Brief Synopsis of Changes Ushered in by Part II of Russian Tax Code
by Alice Sidorow and Elvira Kroes, KPMG, Moscow
(KPMG in Russia is a KPMG International member firm)

In Russia, effective January 2001, the taxation of individuals has been governed by Part II of the Russian Tax Code, which introduced many changes with regard to the taxation of Russian and foreign nationals. (For prior coverage, see The Expatriate Administrator, Fall 2000 issue, no. 2001-3, Worldwide Digest.) These changes included the taxation of residents and nonresidents, dividends taxation, and social security, among other areas. The tax changes have been driven by a desire to install a stable fiscal environment in Russia, enhance competition, and encourage economic growth. Some of the more significant changes are outlined below.

Taxation of Residents Versus Nonresidents

Effective January 1, 2001, a flat 13-percent income tax rate applies to Russian tax residents on most types of income (except for dividends, interest, and some types of material benefits). Nonresidents are subject to a 30-percent rate on all types of Russian source income.

Residents (individuals who spend 183 days or more in Russia) are taxable on their aggregate worldwide income, whereas nonresidents (individuals spending less than 183 days in Russia) are only taxable on Russian source income.

The definition of Russian source income has been changed to include remuneration for work or services performed in Russia, regardless of the actual place of payment.

There are some planning opportunities available to foreign nationals working in Russia in the year of arrival and departure. If in these years an individual is resident, i.e., physically present in Russia for 183 days or more (days of arrival to Russia are not considered days spent in Russia, while days of departure are days spent in Russia), he or she will be taxed at 13 percent as opposed to 30 percent if he or she is not resident. Therefore, it may be advantageous to ensure that the individual does spend more than 182 days in Russia in the year of arrival or departure.

Taxation of Dividends

The tax rate on dividends in 2001 is 30 percent. The ultimate tax payable depends, however, on the nature of the dividends and on whether the recipient is resident or nonresident.

Residents are taxed on dividends received both from Russian and foreign organizations. When calculating tax on Russian source dividends, a tax credit is available with respect to the underlying corporate tax paid by the Russian organization. When calculating tax on foreign source dividends, a foreign tax credit for taxes withheld is available only if there is a double tax treaty between Russia and the country of the payor.

Nonresidents are subject to a 30-percent Russian withholding tax in respect of dividends received from Russian organizations. The 30-percent rate may, however, be reduced or eliminated by a double tax treaty between Russia and the country where the individual is resident.

From January 1, 2002, the rate of tax on dividends will drop from 30 percent to 6 percent. A Russian legal entity paying out dividends will be required to withhold zero percent to 6-percent tax on dividends paid to Russian tax residents and 6-percent tax on dividends paid to nonresidents. Foreign source dividends received by Russian residents will be subject to 6-percent tax. A foreign tax credit will be available if there is a double tax treaty between Russia and the country of the payer of the dividends.

Avoidance of Double Taxation

Double tax treaties between Russia and other countries may override the provisions of Russian tax legislation if they differ from domestic legislation and may serve as a basis under which foreign tax credits or relief are provided.

Under Russian law, to obtain a foreign tax credit/relief, individuals must submit to the tax authorities documentation confirming that they are resident in a state that has a tax treaty with Russia, together with documents confirming the amount of income received and income tax paid outside Russia. Such proof may be submitted either prior to the payment of taxes, or within a year of the end of the tax period for which the taxpayer is claiming a foreign tax credit/relief.

In the absence of the double tax treaty, an individual taxpayer will be subject to tax in Russia in accordance with Russian law.

Social Security Contributions for Expatriate Employees

Prior to 2001, it was unclear whether Russian social security contributions had to be paid for expatriate employees working in Russia; tax authorities often decided this issue on a case-by-case basis. The new Tax Code provides some clarification on this point. Social security is now payable only by the employer, and if a foreign national is not entitled to Russian social welfare benefits (either under Russian law or pursuant to his or her employment contract), then the employer is not required to make social security payments on his or her behalf.

Therefore, if an employer wishes to avoid Russian social security payments for an expatriate employee, the employee's employment contract should specify that he or she is not entitled to Russian social security coverage. Irrespective of what is included in the contract, pension contributions are not required for expatriate employees that are temporarily present in Russia.

Currently, the social contributions are calculated based on a regressive scale¹: the higher the amount of salary, the lower the effective rate of contributions due. If the employer makes contributions on behalf of an expatriate employee based on the regressive scale, the annual amount of social and medical contributions payable on his or her salary currently should amount to approximately USD 765.

Currency Control Liberalization and Treatment of Foreign Securities

In the past few months there has been significant liberalization of foreign currency legislation in Russia. Russian nationals are now allowed to transfer funds from/to Russia to purchase/sell foreign securities. Such transactions no longer require a preliminary Central Bank license as long as the annual amount of funds transferred to purchase/sell securities does not exceed USD 75,000 (or the equivalent in another currency).

In addition, effective September 30, 2001, Russian nationals are allowed to open personal hard currency accounts with foreign banks located in certain countries — members of the OECD and/or FATF (the special financial commission dealing with problems of money laundering).

Russian nationals may thus acquire foreign securities and participate in stock option plans with foreign employers as long as they comply with certain formalities according to Russian legislation.

Conclusion

The Russian tax system has undergone considerable changes in the past decade and the points illustrated above give an indication of the efforts undertaken by the authorities to make the system clearer and geared towards international rules. However, the rules do change with some frequency and existing law is not always straightforward. Multinational employers and their expatriate employees in Russia (or bound for Russia), are advised to consult with their tax advisors regarding the tax laws in Russia and the rules affecting international assignments.

© 2001 KPMG LLP, the U.S. member firm of KPMG International, a Swiss association. All rights reserved.