Tax Messenger
Bill on the implementation of tax policy objectives – a summary of key provisions
19.07.2024
On 8 July 2024 the text of Bill No. 577665-8 “Concerning Amendments to Parts One and Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation Concerning Taxes and Levies” (“the Bill”) was published in advance of its second reading in the State Duma. The Bill sets out wide-ranging amendments to tax legislation aimed at plugging gaps in the law, introducing further relaxations and guarantees for taxpayers and extending the force of certain temporary rules that were put in place in response to the coronavirus epidemic and the increase in sanctions pressure on the Russian economy.
We have identified 10 key amendments which are described below.
Key proposals
- Certain extraordinary measures which were put in place in response to Covid and sanctions are extended:
- The emergency powers of the Russian Government to regulate timeframes for carrying out tax inspections, paying taxes and levies, submitting tax returns, financial statements, etc., are extended until 2028
- The application of a penalty rate for organizations equal to 1/300 of the CBR key rate is extended until 31.12.2024
- Tax exemptions are provided for amounts of debt forgiven by foreign sellers of shares (equity interests) in Russian entities in 2024-2025 or by foreign / Russian persons who received claims in respect of such a sale agreement before 31.12.2025, and for amounts of terminated obligations to pay the actual value of an equity interest to a foreign shareholder in an LLC in the event of its withdrawal or exclusion from the LLC in 2022-2025 – thus extending the previous timeframes for these exemptions
- The special treatment of exchange differences (based on the termination date of claims denominated in foreign currency) is extended until 2027.
- The requirement for a return receipt to be generated upon receipt of electronic requests via telecommunications channels is annulled. Such requests will be deemed to have been received on the 6th day from the date on which the electronic document was sent. This concerns requests to provide documents, requests to provide explanations and / or notifications of summons to a tax authority.
- The range of potential tax monitoring participants is extended by means of a 20% reduction of the threshold levels of taxes paid, income received and assets held.
- Under the Bill, financial statements prepared according to IFRS rules or other internationally recognized standards could be used in determining CFC profits (losses) where a CFC or its controlling person is subject to sanctions as of the end date of the financial year or the CFC is a resident of an unfriendly state.
- Taxpayers will not be penalized for failing to provide documents confirming amounts of profits / losses of a CFC for financial years ending in 2022-2024 if the controlling person of the CFC was subject to prohibitions or restrictions on the provision of such documents and the CFC was a resident of an unfriendly state.
- Personal income tax is to be imposed on financial gain arising from the acquisition of equity interests in an LLC at below market value. The market value of an equity interest is to be determined based on the value of the LLC’s net assets.
- The Bill extends the scope of the PIT deduction for interest on long-term bank deposits (greater than 15 months). The deduction will be applied separately to each tax period in which the deposit is held, rather than all at once to the entire deposit term, as currently happens.
- A prohibition is imposed on the use for profit tax purposes of any loss that was made on activities that are taxed at 0 per cent. At the same time, the Bill lifts the restriction on the use of losses to reduce the amount of a tax base which is subject to a reduced rate (i.e., where the 50% limit does not apply).
- It is proposed that foreign organizations (other than those controlled by a Russian organization or a Russian citizen) and foreign individuals should be excluded from the definition of a “group of persons” whose products are deemed to be the own products of IT companies for the purposes of IT tax reliefs. If the proposal is adopted, income from transactions involving software and databases that were developed, adapted or modified by a foreign organization or individual would be excluded from eligible IT income (which must account for no less than 70% of an IT company’s total income).
- The Bill allows for a 0% profit tax rate to be applied in relation to sales of company shares irrespective of what proportion of the company’s assets consists of immovable property if the taxpayer has owned the shares for more than 5 years and the shareholding to be sold amounts to no more than 1% of the company’s total shares.
Presented below is a more detailed overview of these and other amendments to the Tax Code proposed by Bill No. 577665-8.
Tax administration
The Bill extends until 2028 the powers of the Russian Government to issue tax-related legal acts providing for:
- The suspension, cancellation or postponement of tax control measures
- The extension of time limits established by Russian tax law for the payment of taxes, levies and insurance contributions
- The extension of time limits for the submission to the tax authorities of tax declarations / computations, accounting / financial statements and other documents / information
- The extension of time limits for the sending of, and compliance with, demands for the payment of taxes, levies, insurance contributions, penalties, fines and interest and time limits for the adoption of decisions on the collection of taxes, levies, insurance contributions, penalties, fines and interest
- Additional grounds for the granting of a deferral / instalment plan for the payment of taxes, insurance contributions, penalties, fines and interest, and changes to the procedure and conditions for granting a deferral / instalment plan
- The grounds and conditions for the non-imposition of penalties for the failure to submit tax declarations / computations, accounting / financial statements and other documents / information to the tax authorities
- Specific rules concerning the collection of indebtedness out of funds held in a taxpayer’s accounts, et al.
