Here is our quarterly update on major trends affecting international wealth of Russian elite.
Busy government. The new government of the Prime Minister Mikhail Mishustin has proposed many reforms to improve the economic situation of Russia in general and specifically, in response to the pandemic. Here are some of the new measures affecting affluent Russians.
- No change of definition of individual tax residency. The test for Russian tax residency fornow remains the same – 183 days in the calendar year. There are on-going discussions to amend the definition either temporarily for 2020, or on a permanent basis, however, no specific provisions were introduced by the government so far.
- New 15% rate of personal income tax (PIT). Russian President Vladimir Putin proposed to introduce 15% rate of PIT on earnings above RUB5,000,000 (approximately USD 70,300) from January 01, 2021. The proposal is not the law yet, however, it is likely to be implemented shortly.
- New proposal on taxation of CFCs. Currently, Russian individual and corporate owners of offshore structures must declare them to the Russian Tax Authorities and to pay tax on non-distributable income and gains. The President proposed to allow Russian individuals a choice to pay an annual charge of RUB5,000,000 per structure instead of taxing specific income and gains of offshore structures. The proposal raises many technical questions and has been criticized by the professional community.
- 15% Russian withholding tax and use of double tax treaties (DTT). President Putin has announced 15% withholding tax to be imposed on all dividend and interest payments from Russian companies to foreign jurisdictions. This led to potential denunciation of DTT with Malta and bitter negotiations on the terms of the amended treaty with Cyprus (still on-going). Negotiations with other countries on the terms of DTTs might follow.
- And more… Many other new tax provisions are being discussed, such as (1) introduction of new offshore zones in Russia, (2) special tax regimes for highly qualified individuals, (3) special rates for IT companies, (4) introduction of mechanism of taxation of indirect sale of companies holding real estate in Russia and (5) possibly, another amnesty. Most of the proposals are on very early stages, so we will update you when there is more certainty.
Who, what and where? Governments are now looking where they can find money in response to the economic shock of the pandemic. Most measures are still in the making; however, it is inevitable that wealthy individuals will become the main target for taxmen. Here is a short overview of who will pay what and where.
- Personal tax residence. UK, the USA, Ireland and Australia, among others, introduced legislation allowing for a number of days (e.g. 60) not to count towards tax residency test if an overstay was caused by COVID-19. Some countries, where the center of vital interest ist he main residency test, e.g. Austria, might view accidental overstayers as non-tax residents. In many other cases, there is no specific legislation in place, so the overstayers might find themselves paying more taxes in 2020.
- Increased taxation of the rich. Most countries are looking at how to support people without jobs and small/medium-sized businesses. The governments are looking to fund this by imposing higher tax burden on wealthy individuals and large companies. Specifically, Spain, Germany and UK are discussing an introduction of higher rates of personal income tax and/or capital gains tax.
- More information available to authorities. Implementation of DAC 6 (i.e. reporting of aggressive tax planning arrangements) and the 4&5 AML Directives (among others, publicly available registrars of companies and trusts) has been delayed by most of the EU countries. However, the process is slowly but surely moving ahead. Recently, the Netherlands has introduced registry of beneficial owners of companies and structures open to public (partially). Luxembourg has introduced new registrar of trusts. The European Commission is aggressively chasing non-compliant countries and has even launched legal proceedings against Austria, Belgium and the Netherlands for implementation failures.
- New ways to assess tax burden of the wealthy. For many years Australia has been a pioneer for dealing with tax avoiders. Australian example is often followed by other countries. Last year the Australian Taxation Office has launched a four-year investigation of the country’s 500 wealthiest high wealth private groups. Specifically, they are looking at (1) large, one-off or unusual transactions, including the transfer or shifting of wealth; (2) lifestyles not supported by reported after-tax income; (3) accessing business assets for tax-free private use; (4) poor governance and risk-management systems. The first results were flowing in earlier this year with many fines issued to non-compliant individuals.
Boltenko Law can help. We will be happy to advise you on the effect of the change on your overall tax burden and propose available solutions.
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