Here is our quarterly update on major trends affecting international wealth of Russian elite.
- No change to definition of individual tax residency. The test for Russian tax residency for 2021 remains the same – 183 days in the calendar year. Simplicity of the test and generosity of the day count leave excellent planning opportunities for individuals who prefer to remain Russian tax non-resident. In response to the pandemic for 2020 the government has introduced an option to choose to become a Russian tax resident based on spending 90 days in Russia only.
- New upper rate of personal income tax (PIT). 15% rate of PIT on earnings above RUB 5,000,000 (approximately USD 75,700) will come into force from January 01, 2021. Earnings below the threshold will remain taxed at 13%.
- New flat charge on taxation of CFCs. From January 01, 2021 Russian individuals will have a choice to pay an annual charge of RUB 5,000,000 per all structures, instead of taxing specific income and gains of specific companies and trusts. Currently, Russian owners of offshore structures must declare them to the Russian tax authorities and to pay tax on non-distributable income and gains. Flat charge has its downsides: non deductibility of paid foreign taxes and potential double taxation of distributed income of CFCs.
- Increased CFC compliance for taxpayers who do not choose new flat CFC charge. For reporting period 2021, taxpayers will also have to submit financial reporting of CFC. A unified deadline of the 30th of April for all reporting forms, i.e. notification on CFC, financial reporting of CFC and annual tax return, is set up for individual taxpayers.
- Re-negotiation of double tax treaties (DTT). 15% withholding tax was imposed in 2020 on all dividend and interest payments from Russian companies to foreign jurisdictions. This led to Russia initiating renegotiations of DTTs with many foreign states. So far treaties with Cyprus, Malta and Luxembourg were renegotiated. As a result, having a foreign holding company for Russian assets by Russian wealthy does not bring any substantial tax advantages.
- Withholding taxes from EU countries to offshores – Cyprus. Many EU countries do not allow for lower withholding taxes on dividends, interest, or royalties if paid to offshores. In October, Cyprus announced that it is looking to impose 17% on dividends, 30% on interest and 10% on royalties if payments go to non-cooperative jurisdictions on tax matters according to the EU list. Currently there are 12 countries on the EU list, e.g. Panama and Seychelles; the list is revised from time to time. The most popular offshores, e.g. BVI, are not on the list, so the direct consequences of this new Cypriot measure are limited. Yet this is another indication of how historically popular tax planning technique is being phased out in favor of simpler and more transparent tax arrangements.
- Increased taxation of the rich. Governments are now looking where they can find money in response to the economic shock of the pandemic. The UK is discussing unifying rates of income tax (up to 45%) and capital gains tax (up to 28%), most likely at the higher level. There are also talks of introducing wealth tax. Spain is discussing increasing the upper rate of personal income tax, but only a little. No bad news is coming from Switzerland and Germany so far.
- Moving abroad. Remote working encouraged many of our clients to move abroad on a more permanent basis. We currently see renewed interest to relocating to the UK and Switzerland.
- Second citizenships. Having an opportunity to travel to your European “dacha” even when the borders are closed to tourists, made second citizenships and residence permits even more popular with the Russian wealthy. However, in October Cypriot citizenship by investments program has suffered from Al Jazeera investigation and it was suspended. Further, at the same month the European Commission has launched infringement procedures against Cyprus and Malta for the use of “golden passport” schemes as being abusive to the EU treaties and freedoms. It remains to be seen if the programs will survive, but the Cypriot and Maltese we have spoken to, remain optimistic.
Boltenko Law can help. We will be happy to advise you on the effect of changes on your overall tax burden and propose available solutions.
We take the first introductory call or video meeting on no commitment basis; further work will be done on the agreed contractual terms.
Please contact Olga Boltenko (email@example.com and +41 79 900 2526) or Evgenia Martin (firstname.lastname@example.org and +41 79 126 3195) for further advice.