From 1 January 2021, a 15% individual income tax rate (instead of the current 13%) will apply to the annual income of Russian individual tax residents in excess of a threshold of RUB 5 million. Special rules apply to the taxation of certain types of income such as dividends, capital gains from the sale of securities, and controlled foreign company profits.
We recommend the following in connection with the above changes:
- if possible, accelerating payments (bonuses, dividends, etc.) accrued this year to ensure their receipt by individuals before 2021
- considering the impact of the increased individual income tax rate for existing and new agreements with high-earners and while planning budgets for grossed-up payments
- updating tax accounting and compliance systems and internal controls in line with changes in the tax assessment and withholding procedures
In more detail
- The current 13% individual income tax rate will continue to apply as long as an individual’s income does not exceed the threshold. Otherwise, individuals will pay tax of RUB 650,000 (i.e., 13% of RUB 5 million) plus 15% on the income in excess of the threshold.
- The 15% tax rate will apply to most types of income, with the exception of capital gains from the sale of assets (including real estate but excluding securities), payments under insurance contracts and pension plans, and gifts of assets (excluding securities). These will be subject to 13% tax, even if they exceed the threshold. The 35% individual income tax rate will still apply to certain types of income (e.g., lottery winnings).
- Non-residents will still be subject to 30% individual income tax, although certain exceptions apply. These include interest on deposits with Russian banks and employment income of highly qualified specialists, which will be subject to 13% tax within the threshold and 15% on the excess.
- Tax will continue to be paid mainly through the withholding mechanism, under which tax agents will assess and withhold tax on income exceeding the threshold and subject to the 15% rate. If a tax agent withholds the full amount of tax (e.g., the employer is a tax agent and main source of income and the employee has no other income sources), an individual will not have to pay any additional tax through notification or self-assessment procedures.
- Should the Russian tax authorities determine based on information submitted by tax agents that additional tax needs to be paid due to aggregate annual income exceeding the threshold a Russian individual taxpayer will receive a notification requiring the payment of additional tax. Such an individual would be required pay the additional tax at the 15% rate by December 1 of the year following the end of the tax period. Individuals will not be obliged to file tax returns for the payment of additional tax and will only be required to make payments based on the notifications received.