The requirement for a return receipt to be generated upon receipt of electronic requests via telecommunications channels is annulled
Such requests will be considered to have been received on the 6th day from the date on which the document was sent (as shown in the electronic document’s time stamp). This means that companies and individual entrepreneurs can no longer have their bank account transactions and electronic money transfers suspended on the grounds that they failed to transmit a return receipt for a request from a tax authority. This concerns requests to provide documents, requests to provide explanations and / or notifications of summons to a tax authority.
Transition from quarterly to less regular filing of a unified / simplified tax declaration
At present, taxpayers may file such a declaration quarterly instead of filing multiple nil declarations where no movements take place in bank accounts (or in cash) and where no tax objects exist for certain taxes (corporate profit tax, VAT, unified tax under the simplified taxation system, unified agricultural tax). For newly established companies and newly registered individual entrepreneurs, the deadline for filing a unified / simplified tax declaration is no later than the 20th of the month following the quarter in which they were established / registered.
Special provisions are laid down for those who have suspended their activities. The unified / simplified tax declaration must be filed:
- For profit tax – no later than the 20th of the first month of the second quarter following the tax period in which such operations last occurred and / or a profit tax object last arose
- For other taxes – no later than the 20th of the first month of the second tax period following the period in which operations resulting in the movement of funds last occurred and / or in which tax objects for other taxes last arose
Desk audits of persons that have filed such declarations are conducted in the ensuing calendar year starting from 1 February. In the case of organizations that are being re-organized or liquidated, desk audits will be conducted in the current year and liquidation cannot be completed until the audit has been completed.
Instead of a certificate or notification of registration / deregistration with the tax authorities, the document serving as proof of registration / deregistration will be an extract from the Unified State Register of Taxpayers. Registration with a tax authority may also be confirmed by the following documents:
- An extract from the unified state register of legal entities – for a Russian organization or a branch / representative office thereof
- Details of registration with a tax authority – for a division of a foreign non-commercial non-governmental organization
- An extract from the state register of accredited branches and representative offices of foreign legal entities – for branches and representative offices of a foreign organization in Russia
- An extract from the unified state register of individual entrepreneurs – for an individual entrepreneur
Tax monitoring
The range of potential participants in tax monitoring is extended by reducing the threshold amounts of taxes paid, income received and assets held for the calendar year preceding the year in which the tax monitoring application is submitted. Specifically, the following changes are made to the requirements for submitting a tax monitoring application:
- The threshold of the aggregate amount of taxes payable / transferable to the Russian budget for the calendar year is reduced from 100 to 80 million rubles. Taxes that count towards the threshold include VAT, excise duties, profit tax, mineral extraction tax and insurance contributions. Taxes payable in connection with the movement of goods across the customs border of the Eurasian Economic Union are not included
- The threshold of aggregate income received according to a company’s annual accounting / financial statements is reduced from 1 billion to 800 million rubles
- The threshold of the aggregate value of assets according to a company’s annual accounting / financial statements as of 31 December is reduced from 1 billion to 800 million rubles
The range of organizations for which the threshold requirements are not binding is extended to include organizations already registered for tax monitoring, former members of consolidated taxpayer groups, and state or municipal institutions.
Criteria for entry to the tax monitoring system are established for cases where one organization owns 50% or more of another organization. The organizations must together meet the following criteria:
- The aggregate amount of taxes is not less than 1 billion rubles
- The aggregate amount of income received is not less than 10 billion rubles
- The aggregate value of assets is not less than 10 billion rubles
A change is made to the end date of monitoring where amended declarations are filed. Amended declarations / computations filed for a reporting / tax period of a year for which tax monitoring is or has been conducted will be audited as part of monitoring if the end date of monitoring falls no sooner than 3 months after the date of filing of the declaration / computation.
The list of cases in which tax monitoring is terminated early is extended to include the state registration of an organization as a result of liquidation, re-organization or exclusion from the unified state register of legal entities.
