On July 12, 2024, the Russian President signed the first law[1] passed by the Russian State Duma as part of the "fine tuning" of the tax system announced  earlier. We should note that this law introduces very significant changes not only in the tax laws, but also, speaking in simpler terms, in the usual way of life for Russians, because it will, without exaggeration, affect everyone.

Looking ahead, do keep in mind that now is not the time to relax, as the State Duma continues to consider another bill which is also designed to "fine tune" the tax system and proposes a number of significant amendments (due to be considered on July 23,[2] and we will write about it separately).

1. PERSONAL INCOME TAX

1.1.   Introduction of a five-tier progressive personal income tax scale

This change is perhaps the most talked-about and most comprehensive. Despite the fact that during the consideration and public discussion of the draft law there were many proposals to raise the designated thresholds, it was this amendment that was, in essence, adopted in its original form, except for certain nuances.

Now, a five-tier progressive scale for personal income tax has finally been put into place.

• 13% for annual income up to RUB 2.4 million (i.e. up to RUB 200,000 per month);
• 15% for the portion of annual income between RUB 2.4 million and RUB 5 million;
• 18% for the portion of annual income between RUB 5 million and RUB 20 million;
• 20% for the portion of income between RUB 20 million and RUB 50 million per annum;
• 22% for the portion of annual income exceeding the threshold of RUB 50 million.

The use of increased rates is planned to be applied not to all income, but, same as today, only to the income exceeding the established threshold.

At the same time, the new five-tier progressive tax scale will not apply to a certain category of income[3] – only the tax rates of 13% and 15% will continue to apply to it. The list of such income includes, in particular, the following:

• Income from sale of other property, as well as from property received as a gift;
• Income from sale of shares in limited liability companies;
• Equity income, including dividends;
• Income in the form of insurance benefits;
• Income from operations with securities and derivatives;
• Interest on deposits;
• Income from repo transactions and from securities lending transactions;
• and other types of income.

1.2.   Additional restrictions on application of tax benefits

The amendments also affected Clause 17.2 Article 217 of the Russian Tax Code as to exemption of income from personal income tax when securities or shares in authorized capital of legal entities are held for a period of five years.

Now this benefit applies only to the tax base within the limit of 50 million rubles.

If the tax base exceeds the established limit of 50 million rubles, the 15% tax rate applies to such excess, but without further application of the other increased rates of the progressive tax scale.

2. PROFIT TAX

The general profit tax rate was increased to 25%.

In the period from 2025 to 2030, the tax collected will be transferred to the federal budget at a rate of 8% and to the regional budget at a rate of 17%.

The increased tax rate will apply both to income of foreign organizations from a source in the Russian Federation[4] and to income in the form of profits of controlled foreign companies.

At the same time, the new law introduces a new federal investment tax deduction (the “FITD” or "deduction")^[5] which will allow taxpayers to reduce the amount of profit tax allocated to the Russian federal budget.

Basic parameters for the FITD:

• The FITD will apply starting from the period in which fixed and intangible assets are put into operation or their initial cost is changed.

• The FITD cannot amount to more than 50% of the amount of expenses forming the basic value of fixed and intangible assets.

• There is a ban on applying the FITD simultaneously with other types of investment deductions to identical items of fixed and intangible assets.

• The FITD will not apply to foreign companies, parties to capital protection and promotion agreements, credit institutions and manufacturers of excisable goods.

Currently, the draft prepared by the Russian Ministry of Economic Development defines a limited range of entities that can benefit from the deduction.^[6]

It is assumed that the FITD will be available only to organizations whose activities are aimed at "technological sovereignty projects" in relevant sectors of the economy, etc.

3. Special tax regimes

A noteworty aspect is that the changes significantly affect the simplified taxation system (STS), and it is no exaggeration to say that it will never be the same again. In particular, the new law changes the fundamental parameters of this regime, as well as eliminates the main advantage of the simplified taxation system through the introduction of VAT for all STS taxpayers once certain indicators (rather insignificant ones) are reached.

The main changes to the STS are as follows:

1. Limit for the amount of income which allows for the right to apply the simplified taxation system is increased to 450 million rubles (with annual indexation by the deflator coefficient);
2. The limit of the residual value of fixed assets was increased from 150 million rubles to 200 million rubles (with annual indexation);
3. The maximum number of employees for retaining the right to apply the simplified taxation system was increased to 130 persons (this figure is fixed and cannot be increased);
4. The "increased" tax rates of 8% and 20% have been abolished;
5. Entities using the simplified taxation system will generally pay VAT, but they are subject to a special regime for performing taxpayer duties, in particular:

• Such taxpayers may be exempted from VAT if their income does not exceed 60 million rubles per calendar year^[7];
• The STS taxpayers may apply reduced tax rates[8] for VAT – 5%[9]/ 7%[10]; however, if an entity uses them, it will be unable to deduct "input" VAT on goods, works and services purchased from contracting parties^[11];
• Taxpayers under the simplified taxation system may fulfill their VAT obligations under the general procedure, taking into account the application of general tax rates (0% / 10% / 20%), which will allow them to deduct "input" VAT from contracting parties.

At the same time, transitional provisions for the simplified taxation system are introduced, which will allow those who plan to switch to the simplified taxation system for the first time, as well as those who exceeded the limits of the simplified taxation system in 2024, to apply this special regime in 2025, subject to compliance with the newly introduced limits.

4. Tax amnesty for split business

We previously wrote in detail about changes relating to a tax amnesty for split businesses in our review. The ultimate version of the bill contains the original unchanged text on the tax amnesty for business splitting.

The provisions of the tax amnesty took effect from the date the law was officially published, i.e. from 12.07.2024.

Key parameters of the tax amnesty for business splitting remain as follows:

• A taxpayer must voluntarily abandon the scheme in the form of artificial splitting of a business, which implies consolidation of income for the entire group of entities and payment of the relevant amount of taxes.

At the same time, lawmakers in the final version of the law have not laid out the procedure for consolidating such income and fulfilling the obligation to pay tax as actions indicating abandoning the scheme of artificially splitting a business nor the procedure for assessing such abandoning by the tax authority.

• Amnesty for using a scheme in the form of business splitting may exclude only the tax liability of the taxpayer, but administrative and criminal liability of its controlling persons is not excluded.

Thus, at the moment, the business tax amnesty not only contains very abstract rules of law that do not provide a clear answer to the question of how taxpayers should apply them in practice, but also does not contain any significant guarantees for taxpayers and their controlling persons if they decide to abandon artificial splitting of business.

Our experts keep up to date with changes in the laws on an ongoing basis. We will analyze all aspects of the tax reform in a planned series of webinars, which we will announce shortly.