Changes in Income Tax: What to Expect

Last week, the Russian Government submitted to the State Duma for consideration and subsequent adoption a draft law (hereinafter also the "amendments") proposing to substantially reform Russian tax laws starting January 1, 2025.

The current set of amendments can without exaggeration be called a "briefcase"; therefore, we propose examining its contents in parts, and today we will start with corporate taxation and profit tax, changes in which will affect the largest number of taxpayers.

 

i.       Tax rate increase

News of increase in the corporate tax rate from 20% to 25% could not go unnoticed. At the same time, the effect of this innovation is expected to be quite unambiguous: an increase in budget revenues and an increase in business expenses. Meanwhile, this innovation caused the least number of disputes and objections. For example, both the Russian Union of Industrialists and Entrepreneurs (RSPP) and the business community supported these particular amendments during discussion in the State Duma (unlike, for example, personal income tax amendments).

Withholding tax rate on profits paid at the source to foreign organizations is also subject to a similar increase in respect to certain income to which the general rate of 20% applied earlier, for example, income from sale of Russian real estate and shares in companies that own it. There are no plans to increase other tax rates that pertain to income.

At the same time, the additional revenue from the rate increase will go to the federal budget, so the regions should not expect additional funds.

Further, it is worth noting that there are plans to change the profit tax rate for IT companies to 5% for the period from 2025 to 2027. For the time being, it is assumed that the conditions for applying the preferential rate for them will remain the same.

 

ii.      Preferential accounting rules for investments

Together with the tax rate increase, the draft law provides for introduction and finalization of additional legal mechanisms that will reduce the tax burden for businesses investing in the Russian economy (into intangible assets, fixed assets, etc.). Specifically, the following changes are proposed:

• Increase from 1.5 to 2 for units of the coefficient which applies when accounting for expenses on acquisition and creation of registered software and databases in the field of artificial intelligence (AI), objects from the register of radio electronic products also related to AI and objects included in the list of Russian hi-tech equipment.
• Introduction of the new Article 286.2 of the Tax Code and the structure of a federal investment tax deduction, which will allow taxpayers to reduce the amount of profit tax as concerns the portion transferred to the federal budget.

Given this, taxpayers who meet certain criteria will be able to continue paying income tax at the previous rate of 20% from 2025 to 2030.

At the same time, the amendments do not currently indicate the categories of taxpayers who can enjoy the new deduction, nor do they name the categories of fixed and intangible assets to which it can be applied. Thus, the key parameters are actually unknown at this point. These indicators are planned to be set at the level of secondary legislative acts in a separate Decree of the Russian Government – as representatives of the state noted at the St. Petersburg International Economic Forum (SPIEF), the path for prioritizing and singling out certain types of investments will be chosen.

That said, there are already limits to applying such a deduction. It cannot be more than 50% of the amount of expenses forming the basic value of fixed and intangible assets. There is also a ban on applying the new federal deduction simultaneously with other types of investment deductions to identical items of fixed and intangible assets.

 

Taking into account the positions expressed at the SPIEF "tax" session, amendments to the current version of the draft law, as well as additional amendments that were not prepared as of the time the draft law was submitted, are planned in the course of the draft law being considered in the State Duma.

We believe that if the changes are adopted, the increase in the tax burden will affect every profit tax payer, but not everyone will be able to take advantage of the additional benefits related to investments. Our team will continue to monitor the changes and will further outline the planned amendments for other taxes.