The list of cases in which tax authorities serve a notification of the existence of grounds for a reasoned opinion is extended to include the discovery of evidence of the incorrect determination of amounts of actual costs based on which state support measures are granted.
Tax authorities are granted the right, in the context of tax monitoring, to request banks to provide account balance and cash flow information and documents and information on persons with the authority to dispose of funds, beneficial owners and beneficiaries.
Provision is made to extend the time limit for ordering a field audit during tax monitoring owing to a failure to comply with a tax authority’s reasoned opinion if the taxpayer requested a suspension of the time limit for the receipt of clarifications (but not by more than 3 months).
Unified tax account
The Bill provides for the exclusion from the unified tax payment of amounts of insurance contributions for additional social security for certain categories of workers:
- Members of flight crews of civil aircraft, and
- Certain categories of workers in the coal industry
The purpose of this change is to ensure that contributions received for additional social security are actually recognized in the budget of the Pension and Social Insurance Fund of the Russian Federation for the purpose of calculating the appropriate pension supplement.
A change is made to the date on which aggregate tax liability is deemed to arise under decisions made by authorized tax authorities following TP audits. It will be the effective date of such a decision rather than the effective date of a court ruling as under the current wording of the Tax Code.
Under the Bill, amounts of an advance excise duty payment for manufacturers of alcoholic and / or excisable alcohol-containing products will be included in aggregate liability based on a notice of the payment of that advance payment.
Related party transactions
A deadline is established for the payment of profit tax on income equated with dividends where deviations from arm’s length pricing occur in related party transactions. That deadline will be 28 March of the year following the calendar year in which a person that is not a tax resident of Russia received such income.
Provision is made for local tax officials to be invited to take part in transfer pricing audits by decision of the director / deputy director of the Federal Tax Service.
Penalties for tax offences
Taxpayers will not be penalized for failure to provide documents to the tax authorities confirming the amount of a CFC’s profits / losses for financial years ending in 2022-2024 if the CFC satisfied the following conditions as of the 1st of the month in which the time limit for submitting documents expired:
- The controlling person of the CFC was subject to various measures imposed by foreign states or unions of countries or by other organizations which prohibited or restricted the provision of such documents, and
- The CFC was a resident of an unfriendly state
Fines are introduced for banks, the Central Bank and the Deposit Insurance Agency (where it acts as a temporary administration or receiver) in the event that they fail to provide information on amounts of interest paid on deposits and on balances of individuals’ accounts to the tax authorities on time. The fine will be 1,000 rubles per item of information.
Other changes
The Federal Tax Service is granted the right to establish additional requirements for a surety and for property that can be used as collateral for the purposes of the granting of a deferral, an instalment plan or investment tax credit.
The application of the penalty interest rate of 1/300 of the CBR key rate in relation to organizations is extended to 31.12.2024.
The centralized transmission of information on multi-child families to the Federal Tax Service is introduced in order to enable property tax reliefs to be granted to members of such families on an automatic basis (without the need for an application to be made).
Tax authorities are granted the right, when conducting a desk audit of an excise duty declaration in which deductions are claimed for which registers of documents are provided as supporting documentation, to request the production of the documents from which the information included in the registers was taken.
Mandatory information exchange between electronic platform operators, taxpayers and tax authorities is introduced as part of the development of an experiment to establish an “Automated simplified taxation system” special tax regime. Electronic platform operators will be obliged to transmit to the tax authorities by electronic means information on the netting of claims between those operators and taxpayers and on amounts of agency fees received from a taxpayer.
Electronic platform operators are organizations which supply Internet-based services consisting in the provision of technical, organizational, informational and other resources using information technologies and systems to enable the establishment of connections and the conclusion of transactions for the sale of goods (work, services and property rights) between sellers / service providers and buyers / clients. The Federal Tax Service maintains a register of electronic platform operators and posts it on its official website.
