Major Changes in the Tax Legislation Effective from 2019
At the end of 2018, several enactments were adopted to introduce significant amendments to the tax legislation of the Russian Federation.
In accordance with the explanatory note, draft laws were elaborated to achieve objectives set by the President of the Russian Federation in the Address to the Federal Assembly of the Russian Federation in order “to stimulate Russian business activities and improve business climate in the country by eliminating ambiguous interpretation of regulations provided for by the Tax Code of the Russian Federation and facilitating methods for their implementation”.
This article reviews major amendments.
Legislation on controlled foreign companies (CFC)
Previously, a person was not deemed a controlling person in relation to a foreign company only in case of direct and (or) indirect participation in one or more public companies – Russian organizations. Now there is another reason, i.e. a person is not deemed a controlling person in case of direct and (or) indirect participation in one or more foreign organizations that meet the following conditions:
- Shares are listed on one or more foreign stock exchanges located in foreign member countries of OECD (except for the countries on the “black list” of the Ministry of Finance);
- The share of direct and (or) indirect participation of the controlling person in each such foreign organization does not exceed 50 percent;
- The total share of ordinary shares listed on foreign stock exchanges for all specified foreign stock exchanges exceeds 25 percent of the authorized capital formed by ordinary shares.
The concept of the actual income recipient
- The actual right to income is now determined in relation to each individual income payment in the form of dividends and (or) to a group of income payments under one agreement, rather than to the relations between the parties in general;
- Now the concept of the actual income recipient shall also apply regardless of the jurisdiction of the income recipient company (previously, the “transparent” approach was applied only to income payments to companies registered under jurisdictions covered by an international tax treaty);
- Special provisions are introduced for a Russian organization to be deemed an actual income recipient in cases when it directly participates in a foreign organization which admits having no actual right to income in the form of dividends on shares (participation interests) of this Russian organization.
Personal income tax
The procedure for the recognition of losses by participants (shareholders, members) upon liquidation of business companies has been clarified
It is established that the taxpayer’s loss upon the liquidation or withdrawal from the organization is determined as the negative difference between the income in the form of the cost of the received property and the actual paid cost of the share.
In addition, now the income in the form of excess amount of funds received by the participant (shareholder) of the Russian organization upon the distribution of property during the liquidation or withdrawal from the organization is recognized as dividends. It is also possible now to use tax deductions upon the liquidation of foreign organizations (previously, the situation was uncertain, as the Tax Code of the Russian Federation used the term “company”, which did not allow to draw an express conclusion about the possibility of applying deductions upon the liquidation of foreign organizations).
Tax benefits upon the sale of participation interests (shares)
The restriction in accordance whereto the income from the sale of shares (participation interests) owned by the taxpayer for more than 5 years and acquired after 01.01.2011 was not subject to taxation, has been abolished. Now the date of acquisition of shares (participation interests) is not essential for applying the specified benefit.
Exemption of non-resident income from the sale of Russian real estate
Previously, the benefit providing exemption from taxation of the income from the sale of real estate (with more than 5-year period of ownership) applied only to individual tax residents of the Russian Federation. Now the said benefit also applies to non-residents. However, non-residents still have no right to apply property tax deductions upon the sale of Russian real estate owned for less than 5 years.
Specification of provisions on taxation of income from operations with property rights
Prior to amendments to the Tax Code of the Russian Federation, there was no certainty regarding accounting of expenses over operations with property rights upon the calculation and payment of personal income tax. The revised Tax Code of the Russian Federation sets out that received property rights upon the liquidation of the organization or withdrawal from it, as well as receivables presented for payment and received on a non-repayable basis or partially paid, shall be recognized for the taxpayer as income in kind.
Single tax payment
Since January 1, 2019, a single tax payment for individuals is introduced. Now individual taxpayers may fulfill their payment obligations regarding the transport tax, land tax, individual property tax by a single payment. A single payment may be made on behalf of the taxpayer by a third party.
The list of income that may be omitted when calculating the income tax base has been expanded. Now this list is supplemented by the following types of income:
- Income in the form of cash received by the organization from the subsidiary or partnership (where the recipient organization is a participant) within the amount of the previous monetary contribution to the assets of the subsidiary (partnership);
- Income in the form of results of works on transfer, reconstruction of fixed assets owned by the taxpayer, performed by third parties in connection with the creation of another capital construction project under the state ownership and financed from the budget of the Russian Federation.
In addition, the list of expenses that an organization is entitled to accept in order to reduce the income tax base has been expanded. Such expenses now also include recreational expenses of employees and their families in the territory of the Russian Federation.
In addition to the increase of VAT rate from 18% to 20% from 01.01.2019, other changes were also introduced.
Foreign organizations providing e-services are now obliged to calculate VAT regardless of the type of a buyer – an individual, a legal entity or an individual entrepreneur. Foreign organizations providing e-services, as well as intermediaries involved in mutual settlements with Russian buyers of e-services, are obliged to file an application for registration to the tax authority by February 15, 2019.
The list of operations exempt from VAT taxation (regular transportation of passengers and luggage, certain operations upon the conversion of rental agreements into concession agreements, etc.) has been expanded.
Corporate property tax
Since 01.01.2019, movable property is exempt from corporate property tax.
Introduction of tax for the self-employed (professional income tax)
Since January 1, 2019, the Tax Code of the Russian Federation provides for the possibility of experiments to introduce taxes, duties, special tax treatments. Such experiments are based on federal laws and may be carried out within a limited period of time in the territory of one or more constituent entities of the Russian Federation.
The professional income tax has resulted from one of such experiments, which shall be carried out from 01.01.2019 to 31.12.2019 in Moscow, Moscow and Kaluga Regions, as well as in the Republic of Tatarstan.
Such special tax treatment may be applied by individuals (including individual entrepreneurs) who receive their income from activities where they have no employer and engage no employees.
At the same time, there are some restrictions for the application of such treatment, including but not limited to the sale of excisable goods and goods subject to mandatory labeling; extraction and (or) sale of minerals; receipt of income exceeding 2.4 million rubles in the current calendar year. Tax registration and tax payment may be performed using the free mobile application “My Tax”. The tax period for such treatment is a calendar month, the tax rate of 4% (if in favor of individuals) and 6% (if in favor of individual entrepreneurs and legal entities). No filing of tax returns is required for this special treatment.
Tax inspectors will be able to request information from auditors
Since January 1, 2019, tax authorities have the right to request information and documents from auditors. In this case, such information may be requested from the auditor in two cases:
- If such information and documents were not provided by the client of the audit organization at the request of the tax authority as part of the on-site audit or as part of the audit of related party transactions;
- Upon the request of the competent authority of a foreign state (territory) in respect of the audited person.
Conditions for auditors to fulfill the said obligation are as follows:
- Requested information is required for the calculation of taxes, duties, insurance contributions;
- Information and data are obtained by the auditor in the course of audit activities and provision of other services related to audit activities.
The amount limit of 60 million rubles is established for the income from transactions to recognize transactions with related foreign entities as controlled (previously such transactions were recognized as controlled regardless of the income amount received).
In addition, the total amount criterion of income for transactions between Russian related parties has been established, and now such transactions are recognized as related when the income from such transactions exceeds 1 billion rubles (previously, in some cases, transactions were recognized as related when exceeding the income amount of 60 million rubles or 100 million rubles).
Moreover, now some transactions between Russian related parties are not recognized as controlled at all.
The said innovations shall be applied to controlled transactions with income and/or expenses recognized in order to calculate the tax base from January 1, 2019 (regardless of the agreement date).
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