The fine print of Russia’s proposed tax hikes on personal income and corporate profits

Russia’s Finance Ministry has submitted legislation that would reintroduce progressive taxes on personal income. The progressive scale would begin with annual incomes exceeding 2.4 million rubles ($27,100). Journalists at The Bell break down how the proposed tax hikes will draw most of their funds (more than 2 trillion of 2.6 trillion rubles in total) from higher corporate taxes. The main revenue will come from increasing the corporate tax rate from 20 to 25 percent, but the ministry’s plan also features several “innovations.” Journalists at The Bell highlighted five of these changes, while Meduza’s Margarita Lyutova also explored seven aspects of the proposed reforms.

The reforms will partially roll back a recent tax incentive for IT companies, restoring a 5-percent tax on their profits. At the start of the coronavirus pandemic, when IT businesses’ profits were taxed at a 20-percent rate, the Russian government passed tax relief for the industry, lowering (and then eliminating) corporate taxes, cutting social security taxes from 14 to 7.6 percent, and ending VAT taxes. (The policy succeeded in raising the attractiveness of Russia’s tax jurisdiction and actually resulted in higher-than-expected tax revenue.)

The new 5-percent corporate tax is considered an “acceptable compromise” that preserves most of the tax breaks introduced four years ago. Industry experts told the newspaper Vedomosti that these incentives are necessary because profits are often the sector’s only source of investment for development and product creation.

This reform only affects a few hundred people, but individuals who are registered as controlling persons of foreign companies (CFCs) will now owe a fixed 5-million-ruble ($56,500) tax on each foreign company they control. Currently, they owe this fixed tax just once, regardless of how many foreign companies they control. Persons paying their CFC taxes under this regime are locked into minimum five-year periods, meaning that many taxpayers won’t be able to escape this reformed taxation scheme in 2025. Journalists at RBC estimate that CFC taxpayers average 2.5 foreign companies under their control, though some individuals control dozens of these businesses.

The income threshold for using Russia’s simplified taxation system will rise from 265.8 million rubles ($3 million) to 450 million rubles ($5.1 million), and the threshold for the required residual value of fixed assets will go up by 50 million rubles ($565,000) to 200 million rubles. As another incentive for small businesses, officials will offer a tax amnesty to enterprises that have divided their operations the reduce their tax burden.

Firms with more than 60 million rubles in annual profits will be required to pay value-added taxes according to one of two schemes, choosing between a higher rate and the possibility of deductions. Only 3.2 percent of businesses using Russia’s simplified taxation system exceed 60 million rubles in annual profits, but the taxes paid by these enterprises account for almost half of all tax revenues collected under the simplified system.

Multiple sectors of Russia’s mining industry will be taxed at rates 1.15–2 times higher than now. The Finance Ministry argues that these sectors currently have operational profitability levels at least twice as great as the Russian economy’s average while enjoying a tax burden below the minimally acceptable 5–6 percent of revenue. Echoing concerns about Russia’s IT industry, the higher mineral extraction taxes won’t apply to sectors where the ratio of capital investments for business development to revenue exceeds 20 percent.

Both individuals and legal entities responsible for property registration state fees will now pay a percentage of the acquisition price instead of the current fixed amounts — 2,000 rubles ($23) for individuals and 22,000 rubles ($250) for legal entities — when the property’s assessed value is greater than 20 million rubles ($225,785). The modified real estate taxes will be calculated as 0.1 percent of the contract amount for individual buyers (with a minimum of 0.1 of the assessed property value and a maximum of 500,000 rubles, or $5,645) and 0.3 percent for legal entities (with a minimum of 0.3 percent of the assessed value and a maximum of 1 million rubles, or $11,300).

The Finance Ministry expects to collect at least 16 billion rubles ($180.6 million) in these real estate tariffs. Additionally, property sellers will still pay Russia’s existing tax rates: 13 percent on sales below 2.4 million rubles ($27,100) and 15 percent on more valuable properties.

The reforms preserve the 15-percent maximum tax rate on individual “passive income” from deposits, stock dividends, and other securities for any such annual income exceeding the threshold of 2.4 million rubles. The higher tax rates also will not apply to the income of individual entrepreneurs and self-employed individuals, who will remain taxed at their current rates.

Analysts at the brokerage company BCS estimate that Russia’s publicly traded companies stand to lose 6.3 percent in net profits and dividends under the Finance Ministry’s tax reforms. At the same time, BCS analysts point out that a 25-percent tax rate on corporate profits has been expected for some time already, and so current stock prices might already reflect these diminished earnings. Experts at Tinkoff Investments calculate that higher profit taxes will lower fair value capitalizations by different rates, depending on the industry. (Metallurgy would be hit hardest at 5–8 percent, while IT and media businesses could lose 3–6 percent.)

So far, a government commission on legislative activities has approved the draft legislation, and the federal cabinet will review it on May 30. If it’s adopted without changes, the bill will be submitted to the State Duma, where lawmakers plan to pass it before the end of their current session so the amendments can be incorporated into next year’s budget planning.

The estimated 2.6 trillion rubles ($29.4 billion) would be enough to cover Russia’s federal budget deficits in both 2024 and 2025. Alternatively, it could finance roughly a quarter of the government’s massive “national defense” spending. Incidentally, in the same speech earlier this year when Putin called for more equitable income taxes, the president announced several new infrastructure projects and education initiatives that Finance Ministry officials estimate would cost at least 1 trillion rubles ($11.3 billion) per year.

While senior government officials have indicated that raised taxes will finance key programs, the new income tax revenue would not be earmarked and could be used for any government spending, including the war in Ukraine.

Currently, most personal income taxes and corporate profit taxes are credited to regional budgets, but the Finance Ministry hasn’t clarified the sharing of tax revenue after its proposed reforms take place. It’s likely that the federal government will begin collecting these taxes and redistributing the money to various programs, including regional support. Otherwise, the tax hikes will aggravate already extreme interregional inequality. (In 2021, almost half of all taxes collected by the state were paid in just five of Russia’s 46 regions.)

Bloomberg chief economist on Russia Alexander Isakov points out that the maximum tax rate for income earned on stock dividends, bank deposits, and securities—where affluent and ultra-wealthy individuals make most of their money—will remain unchanged at 15 percent.

Former Russian Central Bank official Alexandra Prokopenko says inflation and the accelerated growth of nominal wages also mean that more and more people will earn incomes that fall under higher tax brackets. A senior Finance Ministry official told the Telegram channel Faridaily that the government isn’t likely to index its salary thresholds to inflation over the years.

At the same time, the proposed scheme offers only minimal income tax relief for the poorest Russians, such as partial refunds for low-earning families with two or more children.

Russia’s Federal State Statistics Service calculates per capita income per family member, including children and pensioners, but working-age adults can have higher earnings. Precise data on the number of these people in Russia today is not publicly available, and we don’t know how Finance Minister Siluanov ascertained that only 3.2 percent of the country’s working-age population earns big enough salaries to owe more under the proposed progressive income taxes.