Financial gain from the acquisition of equity interests in an LLC is to be taxed. The main rules governing taxation are as follows:
- Taxable income arises when equity interests in an LLC are acquired at a price that is below market value
- The market value of an equity interest in the capital of an LLC is equal to the corresponding portion of the value of the LLC’s net assets as of the last reporting date
- Taxable income is equal to the market value of an equity interest less the actual cost of acquiring it
- The PIT rate for tax residents is from 13% to 22%
- The PIT rate for tax non-residents is 30%
Changes are made to the tax treatment of income in the form of interest saved on loans:
- The exemption for loans for the new construction / purchase of housing in Russia / the refinancing of such loans is abolished
- Income is determined based on 2/3 of the lower of the values of the CBR key rate in effect at the date of the loan agreement and at the date of the actual receipt of income. Currently, income is determined only based on 2/3 of the CBR key rate at the date of the actual receipt of income
The tax deduction for interest on bank deposits with a term exceeding 15 months with interest paid at the end of the loan term is extended:
- The non-taxable limit of interest charges is 1 million rubles x the highest value of the CBR key rate during the tax period (determined on the 1st of each month)
A tax agent will be able to deduct a taxpayer’s actual documented expenses based on the taxpayer’s application:
- The amendment to Article 226 of the Tax Code relates to ordinary tax agents which are not participants in the securities market
- By way of proof of expenses an individual must provide the tax agent with the originals or duly certified copies of the documents on the basis of which he incurred the expenses, showing the amounts actually paid
Taxpayers will be granted the right to submit to the tax authorities an application to adjust the previously calculated amount of PIT:
- Applications must be considered within 30 days, after which the adjustment will be accepted or rejected
- Tax calculated following an adjustment of previously calculated tax must be paid by taxpayers no later than the 28th of the third month following the month in which a tax notice was generated in connection with such adjustment
Profit tax
The list of tax-exempt income (Article 251 of the Tax Code) is extended to include amounts of:
- Debt forgiven by foreign sellers under an agreement on the purchase and sale of shares / equity interests in Russian entities in 2024-2025 or by foreign / Russian persons who received claims in respect of such purchase-sale agreements before 31.12.2025
- Terminated obligations to pay a foreign member of an LLC the actual value of the member’s share upon the member’s withdrawal from the LLC in 2022-2025 or expulsion from the LLC in 2022-2025 on the basis of a court order
The tax exemption for these kinds of income previously covered income for the periods 2022-2023.
Under the Bill, amounts of debt arising from operations for which, under Article 271 of the Tax Code, income is recognized according to the cash-basis method (as and when money is received or indebtedness is settled by other means) can no longer be treated as doubtful debt.
The special treatment of exchange differences (based on the termination date of claims denominated in foreign currency) is extended until 2027. The proposal to extend the special treatment evidently stems from increasing problems with foreign currency payments.
The list of types of income that are required to be accounted for under the cash basis is extended:
- Fines, penalties and other sanctions for breaches of contractual or debt obligations and amounts of compensation for losses / damage that are payable on the basis of a court order by a foreign organization from unfriendly countries or by a Russian organization that is a joint respondent of that foreign organization (the income must be recorded no later than 31.12.2026)
- Interest on debt securities issued in accordance with foreign law, rights to which are recorded in a securities register maintained by foreign organizations in accordance with foreign law
The list of expenses that are required to be accounted for under the cash basis is extended:
- Fines, penalties and other sanctions for breaches of contractual or debt obligations and amounts of compensation for losses (damage) that are payable on the basis of a court order by a Russian organization that is a joint respondent of a foreign organization from an unfriendly country
A prohibition is imposed on the use of any loss made on activities for which profit is taxable at 0 per cent.
At the same time, the Bill lifts the restriction on the use of losses to reduce the amount of a tax base for the current period that is taxed at a reduced rate (i.e., where the 50% limit does not apply).
These changes are applicable only to losses occurring from 01.01.2025 onwards. Losses incurred before 2025 will be subject to the old rules established by Article 283 of the Tax Code prior to the amendments made by the Bill (clause 14 of Article 19 of the Bill).
On the one hand, these changes categorically prohibit the deduction of losses made on activities taxable at 0 per cent. However, the fact that the amendments apply only to losses made on or after 01.01.2025 raises the question of the deductibility of losses made by taxpayers before 01.01.2025 in a period in which the current wording of Article 283 of the Tax Code was in force and they applied the 0% rate in situations where the 0% rate is not expressly stated in Article 283 as preventing the deduction of losses made in the period in which it was applied (such as, for example, the current 0% rate for IT companies).
A restriction is placed on the definition of a group of persons for the purposes of recognizing software developed by other members of a group as a taxpayer’s own software. Specifically, a foreign organization (other than a foreign organization that has a Russian organization or a Russian citizen as a controlling party) or a foreign citizen cannot be recognized as an entity forming part of the same group as the taxpayer.
