The President’s speech: things business should pay attention to
The Russian President has delivered an address in connection with the global coronavirus pandemic and has announced a number of new measures. The measures that the President has proposed will be specified in legislative instruments, which, once adopted, we will be able to assess more thoroughly. Today, based on the text itself, we will consider those of the proposals in the address that had the greatest resonance.
1. A tax deferral (except for VAT) should be granted to small and medium-sized enterprises (SMEs) for the next six months. As regards micro enterprises, in addition to the tax deferral, they should be granted a deferral for paying insurance contributions to social welfare funds. According to the Law on supporting SMEs and the Government’s resolution dated 2016, 'small enterprises' means enterprises with an annual turnover of RUB 120 to 800 million, while medium-sized enterprises have an annual turnover of RUB 800 million to 2 billion.
The above measures will apply only to those companies that are engaged in the “sectors most exposed to the current troubled times”. The Government has been instructed to continually monitor the situation and, if necessary, to expand and adjust the list of industries that require support.
We believe that the Government will determine in near future the list of industries and sectors of the economy which have been most affected by the restrictive measures the authorities have introduced and which will receive state support during the pandemic. The above tax deferral and tax instalments will be granted to such enterprises after the relevant amendments are made in the Russian Tax Code (the “Tax Code”) and further powers are vested in the Government.
2. It is proposed that insurance contributions for SMEs will be halved, from 30% to 15%. Such reduced rate will apply to salaries that exceed the minimum monthly wage. It is further proposed that the reduced rate will be introduced not only as an anti-crisis measure but in the long term.
It is obvious, though, that the above reduction is only possible after relevant amendments have been made in the Tax Code. However, nothing precludes the authorities from giving retroactive effect to such amendments.
3. All income (in the form of interest and dividends) that is paid abroad from Russia to offshore jurisdictions must be “adequately” taxed. It is proposed that for those who withdraw their income in the form of dividends to foreign accounts a 15% tax on such dividends should be stipulated. The Government has been instructed to arrange for double tax treaties (DTTs) to be amended, including the possibility of unilateral withdrawal from such DTTs if Russia’s proposals are not accepted. It is proposed to start with those countries through which significant resources of Russian origin pass, which is the most sensitive issue for our country.
This section of the President’s address leaves many questions open. If it is a question of taxing income that is “withdrawn to offshore jurisdictions and territories” through “trustworthy” jurisdictions, no such amendments to DTTs are required. One has only have to apply existing legal mechanisms and institutions, such as the beneficial ownership of income, the pass-through approach, and others. The Russian Federal Tax Service (the “Federal Tax Service”) has successfully applied such mechanisms on numerous occasions. In any case, amendments to international treaties and withdrawal from same require compliance with inter-state procedures which will be rather time-consuming.
4. It is proposed that interest income of individuals whose overall volume of bank deposits or investments in debt securities exceeds RUB 1 million should be subject to income tax of 13%.
Please be reminded that article 5 of the Tax Code does not allow for the introduction of new taxes, for an increase of tax rates or for any other worsening of a taxpayer’s position earlier than on the first day of the next taxation period. This article rests on the principle of certainty of taxation. This is one of the basic taxation principles; therefore, we believe that even in such troubled times it cannot be overridden by the anticipated amendments to the Tax Code. Consequently, the proposed amendments should not come into force any earlier than on 1 January 2021.
5. A six-month moratorium is to be introduced on creditors filing for the bankruptcy of companies and recovery of debts and fines. The measures are planned to be implemented with respect to companies engaged in sectors mostly hit by the “current tough times”. The list of such companies will be able to be extended.
1. A tax deferral (except for VAT) should be granted to small and medium-sized enterprises (SMEs) for the next six months. As regards micro enterprises, in addition to the tax deferral, they should be granted a deferral for paying insurance contributions to social welfare funds. According to the Law on supporting SMEs and the Government’s resolution dated 2016, 'small enterprises' means enterprises with an annual turnover of RUB 120 to 800 million, while medium-sized enterprises have an annual turnover of RUB 800 million to 2 billion.
The above measures will apply only to those companies that are engaged in the “sectors most exposed to the current troubled times”. The Government has been instructed to continually monitor the situation and, if necessary, to expand and adjust the list of industries that require support.
We believe that the Government will determine in near future the list of industries and sectors of the economy which have been most affected by the restrictive measures the authorities have introduced and which will receive state support during the pandemic. The above tax deferral and tax instalments will be granted to such enterprises after the relevant amendments are made in the Russian Tax Code (the “Tax Code”) and further powers are vested in the Government.
2. It is proposed that insurance contributions for SMEs will be halved, from 30% to 15%. Such reduced rate will apply to salaries that exceed the minimum monthly wage. It is further proposed that the reduced rate will be introduced not only as an anti-crisis measure but in the long term.
