The law on taxation of income exceeding 5 million rubles1 (the “Law”) takes effect on 01 January 2020. Starting from the new year, individuals whose income for the tax period exceeds 5 million rubles will be taxable at a higher rate (650,000 rubles + 15% of the amount exceeding 5 million rubles).
This article looks at the most significant amendments to the Tax Code of the Russian Federation, which were introduced as the Law was adopted.
What income will be taxed at a higher rate?
The new rate will only apply to income that exceeds 5 million rubles per year, is taxed at 13% and is considered when determining the aggregate tax base by virtue of direct instructions of the Tax Code of the Russian Federation. This approach will also apply to non-residents.
For example, a resident’s interest income on mortgage-secured bonds will still be taxed at 9%, and the rate for the amount of savings on interest when receiving borrowed funds will be 35%. Income arising from the sale of property, even if it is more than 5 million rubles, will not also be taxed at a higher rate2.
As for non-residents, the increased rate will only be relevant for their income being taxed 13% (these include, for example, salaries of highly qualified specialists and patent workers). For other income of non-residents, which are subject to a 30% default rate, the increased rate will not apply.
How is the tax base determined?
The legislative bodies are introducing a new method of determining the tax base for the increased rate application purposes. From now on (transition period from 2021 to 2022 excluded), the total amount of income mentioned in “new” clause 2.1 of Art. 210 of the Tax Code of the Russian Federation (among other things, these are income from equity participation, income from profits of a controlled foreign company, and the “main tax base” – other income taxed at 13%) will be considered. If the total amount of income exceeds 5 million rubles, then the excess amount will be taxed at an increased rate. At the same time, the aggregate tax base for individual income tax is reduced by the amount of deductions that are due to the taxpayer.
Below is an example of application of the new taxation method:
Supposing that in 2023 a taxpayer will receive a salary of 400,000 rubles per month (i.e. 4.8 million rubles per year) and income from equity participation in the amount of 1.2 million rubles. Their total tax base will be 6 million rubles, with the amount of payable individual income tax calculated as follows:
(6 million rubles (tax base) – 5 million rubles (threshold value)) * 0.15 (increased rate) + 650,000 rubles = 800,000 rubles.
If in the above situation, the taxpayer is entitled to a deduction of 1 million rubles, then the total tax base will be 5 million rubles and, therefore, the increased rate will not apply.
This method is not to be used during the 2020-2021 transition period. So, with the above income remaining unchanged in 2021 and 2022, then that taxpayer is not obliged to pay individual income tax at an increased rate, since none of his income exceeds 5 million rubles. If in 2021, the above taxpayer earns 5.2 million rubles as a salary and receives income from equity participation in the amount of 1.2 million, he will then be taxed at an increased rate only on his salary, which is recognised as the main tax base.
The amount of individual income tax payable in this case will be calculated using the following formula: (5.2 million (annual salary) – 5 million (threshold value)) * 0.15 + 650,000 rubles = 680,000 rubles.
How do I calculate tax if income is received from different sources?
The current version of the Law provides for the following procedure for applying the increased rate after the transition period when receiving income from different sources (if each of them individually does not exceed 5,000,000 rubles):
- Each of the tax agents withholds 13% of the taxpayer’s income paid by them;
- Information about the income of the taxpayer is submitted to the tax authority, which determines whether there is an excess of 5 million rubles;
- If there is, the tax authority sends the taxpayer a relevant notification regarding payment of individual income tax at an increased rate due by 1 December of the current year.
As regards the transition period, with the wording of sub-clause 8, clause 2.1 of Art. 210 of the Tax Code of the Russian Federation (as amended by the Law) some questions remain unanswered, which we believe should be considered by the legislative bodies. The central of those questions is what income will be included in the main tax base if the taxpayer receives a salary and, for example, income from real estate rental.
From the perspective of sub-clause 8, clause 2.1 of Art. 210 of the Tax Code of the Russian Federation, salary and rental income must count collectively as part of the main tax base, which is why an excess of 5 million rubles invokes an increased tax rate. However, such an interpretation does not seem indisputable.
It is worth noting that during the transition period, the tax agent only has the right to one mistake. Liability for incorrect calculation and withholding of individual income tax at an increased rate will not occur if the arrears are paid before 1 July 2021.
Despite the fact that the Law still has some unclear points, a number of its amendments related to the calculation and payment of individual income tax at a higher rate seem to be quite reasonable even now. We expect that some controversial aspects of the Law will be clarified by the Ministry of Finance in the nearest future. In the long run, this will lead to greater clarity with regard to the application of the rules of the Tax Code of the Russian Federation amended by the Law and, as a consequence, in the calculation and payment of individual income tax.
Article prepared by F+P associate Aleksey Gurin.
1 Federal Law of 23.11.2020 No. 372-ФЗ.
2 Clause 1 of Art. 224 of the Tax Code of the Russian Federation