The tax reform law has been signed by the President. How does the final version look?

Tax calculations under the progressive scale would follow the same principle as currently applies, i.e., each higher rate would apply only to the amount in excess of the threshold for the preceding rate.

The Law contains a number of measures aimed at reducing the tax burden for taxpayers with lower incomes, including partial tax rebates and increases in the levels of tax deductions. For example:

• Child-related deductions are doubled: a deduction of 2,800 rubles per month will apply for a second child and 6,000 rubles for a third and any further children. In addition, the income threshold for the application of child-related deductions will be raised from 350,000 to 450,000 rubles, and employers will be able to grant a deduction without an application having to be made.
• A new tax deduction of 18,000 rubles is introduced for those who pass labor and defense readiness (GTO) tests (the Bill originally proposed a deduction of 500 rubles per month for 12 months).

Also cut from the Bill is the proposed restriction on the application of investment deductions and the long-term private savings deduction for wealthy individuals (i.e., those for whom the sum of all taxes exceeds 50 million rubles).

Persons working in Far North regions and other areas with unfavorable climatic (environmental) conditions will be taxed according to the previous PIT scale (13% and 15% on amounts above 5 million rubles per year) on that part of their wages accounted for by regional wage coefficients and percentage increments.

The Law makes amendments regarding the regulation of CFC activities which both increase the burden for owners of such companies that apply the special lumpsum tax regime and alter the rules around the administration of such companies in light of the current international situation.

Specifically, the Law introduces fixed levels of CFC profits commencing from 2025 for taxpayers that are controlling persons and have transferred to the special taxation regime, depending on the number of CFCs. Specifically:

• if the taxpayer is a controlling person of one CFC, the fixed profit level will be 27,990,000 rubles
• for two CFCs it will be 52,718,000 rubles
• for three or four CFCs the fixed profit level will increase by 22,727,300 rubles for each additional CFC starting from the third one
• if the taxpayer is a controlling person of five or more CFCs the fixed profit level will be 120,899,900 rubles

This means that tax payable under the special regime is now limited to a maximum of 25 million rubles (the initial proposals did not set a ceiling and proposed charging 5 million rubles for each CFC). Additionally, in view of the current international situation, a provision has been introduced to the effect that, if a CFC or a taxpayer who is a controlling person of that CFC is subject to sanctions imposed by foreign states which give rise to compulsory external administration of the CFC, the controlling person has the right to notify the tax authority of the cessation of participation in that foreign entity.

General provisions

• The Law increases the basic rate of corporate profit tax from 20% to 25% for profit of Russian entities and foreign entities that receive income from Russian sources. The additional tax amounts will be paid to the federal budget. In a change to the bill originally tabled by the Ministry of Finance, it has been decided not to raise the rate for private foundations.
• Regional governments are granted the right to set reduced rates of corporate profit tax for Russian entities included in the register of small technology companies. This change was made to the Bill before the second reading.
• In another change from the bill drafted by the Ministry of Finance, the Law includes an amendment that allows a special tax rate of 20% (3% to the federal budget and 17% to the regional budget) to be set for entities holding licenses to use subsurface sites referred to in subsection 5 of clause 1 of Article 333.45 and clause 2 of Article 343.5 of the Tax Code.
• The provision allowing regions to introduce an investment tax deduction (ITD) mechanism has been extended indefinitely. Furthermore, a federal ITD has been introduced. Also, the tax benefits provided under the regional investment project (RIP) mechanism for entities included in the register of RIP participants have been made permanent.

