savings on interest on using borrowed (credit) funds received by individuals from their employers will not be subject to personal income tax.
Without this exemption, because of the significant increase of the Central Bank’s key rate, individuals who had received from their employer a credit/loan on market terms were to pay personal income tax at the 35% rate on the difference between the 13.33% rate (2/3 of the key rate) and the interest rate under the agreement they had entered into. In certain cases, the amount of tax due could have reached 50% or more of the amount of the interest paid under the loan obligation.
No income will be subject to personal income tax which was derived as a result of the receipt into ownership in 2022 of securities of Russian companies; membership interests in the issued capital of Russian companies; units of Russian mutual investment funds; and public and municipal securities from a foreign company with respect to which the taxpayer is a controlling person as at 31 December 2021, provided that:
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the securities (membership interests) were held by the foreign company that transfers same as at 1 March 2022;
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together with its tax return, the taxpayer has submitted an application for such income to be tax-exempt, indicating the features of securities (membership interests) received, the foreign company which has transferred such securities (membership interests), and attached the documents evidencing the value of the securities (membership interests) based on the accounts of the transferring company.
If the above items are further transferred/assigned, the amount equal to the value of securities (membership interests) transferred will be booked as the taxpayer’s expenses that are associated with the acquisition of the securities (membership interests) based on the accounting data of the foreign transferring company.
This benefit can be viewed as a new step towards 'deoffshorisation'. Please note that unlike similar rules of article 217(60) and 217(60.1) of the Tax Code, it is not required in the case concerned to liquidate the foreign company from which the individual receives assets. When the draft law is prepared for the second reading, similar relief can also be introduced for income of Russian companies that receive assets from a CFC.
Property tax
As regards corporate property tax, the cadastral value of real estate will be fixed as at 1 January 2022 for the purposes of the tax base in 2023 and 2024.
What to think about and what to do
The deadline for introducing amendments to the draft law is only one day. It can be assumed that clarifying amendments or even amendments which introduce totally new support measures can appear during that period. It can also be assumed that the law will be adopted within the next few days, and then be approved by the Federation Council, signed by the Russian President, and published and come into effect. We would recommend that you follow the developments and changes in the legal and regulatory framework.
Help from your adviser
Pepeliaev Group’s lawyers continually monitor changes in tax legislation and are ready to promptly advise you on any tax aspects that taxpayers are facing in the current situation.
[1] For the draft federal law “On amending article 75(4) of Part I and Part II of the Russian Tax Code” please go to https://sozd.duma.gov.ru/bill/84984-8
The transitional provisions of the draft law stipulate that the new wording of these provisions of the Tax Code will apply to legal relationships which emerged from 9 March 2022. This leaves open the question of whether the moment when the arrears emerged is relevant for applying new ‘soft’ rules for accruing the penalty. Thus, does it mean that if the arrears emerged before 9 March 2022, then the old penalty rules will apply, where the rate of such penalty increases after the 31st day of the delay? Or does it imply that the increased rate will not apply when the penalty is assessed for any periods after 9 March 2022 regardless of when the arrears emerged? The answer to this question is not cut and dried.