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Russia To Ease Taxes, Hit Foreign-Fund Gains Due To Virus

By Joseph Boris · March 25, 2020, 9:10 PM EDT

Russia next week will roll out business tax breaks, impose a 15% levy on residents’ capital gains if moved offshore and take other steps to guard against economic harm from the coronavirus pandemic, President Vladimir Putin said Wednesday.

In a televised speech, Putin told Russians it was necessary to defer all taxes on small and medium-sized businesses, except for value-added tax, for the next six months. In addition, microenterprises — generally regarded as businesses with no more than five employees — should be granted a deferral on their contributions to social insurance funds, he said.

Putin also said he had asked Russia’s central bank to take other measures to prevent layoffs and bankruptcies.

Russians who shift interest or dividend income to foreign accounts should begin paying a 15% tax on that income, the Russian leader said, adding that the change would require amending Russia’s double-taxation treaties with some countries.

“If our foreign partners do not accept our proposal, Russia will unilaterally withdraw from these treaties,” Putin said. “We will begin with countries that attract substantial resources from Russia, which is a very sensitive issue for our country.”

The president said two-thirds of funds with gains flowing offshore are taxed at a rate of 2%, while “people with modest salaries pay an income tax of 13%.”

“This is unfair, to say the least,” he asserted.

Putin further explained the change by saying many countries levy income taxes on interest earned by individuals from their bank deposits and securities investments, whereas Russia doesn’t tax such income.

Separately, a new tax of 13% would apply to residents with over 1 million rubles ($12,800) in income from bank deposits or debt securities, Putin said, stressing that only interest income would be taxed, not the principal in those foreign accounts.

Only about 1% of deposit holders will be affected by the initiative, he explained.

Over the past five years, the Russian government has conducted an amnesty program whereby domestic companies operating in foreign jurisdictions can redomicile with their funds repatriated from offshore accounts. The first phase of the amnesty began in July 2015, and the third phase was extended through February this year.

Alexander Tokarev, director of tax and legal, international, for KPMG in Russia and the CIS, pointed out that no concrete details have emerged as to how Russia will introduce these new rules.

Among other things to be determined is how the higher tax rate on dividends and interest would be worked into certain double-taxation treaties, or DTTs, involving Russia, such as through a limitation-on-benefits clause or other mechanism, Tokarev told Law360. Also unknown is the list of offshore jurisdictions that Putin’s government plans to target, he said.

In 2015, Russia codified the concept of beneficial ownership, which in some cases limits DTT benefits, such as when the company receiving income has weak economic justification; limited substance in terms of office space, qualified directors and employees; and few assets, or is paying income to a nontreaty country.

“As a result, ‘transit structures’ are no longer feasible in Russia, since they don’t allow for DTT benefits,” Tokarev explained. “For several years, we have been advising our clients to avoid such structures — to have proper business reasons, substance, cash flow, etc. The introduction of these new rules, therefore, may be in many cases excessive.”

However they’re implemented, Tokarev said he expects the new rules will be permanent, despite being presented as an emergency response to the pandemic. He also sees a risk that companies with a genuine business purpose that are investing into Russia will be caught up in the measures and unfairly denied DTT benefits.

“This could influence the intentions of foreign companies to invest in Russia,” he said.

Addressing the pandemic more broadly, Putin announced in his speech that Russia would delay a referendum set for April 22 on proposed constitutional amendments that could extend his term indefinitely. Putin has been Russia’s president since 2000.

He also said that to slow the virus’ spread, the period from Saturday through April 5 should be a paid vacation for all working Russians. All essential services, including transportation, stores, banks, pharmacies and medical institutions, would continue to work as usual during this time.

As of Wednesday, Russia had reported 658 confirmed cases, including three deaths, of COVID-19, the disease caused by the coronavirus. The caseload was triple the number reported a day earlier, illustrating the speed at which the pandemic has grown.

Russian government representatives couldn't be reached for comment.

--Editing by John Oudens.

Update: This story has been updated to add comments from Tokarev.

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