The federal investment tax deduction

• The Law provides for a federal investment tax deduction (federal ITD) to be claimed out of tax payable to the federal budget in an amount not exceeding 50% of expenses incurred for the construction or modernization of / additional investment in fixed assets and amortizable intangible assets.
• The procedure for determining the federal ITD and the key conditions for applying it will be established separately by the Russian Government (the exact amount of the federal ITD is still under discussion).
• An unused federal ITD may be used to reduce tax (advance tax payments) in ensuing periods.
• The federal ITD may also be applied by taxpayers that form part of the same group as an entity that has the right to apply it. This is a significant new development for Russian tax law.
• The following do not have the right to claim a federal ITD:
  • foreign entities deemed to be tax residents of Russia
  • entities deemed to be taxpayers which are parties to an investment protection and promotion agreement (IPPA)
  • credit organizations
  • entities that manufacture certain excisable goods
• The list contained in the Law of persons not entitled to a federal ITD differs from the version contained in the bill originally submitted to the State Duma. Specifically, entities engaged in hydrocarbon extraction have been excluded from the list, while credit organizations have been included.
• If a fixed asset or intangible asset in relation to which a federal investment tax deduction has been applied is sold or otherwise disposed of (other than liquidated) less than five years after being placed into service and before the expiry of its useful life, the amount of tax not paid owing to the application of the deduction must be restored and paid (with penalties).
• The amount of tax payable to the federal budget after the federal investment tax deduction has been used may not be less than 2% (3% in 2025 to 2030), and taxpayers cannot simultaneously claim regional and federal investment tax deductions.

The tax rate for IT organizations accredited by the Ministry of Digital Development is set to rise from 0% to 5%. The tax will be payable to the federal budget and the period for which the rate will apply has been extended to 2025-2030 (compared with 2025-2027 in the original version of the bill).

A number of additional measures to support high-technology activities have been introduced. These are available not only to IT companies accredited by the Ministry of Digital Development but also to other taxpayers. In particular, the multiplier for expense deductions is increased from 1.5 to 2 for certain operations:

• in the case of the creation of a fixed asset included:
  • in the Unified Register of AI-Related Russian Radio-Electronic Products, or
  • in the Unified Register of Russian Software and Databases (evidently meaning an integrated hardware/software system), or
  • in the List of Russian High-Technology Equipment
• in the case of the creation of intangible assets in the form of exclusive rights in computer programs and databases which are included in the Unified Register of Russian Software and Databases. The requirement for software and databases to be AI-related has been excluded
• in the case of the inclusion in miscellaneous expenses of costs for the purchase of rights to use software and databases included in the Unified Register of Russian Software and Databases. The requirement for software and databases to be AI-related has been excluded
• in the case of the inclusion in miscellaneous expenses or in the historical cost of intangible assets of R&D costs included in the R&D list established by the Russian Government

The rules preventing IT benefits from being applied in the event of re-organization have been eased. The re-organization of IT companies will not prevent them from claiming IT benefits in the case of:

• mergers/acquisitions of IT companies in 2025-2026 if all the IT companies involved in the re-organization applied IT benefits in 2024
• a spin-off in 2024-2025 if the IT company from which the spin-off occurs applied IT benefits in 2023

The threshold for the STS is raised from 250 million to 450 million rubles. However, organizations and individual entrepreneurs (IEs) that apply the STS will now be liable to pay VAT

• at special rates:
  • 5% if income of organizations and IEs under the STS for a calendar year does not exceed in the aggregate 250 million rubles
  • 7% if income of organizations and IEs under the STS for a calendar year is from 250 million rubles to 450 million rubles, or,
• at the taxpayer’s option, at the standard VAT rates (0% / 10% / 20%).

Rules are established for determining a taxpayer’s income both for the purposes of claiming exemption from VAT and for the purposes of applying the special VAT rates of 5% / 7%.

If a taxpayer’s income for the preceding year was no more than 60 million rubles, an automatic exemption from VAT will apply without the need to submit a notification to the tax authority.

The application of the special VAT rates (5% / 7%) does not require a specific notification to be submitted to the tax authorities. A VAT return filed by an STS payer in which the special VAT rate of 5% / 7% is applied for the first time will be treated as such notification. Starting from the tax period for which that VAT return was filed, the taxpayer will be obliged to apply the chosen special tax rate for 12 consecutive tax periods.

The following restrictions are established for STS payers that apply the special VAT rates (5% / 7%): 

• They do not have the right to deduct input VAT.
• They do not have the right to apply the provisions of clauses 3 to 5.1 of Article 154 of the Tax Code in determining the tax base for operations referred to in those clauses of the Tax Code.
• They do not have the right to apply 10% / 20% VAT rates or 0% VAT rates except in situations where the taxpayer carries out operations referred to in subsections 1 to 1.2, 2.1 to 3.1, 7 and 11 of clause 1 of Article 164 of the Tax Code.
• The special VAT rates of 5% and 7% are not applicable to imports of goods into Russia or to operations referred to in clauses 1 to 6 of Article 161 of the Tax Code in which the taxpayer acts as a tax agent for VAT purposes. 