In this case, software developed by such entities that is licensed or used for the provision of particular services by a Russian accredited IT company which is their parent, subsidiary or sister company with one person owning more than 50 per cent would not be considered as IT income for the purposes of IT benefits.
A provision is introduced allowing for the 0% rate to be applied in the case of the sale of company shares traded on the organized securities market regardless of the make-up of the company’s assets if the taxpayer has owned the shares for more than 5 years and the shareholding being sold during the tax period amounts to no more than 1% of the company’s total shares. This obvious relaxation for both parties – the owner and issuer of shares – will aid the development of the organized securities market and appears to be in line with the President’s proposal to double the capitalization of the Russian stock market by 2030.
The Bill proposes to allow the 3-year period granted to international holding companies to carry out necessary investments to be extended by 1 year by agreement with regional governments (clause 4 of Article 284.10 of the Tax Code).
It is proposed to allow financial statements prepared according to IFRS rules or other internationally recognized standards to be used in determining a CFC’s profit / loss if the CFC or its controlling person is subject to sanctions as of the end date of the financial year or the CFC was a resident of an unfriendly state. The relevant amendment is made to subsection 1 of clause 1.2 of Article 309 of the Tax Code.
The amendment is clearly designed to alleviate the difficult situation in which CFC owners have found themselves owing to the inability to prepare / provide financial statements based on the national standards of the country in which a CFC is resident owing to sanctions and other restrictions imposed by unfriendly states. It is along the same lines as the proposal mentioned above in the “Penalties for tax offences” section to exempt a controlling person of a CFC from penalties for failing to submit a CFC’s profits / losses for years ending in 2022-2024 if:
- The controlling person of the CFC is under sanctions which prevent the provision of the CFC’s financial statements, and
- The CFC is in an “unfriendly” jurisdiction as of the 1st of the month in which the time limit for providing documents confirming the CFC’s profits / losses expires.
Mineral extraction tax
Zero-rate MET for gas and condensate pumped into the formation during hydrocarbon extraction
A zero rate of MET is established for the extraction of natural fuel gas and gas condensate which are injected into the formation in the process of hydrocarbon extraction. At present, zero-rate MET applies only to the extraction of natural fuel gas which is injected into the formation in the process of gas condensate extraction.
At the same time, the Bill removes the wording to the effect that the quantity of natural fuel gas injected into the formation that is taxable at 0 per cent is to be determined by the taxpayer independently based on the direct method using verified and sealed measuring devices (where natural fuel gas (other than associated gas) is injected into the formation within multiple subsurface sites) and data contained in duly approved federal statistical monitoring forms.
MET deductions
The Bill amends the procedure for calculating the MET deduction for oil extraction in the Nizhnevartovsk District of the Khanty-Mansiisk Autonomous District / Yugra under a subsurface license issued before 01.01.2016 with initial recoverable oil reserves of 450 million tons:
- the period in which the taxpayer has the right to increase the basic amount of the tax deduction (2,917 rubles) by amounts of increments is extended. This will apply to periods commencing between 01.07.2024 and 31.12.2026 (at present, the right is limited to periods commencing between 01.04.2022 and 31.12.2022)
- the amount by which a tax deduction is increased will be determined as fixed values established separately for each period commencing in 2024, 2025 and 2026
- a limit is imposed on the total amount of the deduction – it may not exceed 16,600 rubles for all tax periods
Under the Bill, residents of the Arctic Zone which apply the MET deduction provided for in Article 343.6 of the Tax Code are prohibited from applying the tax deduction for parties to an IPPA under Article 25.18 of the Tax Code.
Simplified taxation system
It is proposed that the value of Russian high-technology equipment (according to a list to be established by the Government) should be excluded from the total value of fixed assets above which the simplified taxation system cannot be applied (150 million rubles). This is essentially an indirect measure to support Russian high-technology equipment by stimulating demand for it.
How should we start planning today?
The Bill makes substantial changes to tax legislation. The changes have quite large-scale implications.
So far, the Bill has only been passed in the first reading and still has to go through second and third readings, during which it may be substantially revised. Nevertheless, given the scale of the proposed changes, we recommend monitoring the Bill’s progress through the Federal Assembly of the Russian Federation.
We will continue to monitor the Bill and will keep you informed of all changes in the law and related practice.
AUTHORS
- Natalia Khobrakova, Partner
- Marina Belyakova, Partner
- Gueladjo Dicko, Partner
- Larissa Gorbunova, Partner
- Viktor Arkhipov, Manager
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