Tax Messenger

Tax reforms – a roundup of the Finance Ministry’s key proposals

30.05.2024

On 28 May 2024 the Ministry of Finance presented the Government with a bill (“the Bill”) setting out a range of amendments to the Tax Code of the Russian Federation (“the Tax Code”), including:

the introduction of a new progressive scale of personal income tax rates
an increased corporate profit tax rate (the basic rate would go up from 20% to 25% and the preferential rate for IT companies from 0% to 5%)
higher thresholds for the application of the simplified taxation system (STS) and the introduction of a requirement for VAT to be paid under the STS
additions to the range excisable goods
changes to resource rent taxes.

Personal income tax (PIT)

Since 2021, resident individuals have been taxed on a progressive scale of 13% on income up to 5 million rubles and 15% on anything above that level.

In place of the current rules, the Bill proposes to introduce 4 scales depending on the type of income. The main scale would include 5 rate bands.

Salary, rental income and other income forming part of the main tax base, as well as CFC profits (including fixed CFC profits), would be subject to the following rates:

13% – up to 2.4 million rubles
15% – from 2.4 million to 5 million rubles
18% – from 5 million to 20 million rubles
20% – from 20 million to 50 million rubles
22% – from 50 million rubles

Dividends, income from securities and derivatives transactions, taxable interest on deposits with Russian banks, insurance payouts, pension payments, income from the sale of ownership shares in Russian companies and certain other kinds of income would be taxed at the following rates:

13% – up to 2.4 million rubles
15% – from 2.4 million rubles

Also highly important is the possible termination of the PIT exemption for income from the sale of ownership interests and shares that have been held for more than 5 years if the sum of all tax bases for the relevant tax period exceeds 50 million rubles. The relief for sales of securities of Russian high-tech companies would also cease to have effect in this case, as would certain investment deductions and the deduction for long-term personal savings.

Another significant change is the possible increasing of the fixed profit level for CFCs, potentially based on the number of CFCs, for taxpayers which apply the relevant regime.

Income of certain categories of taxpayers which is received in accordance with Russian law, where it is directly connected with participation in the Special Military Operation, would be taxed at the following rates:

13% – up to 5 million rubles
15% – from 5 million rubles

For income from the sale of property (other than securities) and income in the form of the value of property (other than securities) received through gifting, a flat PIT rate of 13% would remain in place.

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 Bill 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 would 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 would be raised from 350,000 to 450,000 rubles, and employers would be able to grant a deduction without an application having to be made.
A deduction of 500 rubles per month for 12 months is introduced for persons who have passed labor and defense readiness (GTO) tests and have been awarded a badge and persons who have confirmed the receipt of a badge provided that they pass a medical examination.

Corporate profit tax

The key changes as far as corporate profit tax is concerned is the proposed raising of the basic rate of tax from 20% to 25% for profits of Russian and foreign organizations which receive income from Russian sources and from 15% to 22% for profits of private funds. The additional tax revenue would go to the federal budget.

The Bill also contains a range of measures designed to level the playing field for companies that actively invest. For instance, it is proposed that the provision allowing regions to introduce an investment tax deduction (ITD) mechanism should be extended indefinitely. Furthermore, it is planned to introduce a federal ITD (out of tax payable to the federal budget) amounting to no more than 50% of expenses incurred. The procedure for determining the ITD would be established separately by the Russian Government. It would not, however, be possible to claim the standard ITD alongside the federal deduction, and certain taxpayers would be barred from claiming it: resident foreign companies, hydrocarbon extraction companies, parties to investment protection and promotion agreements and manufacturers of certain excisable goods.

It is important to note that the introduction of the federal ITD is one of the measures most keenly anticipated by businesses, so the specific parameters of the deduction are important to assessing the overall effect of the proposed tax changes.

Profit tax for high-technology businesses

The tax rate for IT organizations accredited by the Ministry of Digital Development would rise from 0% to 5%. That rate would be set for the period 2025-2027 and the tax would be payable to the federal budget.