For the first time the Law introduces a legislative definition of “business splitting”, defining it as the division of unified business activities among multiple formally separate entities (organizations and IEs) which are controlled by the same persons, the sole or primary purpose of which is to enable taxes to be artificially reduced through the application of special tax regimes by the entities concerned in a manner that breaches the limits prescribed by Article 54.1 of the Tax Code on the exercise of rights in relation to tax calculation. The concept of “voluntary discontinuation of business splitting” is also introduced.

Under the amnesty, tax authority decisions on business splitting which were issued based on tax audits for the period 2022-2024 will be suspended from the effective date of the Law. Eligibility for the amnesty will depend on whether the taxpayer discontinued business splitting in subsequent periods (2025-2026) and how and when that discontinuation occurred (voluntarily, after the tax authority ordered a field audit for 2025-2026, as a result of the cessation of activities, etc.).

These factors will determine those cases in which obligations to pay tax assessments, fines and penalties for tax offences related to business splitting are cancelled and those cases in which they are not.

The Bill introduces new types of excisable goods:

• raw nicotine and non-tobacco nicotine-containing mixture for heating
• pharmaceutical ethanol, and alcohol-containing drugs not included in the relevant List to be approved by the Russian Government
• natural gas acquired for the production of ammonia

The Bill also prescribes exemptions for pharmacies which make up prescription drugs that are classed as excisable goods.

The Law makes substantial changes to the tax landscape. To avoid any substantial increases in your company’s tax burden, it is essential to take immediate steps to analyze the impact of the changes and consider appropriate responses. Companies can take the following steps right now to help address potential tax implications:

Profit tax

• Plan transactions occurring within the current tax period and the timing of their recognition (in 2024 or 2025)
• Carry out a comprehensive review of tax records to identify potential ways of reducing tax liability, such as by using:
  • Instruments provided for in the Law (deduction multipliers, federal ITD)
  • Other instruments for increasing tax efficiency
• Analyze potential for applying certain state support mechanisms (IPPAs, SPIC 1.0 / 2.0, RIPs, etc.)

PIT and CFC changes

• Analyze the effect of the introduction of the progressive PIT scale and assess avenues for modifying incentive schemes in light of the new rates and the rate differential
• Analyze whether it would be feasible / beneficial to reduce the number of CFCs (for example, through liquidation or re-organization)
• Assess the potential effect of transferring CFCs to the general tax regime and examine the possibility of distributing assets among family members
• Consider options for re-organizing CFC ownership – where there are appropriate non-tax grounds for doing so (for example, ownership via trusts and private foundations)
• Assess the possibility of simplifying structures and transferring assets to Russia (establishing direct ownership by individuals or ownership via closed-ended unit investment funds)

Risks and consequences of business splitting / the “Amnesty”

• Carry out a thorough analysis of the company’s (group’s) business to determine:
  • whether business splitting criteria/attributes are present and/or
  • the advisability of taking advantage of the amnesty
• In the event of the voluntary discontinuation of business splitting – prepare all necessary documents correctly and notify the tax authorities in the appropriate manner
• Modify or redesign the business structure to ensure an appropriate balance of risk and efficiency
• Evaluate internal due diligence procedures in relation to counterparties/suppliers that apply special tax regimes to assess:
  • whether there are potential tax risks
  • whether appropriate documentation is drawn up
  • the conditions of existing transactions in terms of whether tax is included in the contract price
• If a tax audit is conducted in relation to a company to check for business splitting, carefully assess the risk of subsequently appealing against the findings of the audit.

VAT records for STS payers

• Model tax scenarios to assess general efficiency and facilitate the choice between special or standard VAT rates. Since applying the special rates means that input VAT cannot be reclaimed, the choice of whether to pay VAT at standard or special rates is not always obvious
• Assess whether the use of the STS regime is efficient in terms of both the increased tax burden from VAT and business splitting risks
• Prepare for the new realities, paying close attention to methodological issues and transitional provisions

We will continue to monitor any further adjustments to the Law and keep you informed of all changes and their practical implementation. 

Authors: B1 team.