The Ministry of Finance of the Russian Federation has submitted a draft1 to the State Duma of the Russian Federation, which proposes to reduce the minimum period of stay of individuals in the Russian Federation for their recognition as tax residents. In the next three years, this period may be reduced to 90 days in one tax year.
1. Criteria for tax residency
1.1. Duration of stay in the Russian Federation
Today, in order to be a tax resident of the Russian Federation, it is necessary to spend more than 183 days a year in the country2. However, the Ministry of Finance of the Russian Federation took the initiative to halve this period. This innovation will be applied only if individuals wish to become tax residents. For all others, the criterion of 183 days will apply.
1.2. Centre of vital interests
In addition to the criterion for the period of stay in the Russian Federation, it is proposed to introduce another criterion for recognising a person as a tax resident of the Russian Federation – the presence of a “centre of vital interests” in the Russian Federation. This criterion can be widely interpreted and determined on the basis of factors such as the place of business, citizenship, location of real estate, place of residence of the family.
The criterion of the centre of vital interests is already applied in the Russian Federation in agreements on the avoidance of double taxation. However, even within the framework of such agreements, it is rather difficult to administer a person’s compliance with this criterion, since at the moment there are no methods and experience in determining the criteria for a centre of vital interests. In this regard, the question of the introduction of this criterion is postponed.
2. Consequences of changes
The voluntary acquisition of tax residency subject to the criterion of being in the territory of the Russian Federation within 90 days will entail:
- The obligation of an individual who has received the status of a tax resident of the Russian Federation to pay personal income tax and file a tax return.
- The application of Russian rules in relation to controlled foreign companies in which participates an individual recognised as a tax resident of the Russian Federation.
- The risk of double tax payments by an individual who is a tax resident of another country with which the Russian Federation has not entered into an agreement on the avoidance of double taxation3.
Thus, we recommend to analyse the options for planning your tax residency evaluating your connections with the Russian Federation and other states, due to changes in tax legislation that may come into force in the next three years.
Flightman + Priest lawyers are willing to conduct a comprehensive analysis of your situation and offer you the ideal options for structuring your tax residency.
1 Main directions of the budget, tax and customs tariff policy for 2020 and the planning period of 2021 and 2022.
2 Clause 2, Art. 270 of the Tax Code of the Russian Federation.
3 In the Agreement between the Government of the Russian Federation and the Government of the Republic of Cyprus “On the Avoidance of Double Taxation with respect to Income and Capital Taxes” dated 05.12.1998, a centre of vital interests is defined as the closest personal and economic ties.