Tax Digest for February 2024
Movchan's Group
Mar 25, 2024Main topics of the past month:
- The Russian Government has started preparing changes to the personal income tax scale and corporate tax rate.
- The UK will abolish the non-dom tax regime.
- The Central Bank of Russia clarified requirements for residents regarding contributions to the authorized capital of foreign companies.
- The Russian tax service will automatically receive data on Russian citizens' foreign passports.
- The Russian government plans to simplify the creation of personal funds.
- The Russian Ministry of Finance is ready to expand tax benefits for long-term deposit holders.
- The European Parliament approved a directive on the criminalization of sanctions violations and circumvention.
- Hong Kong is raising taxes for high-income individuals for the first time in 20 years.
The Russian Government has started preparing changes to the personal income tax scale and corporate tax rate
According to media reports, the Russian Government has begun working on a more "fair" differentiated taxation system, previously announced by the President of Russia.
There is a discussion on increasing personal income tax from 13% to 15% for citizens with an income of 1 million rubles per year and from 15% to 20% for income over 5 million rubles per year. It is proposed to levy personal income tax at an increased rate not on all income, but only on the amount exceeding 1 or 5 million rubles, respectively. Simultaneously, the possibility of increasing the corporate tax rate from 20% to 25% is being considered.
Another block of changes is tax benefits. In terms of personal income tax, they will be available to citizens with lower incomes. Regarding corporate tax: companies will be able to claim them if they make capital investments.
The UK will abolish the non-dom tax regime
From April 2025, the UK will change the system of preferential taxation for foreigners, announced the Chancellor of the Exchequer Jeremy Hunt. "Having studied this issue for many months, I concluded that we can indeed introduce a system that will be fairer and at the same time competitive with other countries," he said in the House of Commons.
From April 2025, the UK will abolish the "non-domicile" (non-dom) status, allowing its holders to avoid paying tax on income earned outside the country. The government website states that the domicile concept is outdated and encourages people to keep income and profits offshore. Instead, a new regime based on tax residency will be introduced. New arrivals in the UK will enjoy a 100% tax exemption on foreign income for the first four years.
Recall that the concept of non-dom in the context of UK taxation usually applies to people who have moved to the country, have tax resident status there, but do not have a "domicile" (historical place of residence considered for taxation in the UK). This status allowed not paying taxes on income arising outside the United Kingdom and not imported/used by the individual in the UK. People with this status pay taxes only on income earned directly in the UK (e.g., salary or dividends from an English company). This regime is available only in the first 15 years of living in the country.
For current non-dom status holders, a transition period will apply in 2025–2026, during which they will be able to pay tax only on 50% of foreign income. The abolition of non-dom is a significant change for wealthy individuals who chose the United Kingdom as their permanent residence partly due to the ability to use this regime. These changes could potentially push some of these wealthy individuals to leave the country. The innovations are expected to attract $3.4 billion in taxes annually by 2028–2029, Bloomberg notes.
The Central Bank of Russia clarified requirements for residents regarding contributions to the authorized capital of foreign companies
From April 1, 2024, Russian residents will not be required to obtain individual permission from the Central Bank of Russia to pay shares, contributions, and units in the property of non-residents if the amount of such transactions in favor of one legal entity does not exceed 15 million rubles.
The Russian tax service will automatically receive data on Russian citizens' foreign passports
The Russian Ministry of Finance proposes to establish the obligation of authorized bodies to report to the tax authority at the citizen's place of residence information on the facts of the initial issuance (replacement) of a foreign passport of a citizen of the Russian Federation.
It is planned to establish that the bodies issuing and replacing foreign passports are obliged to report to the tax office at the place of residence of the citizen to whom the passport is issued, the following information:
- on the facts of the initial issuance, issuance in addition to the existing one, or replacement of a foreign passport;
- on changes in personal data contained in the newly issued foreign passport.
This information must be transmitted to tax authorities within five days from the date of issuance of the new foreign passport. Also, the inspection will be informed about the fact of the citizen submitting an application to declare the foreign passport invalid due to its loss. Obtaining information on foreign passports is necessary for the automatic determination of individuals' residency status.
By law, Russians are allowed to have two Russian foreign passports simultaneously. Apparently, this is how the tax service is fighting cases where a taxpayer shows one foreign passport to tax authorities but travels with the second one. In this situation, a person can potentially mislead tax authorities about the number of days spent in Russia during the year and, accordingly, their tax residency status.
The Russian government plans to simplify the creation of personal funds
Amendments to the Civil Code of the Russian Federation, providing for the possibility of creating lifetime personal funds, came into force on March 1, 2022. A year later, changes were made to the Tax Code of the Russian Federation, defining the taxation features of personal funds and their beneficiaries.
The Ministry of Economic Development of Russia developed amendments simplifying the creation and regulation of personal funds in Russia. One of the goals of the developed amendments is to simplify their state registration. The decision on state registration of the fund will be made not by the Ministry of Justice of Russia (in general, it registers NGOs), but by the Federal Tax Service of Russia — by analogy with commercial organizations. Information on the creation, reorganization, or liquidation of a personal fund, as well as changes in the founding documents, will be entered into the Unified State Register of Legal Entities upon the notary's application. The notary must also conduct a legal examination of the documents for establishing a personal fund and check the founder's compliance with Russian legislation. In particular, the notary, not the Ministry of Justice of Russia, will check the market value of the property transferred to the personal fund.
In addition, funds are planned to be removed from the supervision of the Ministry of Justice of Russia, in particular, to be exempt from annual activity reports and unscheduled inspections. Besides, the amendments propose granting personal funds the status of qualified investors in accordance with securities market legislation.
The Russian Ministry of Finance is ready to expand tax benefits for long-term deposit holders
As reported by RBC, the Russian Ministry of Finance proposed changing the calculation of personal income tax on deposits for more than one year. The tax-exempt base will include income received not only in the year of actual receipt to the taxpayer's account but also accrued for previous periods of such a deposit.
According to the current norms of the Tax Code of the Russian Federation, interest income on deposits is not taxed on the amount that depends on the key rate: the maximum Central Bank rate on the first day of each month for the reporting year is multiplied by 1 million rubles, the resulting amount is subtracted from what the depositor received for the reporting year, and 13 or 15% (for income over 5 million rubles) tax is levied on this result.
According to the proposed amendments, if the depositor's income for the current tax period is below the threshold amount (1 million rubles multiplied by the maximum Central Bank rate), the resulting difference can reduce the tax base of subsequent tax periods. The new approach will affect deposits for a term of one year or more.
The European Parliament approved a directive on the criminalization of sanctions violations and circumvention
The European Parliament approved a directive on the criminalization of violations and circumvention of sanctions imposed by the European Union, "to harmonize the application of EU sanctions in all member states." The bill concerns not only sanctions against Russia but any restrictions imposed by Brussels.
The European Parliament stated that there is currently a practice of sanctions violators seeking EU countries "with the weakest enforcement." The new law establishes "consistent definitions of violations," including failure to freeze funds, non-compliance with travel bans or arms embargoes, transferring money to sanctioned individuals. In some cases, providing financial services or legal advice in violation of sanctions will also be considered a crime. The directive provides that individuals who violate sanctions will face criminal liability of up to five years in prison, and companies will be fined.
Hong Kong is raising taxes for high-income individuals for the first time in 20 years
According to the new law, in Hong Kong, annual income over 640,000 US dollars will be taxed at 16% (previously 15%). This will affect about 12,000 people or about 0.6% of taxpayers.
Mark Gindileev
For detailed explanations, you can contact the author directly via Facebook or Telegram
