RS Main Can Russia become a tax off-shore zone for wealthy foreigners?

Can Russia become a tax off-shore zone for wealthy foreigners?

One of the most hotly discussed tax news of the beginning of the year was how Gerard Depardieu was granted Russian citizenship after he expressed his indignation regarding high taxes in his home country of France. Russia declares that its personal income tax rate is actually one of the lowest in Europe. So can Russia become a tax off-shore zone for foreigners?

The lowest rate?

tax haven

We’ll start our survey of income tax rules with that very rate which claims to be one of the lowest in Europe. In actuality, Russia’s 13 percent, which are deducted from the majority of income sources, is significantly lower than the 45-55% deducted from Europeans. At the same time one must say that there any other ‘friendly’ tax jurisdictions. For example, in Bulgaria the tax rate is only 10% and the same rate is used in Kazakhstan. The tax rate isn’t much higher in Hong Kong, Czech Republic and Lithuania (15%), Hungary and Romania (16%) or Ukraine (17%).

However, when making such comparisons one should remember that in Russia the 13% tax rate is not applied to all forms of income. Firstly, only tax residents (those who have spent more than 183 calendar days in Russia during a 12-month period) have the right to such a rate. If that condition is not met then the tax rate increases to 30%. That is already comparable to rates in Cyprus (35%), Latvia (25%) Malta (35%), Poland (32%) and India (30%). It is true that there is one exception – dividends from Russian companies are taxed at a rate of merely 15% for non-residents which once again returns Russia into the group of jurisdictions with attractive tax rates.

Secondly, part of income (like for deposits and loans with high interest rates), even for residents, is taxed at a higher rate – 35%

Which income falls under the Russian rate

Only those foreigners who have spent more than half of year during the course of the year in Russia can make a claim to pay income taxes of 13%. Those who make frequent trips to Russia are subject to the increased tax rate of 35%, but not all foreigners’ income items fall under this rate. According to the Russian Tax Code the only income taxed is that income which non-residents receive from sources within the Russian Federation.

This means that only income from activities conducted in Russia – renting property, salary, insurance payments, compensation for licensing agreements, etc. will be taxed at 35% (which is still significantly lower than the 45-55% tax rate in the majority of countries in continental Europe). Income received outside of Russia do not fall under the rate established by the Tax Code.

We would like to point out that if a foreigner lives in Russia more than a half of year then all of his/her income received abroad will be subject to the 13% rate. In that case in order to not pay taxes twice (both in Russia and abroad) it is necessary to determine whether or not Russia has entered into a double taxation agreement with the country where the foreigner paying personal income tax in Russia. * If such an agreement has not been signed then one must use tax consultants to determine whether or not such income is subject to personal income taxation in the country where the income has been received.

Before packing your bags

Therefore, Russia can only be considered a real tax off-shore zone for those foreigners who become Russian tax residents and only for those countries with whom double taxation avoidance agreements (which establish that foreigners are exempt from paying taxes on the same source of income in the country where the income has been received if such a tax was already paid in Russia) have been signed.

If the opposite is true then only those sources of income which were received in Russia will fall under the low (in comparison with Europe) tax rate. This means that foreigners must move their business and financial flows to Russia in order to lower their tax burden. Transferring one’s business would inevitably force one to hire personnel, consequently, social insurance premiums must be paid out (roughly 30% of each employee’s salary) along with profit tax, VAT, etc. which may annul the whole profit received from the lower personal income tax.

Aleksei Krainev, tax lawyer RS

Tax rates on personal income in Europe and Asia in 2013

Name of the countryTax rate (%)
Russian Federation13
Hong Kong15
Czech Republic 15
Slovak Republic19
Latvia 25
Greece 45
France 45
Portugal 46,5
Ireland 48
Belgium 50
United Kingdom50
the Netherlands52

* List of countries with whom such agreements have been signed:
Australia, Austria, Azerbaijan, Albania, Algeria, Armenia, Belarus, Belgium, Bulgaria, Brazil, Great Britain, Hungary, Venezuela, Vietnam, Germany, Greece, Denmark, Egypt, Israel, India, Indonesia, Iran, Ireland, Iceland, Spain, Italy, Kazakhstan, Canada, Qatar, Cyprus, Kyrgyzstan, China, North Korea, South Korea, Kuwait, Lebanon, Lithuania, Luxembourg, Macedonia, Malaysia, Mali, Mexico, Morocco, Moldova, Mongolia, Namibia, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Serbia, Montenegro, Singapore, Syria, Slovakia, Slovenia, USA, Tajikistan, Thailand, Turkey, Turkmenistan, Ukraine, Uzbekistan, the Philippines, Finland, France, Croatia, Czech Republic, Switzerland, Sweden, Sri Lanka, South Africa and Japan.