The Russian Ministry of Finance has proposed reducing from 183 to 90 the number of days an individual needs to spend in Russia in a 12-month period in order to qualify for the Russian tax resident status1.
The Russian Ministry of Finance also proposes to treat an individual as a Russian tax resident if his/her centre of "vital interests" is in Russia, regardless of the number of days spent there.
'Centre of vital interests' may be legally defined rather broadly (the family’s primary residence, location of real estate and main assets, main place of business activities, and citizenship).
The new rules target high net worth Russian individuals who have moved abroad or ceased to be Russian tax residents, but have kept close ties with Russia and have Russian businesses and assets. Many foreign jurisdictions provide such individuals with tax residency and low tax rates even if their physical presence in the country is short (60-90 days).
Obtaining the Russian tax resident status would have the following consequences for an individual:
1. Russian taxation of his/her worldwide income;
2. risks of being treated as a tax resident in multiple jurisdictions unless there is a tax treaty that rules out double taxation;
3. application of Russian tax rules to foreign companies and structures that are under his/her control;
4. disclosure of information provided to foreign banks for the purposes of automatic information exchange with Russia (CRS)2.
Under the new rules it may be practically impossible for an individual to be "tax non-resident in all countries."
The Russian Ministry of Finance is working on the draft of the new rules and will be discussing it with the business community. The new test may be adopted within the next three years (and become effective as of 2021-2022).
Individual income tax reduction for tax non-residents
In addition to changes to Russia's tax residence criteria, the Russian Ministry of Finance proposes reducing the individual income tax rate from 30% to 13% for tax non-residents. There is no further information yet on types of income that would be subject to the reduced tax rate, nor are there any other details. Currently the 13% tax rate applies to income of tax residents and to salaries of highly qualified foreign specialists (regardless of the number of days they spend in Russia).
Actions to consider
Individuals may need to consider the following:
1. review the number of days spent in Russia and other countries, as well as the scope of their personal and economic ties with Russia;
2. for tax non-residents - develop a long term strategy:
- decide whether to be or not to be a Russian tax resident;
- consider bespoke asset restructuring of assets that generate main income in order to mitigate tax risks;
- develop defense files to confirm tax residency in chosen jurisdictions.
1. Budget, Tax and Customs Policy Trends Report for 2020 and for the Target Period 2021 – 2022 were introduced to the State Duma as Annex to Draft Law No. 802503-7 "On the Federal Budget for 2020 and the Target Period 2021 – 2022 ".
2. For more information on this matter please see our Legal Alert, dated July 2016