It is obvious, though, that the above reduction is only possible after relevant amendments have been made in the Tax Code. However, nothing precludes the authorities from giving retroactive effect to such amendments.
3. All income (in the form of interest and dividends) that is paid abroad from Russia to offshore jurisdictions must be “adequately” taxed. It is proposed that for those who withdraw their income in the form of dividends to foreign accounts a 15% tax on such dividends should be stipulated. The Government has been instructed to arrange for double tax treaties (DTTs) to be amended, including the possibility of unilateral withdrawal from such DTTs if Russia’s proposals are not accepted. It is proposed to start with those countries through which significant resources of Russian origin pass, which is the most sensitive issue for our country.
This section of the President’s address leaves many questions open. If it is a question of taxing income that is “withdrawn to offshore jurisdictions and territories” through “trustworthy” jurisdictions, no such amendments to DTTs are required. One has only have to apply existing legal mechanisms and institutions, such as the beneficial ownership of income, the pass-through approach, and others. The Russian Federal Tax Service (the “Federal Tax Service”) has successfully applied such mechanisms on numerous occasions. In any case, amendments to international treaties and withdrawal from same require compliance with inter-state procedures which will be rather time-consuming.
4. It is proposed that interest income of individuals whose overall volume of bank deposits or investments in debt securities exceeds RUB 1 million should be subject to income tax of 13%.
Please be reminded that article 5 of the Tax Code does not allow for the introduction of new taxes, for an increase of tax rates or for any other worsening of a taxpayer’s position earlier than on the first day of the next taxation period. This article rests on the principle of certainty of taxation. This is one of the basic taxation principles; therefore, we believe that even in such troubled times it cannot be overridden by the anticipated amendments to the Tax Code. Consequently, the proposed amendments should not come into force any earlier than on 1 January 2021.
5. A six-month moratorium is to be introduced on creditors filing for the bankruptcy of companies and recovery of debts and fines. The measures are planned to be implemented with respect to companies engaged in sectors mostly hit by the “current tough times”. The list of such companies will be able to be extended.
The moratorium can be viewed as a ground for suspending the statute of limitations and the deadline for filing for bankruptcy. However, given that the relevant explanations of courts will appear later and given the incomplete nature of statutory regulations adopted in haste, we recommend that, where the statute of limitations is expiring, claims and petitions for bankruptcy based on debts should be filed in the near future.
6. Entitling an individual in difficult straits (such as one facing a reduction of his/her income by 30%) to suspend servicing his/her debt under consumer credits or mortgages and extend such servicing without any penalties (the Russian Central Bank will develop a similar mechanism for individual entrepreneurs).
7. Granting a six-month grace period to SMEs and micro enterprises that are facing difficulties with repaying loans.
It should be remembered that banks represent only one category of creditors of SMEs. Creditors who are not banks can be virtually put into a position in which they will be able neither to receive their monies nor to initiate the bankruptcy of the debtor. This may affect the financial standing of many players on the market.
8. An announcement that next week will be a week off work with full pay (the days off work will be from Saturday 28 March until Sunday 5 April).
9. Payments against sick leave are proposed to be calculated based on the amount of no less than one minimum monthly wage (at least until the end of the current year).
10. It was announced that the most important goal for all employers is to secure stability on the labour market and to retain their employees.
It is difficult now to evaluate the effect of the above measures on business in Russia. It is obvious though that we are facing yet another round of radical changes to Russian legislation.
We will closely monitor the changes and inform you about them.
Stay in touch!
6. Entitling an individual in difficult straits (such as one facing a reduction of his/her income by 30%) to suspend servicing his/her debt under consumer credits or mortgages and extend such servicing without any penalties (the Russian Central Bank will develop a similar mechanism for individual entrepreneurs).
7. Granting a six-month grace period to SMEs and micro enterprises that are facing difficulties with repaying loans.
It should be remembered that banks represent only one category of creditors of SMEs. Creditors who are not banks can be virtually put into a position in which they will be able neither to receive their monies nor to initiate the bankruptcy of the debtor. This may affect the financial standing of many players on the market.
8. An announcement that next week will be a week off work with full pay (the days off work will be from Saturday 28 March until Sunday 5 April).
9. Payments against sick leave are proposed to be calculated based on the amount of no less than one minimum monthly wage (at least until the end of the current year).
10. It was announced that the most important goal for all employers is to secure stability on the labour market and to retain their employees.
It is difficult now to evaluate the effect of the above measures on business in Russia. It is obvious though that we are facing yet another round of radical changes to Russian legislation.
We will closely monitor the changes and inform you about them.
Stay in touch!