The Bill contains a number of additional measures to support high-technology activities. These would be available not only to IT companies accredited by the Digital Development Ministry, but to other taxpayers also. 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 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 AI-related computer programs and databases
in the case of the inclusion in miscellaneous expenses of costs for the purchase of rights to use computer programs and databases which are included in the unified register of Russian AI-related computer programs and databases
in the case of the inclusion in miscellaneous expenses or in the historical cost of R&D of costs for R&D included in the R&D list established by the Russian Government.

Changes for taxpayers that apply the STS

The threshold for applying the STS is raised from 250 to 450 million rubles.

However, organizations and individual entrepreneurs (IEs) that apply the STS would be liable to pay VAT if their aggregate income for the preceding calendar year was in excess of 60 million rubles.

Organizations and IEs that transferred to the STS during the calendar year and/or had an aggregate income of no more than 60 million rubles in the preceding calendar year may claim a VAT exemption provided that they notify the tax authorities.

The Bill establishes the following VAT rates for organizations and IEs that apply the STS and are liable for VAT:

5% if their aggregate income for the calendar year does not exceed 250 million rubles
7% if their aggregate income for the calendar year is between 250 and 450 million rubles
Standard VAT rates (0% / 10% / 20%).

Input VAT paid by organizations and IEs that apply the 5% and 7% VAT rates is not deductible. The non-deductible amounts of tax would not be included in the cost of goods, work and services purchased but would be included in expenses (if the tax object for STS purposes is income minus expenses).

VAT on goods, work and services that was previously claimed for deduction by taxpayers that apply the STS must be restored if the goods, work and services are used in activities for which VAT is charged at the special rates prescribed for such taxpayers (i.e., 5%/7%).

Excise duties

The Bill introduces new types of excisable goods:

raw nicotine and non-tobacco nicotine-containing mixture for heating
pharmaceutical ingredients of ethyl alcohol, 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.

Mineral extraction tax

As far as mineral extraction tax is concerned, the Bill contains a number of adjustments designed to “average out” the rent tax burden for extractive industries coupled with a parallel abolition of exchange rate-linked export duties. Specifically, it is proposed:

to increase the multiplier Czhr used in calculating tax in relation to iron ore extraction from 0.044 to 0.055
to increase the Crenta rent coefficient from 7 to 14 for apatite-nepheline, apatite and phosphate ores
to apply a Crenta coefficient of 8.1 in relation to potassium salts

Mineral extraction tax for fertilizer producers would be increased twofold or more (depending on the type of fertilizer).

Amnesty for “business splitting”

For the first time the Bill 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. 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 in the period 2022-2024 would be suspended from the effective date of the Bill. The fate of the suspended decisions would depend on whether the taxpayer discontinues business splitting in subsequent periods (2025-2026) and how and when that discontinuation occurs (voluntarily, after the tax authority has ordered a field audit for 2025-2026, as a result of the termination of activities, etc.).

These factors 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.

Possible implications

Overall, the Bill raises the tax burden for those taxes affected by the amendments. There are indications that the Ministry of Finance intends to take into consideration the views expressed by certain figures in the business community, who opposed the introduction of extraordinary and one-off taxes while accepting increases in the rates of standard taxes. This approach is indirectly corroborated by the Ministry’s subsequent proposal to abolish exchange rate-linked export duties.

Another important aspect of the Bill which has been highlighted by the government is the goal of achieving greater “fairness” through the introduction of a progressive scale of PIT rates and by increasing the tax burden on businesses that have substantial rent reserves and/or do not make sufficient investments.

The Bill is at an early stage and may be modified following discussions within the Government and readings in the State Duma and the Federation Council. We will continue to monitor the Bill and will keep our readers updated on further changes to the Bill and its progress through approval stages as and when news becomes available.

Authors: B1 team.