Alarming 2020 year for the personal income tax

In 2020, changes made to the Tax Code of the Russian Federation affected mainly individuals with income above the national average.

The first unpleasant surprise was the introduction of a tax on interest on deposits in Russian banks.

In accordance with the amendments made to the Tax Code, the tax base for interest on deposits will be determined as the excess of the income amount in the form of interest over the amount of interest calculated as the product of one million rubles and the key rate set by the Central Bank at the beginning of the tax period. That is, for example, at the current key rate of 4.25% non-taxable income from deposits will amount to 42,500 rubles per year. Interest on deposits of less than 1 million rubles will not be taxed regardless of the rate.

It should be noted that the amount of all the taxpayer’s deposits in the aggregate in different banks will be taken into account. For tax purposes, income will be converted into rubles at the official exchange rate set by the Central Bank of Russia on the date of the actual receipt of income on foreign currency deposits.

At the same time, deposits with a rate of less than one percent, as well as escrow accounts, will not be taken into account when determining the tax base.

Every year Russian banks will submit information about the taxable interest paid to each depositor for the past year to the tax service. Depositors will have to pay the tax on or before December 1.
In addition to interest on deposits, income received on regional and municipal bonds, federal loan bonds and other state securities of the member states of the Union State will now be charged with the personal income tax.

Coupon income on debt corporate securities of Russian issuers in rubles issued after January 1, 2017, and income in the form of a discount received upon redemption of outstanding bonds of Russian issuers in rubles issued after January 1, 2017 will also be charged with 13% tax.

In November 2020, President of the Russian Federation signed the Law on Amendments to the Tax Code of the Russian Federation, according to which individuals who are the controlling persons of a foreign company may apply the so-called imputed CFC income tax.

The imputed tax in the amount of 5,000,000 rubles is calculated based on the CFC fixed income. Thus, the amount of CFC income for 2020 is set at 38,460,000 rubles, and for tax periods starting from 2021 – at 34,000,000 rubles.

When an individual switches to paying the personal income tax from the CFC fixed income, the number of foreign companies and the actual amount of income of such companies does not matter.

However, payment of the CFC fixed income tax does not exempt an individual from the obligation to file a CFC notification.

The procedure for submitting a CFC notification has been changed since 2021, and the deadline for submitting a notification for individuals is set for April 30 of the year following the reporting year. Together with the CFC notification the controlling person is obliged to submit financial statements of the controlled company, on the basis of which the amount of retained earnings is determined.

Simultaneously with the change in the procedure for submitting CFC notifications, fines for late submission of statements were increased. The fine was increased from 100,000 rubles to 500,000 rubles, and a new fine of 500,000 rubles was introduced for failing to submit financial statements of the CFC.

Individuals who have switched to paying the CFC fixed income tax are exempt from filing CFC statements, and the tax authority has no right to demand submission of such statements from such a controlling person.

To switch to the new tax regime, the controlling person should submit a notification of the transition to the payment of the personal income tax from the CFC fixed income to the tax authority.

The notification should be submitted to the tax authority at the place of residence by December 31 of the year that is the tax period from which the taxpayer pays the fixed income tax.

The notification of the transition to the CFC fixed income tax regarding the 2020 tax period shall be submitted to the tax authority by February 01, 2021.

After transition to paying the personal income tax from the CFC fixed income for 2020 or 2021, it is possible to abandon this procedure no earlier than in three years. In case of a second transition, as well as in case of an initial transition from 2022 and later, it is possible to abandon the procedure no earlier than in five years. Such temporary restrictions cease to apply if the legislator increases the amount of taxable fixed income.

Amendments to the Tax Code have no restrictions on the transition of a controlling person to the CFC fixed income tax, if the company is active and its income is exempt from taxation.

Thus, the controlling person of an active foreign company has the right to switch to the CFC fixed income tax and not to submit financial statements of the controlled company to the tax authority when submitting a CFC notification, but in this case the CFC is not subject to the rules on tax exemption of the foreign company’s income established by the tax legislation.

It should be noted that the payment of the CFC fixed income tax does not exempt the income of the controlling person from taxation when distributing the CFC’s income. The Tax Code also does not provide for the offset of the tax amount paid upon subsequent taxation of dividends received from the CFC.

While maintaining the same procedure for the taxation of the CFC income, only the deadline for filing a CFC notification and statements changes for the controlling person of the active company.

The latest innovation was the increase in the personal income tax rate from 13 to 15%. However, this change will not affect everyone, but only those who have an annual income of more than 5,000,000 rubles.

It means that income up to 5,000,000 rubles will be taxed at a rate of 13%, and everything above that – at an increased rate. Income will be taxed following this principle starting from 2021, i.e. the tax on interest on deposits and the personal income tax at the rate of 15% will be paid for the first time by tax residents of the Russian Federation in 2022.

Tatiana Frolova

Leading Lawyer

Korpus Prava Private Wealth

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