Taxation of interest on bank deposits in Russia and income from debt securities
On 31 March 2020 the Russian Authorities adopted a law that will make amendments to the Tax Code affecting the taxation of individuals’ interest income from bank deposits in Russia as well as bond income.1
The idea of changing the procedure for taxing individuals’ income from bank deposits and bonds was voiced by President Vladimir Putin in his address to the nation last week on the coronavirus pandemic. His proposals were included in a draft law that had already been passed in the first reading and were approved by the State Duma on an expedited basis.
The law eliminates exemptions for coupon income on traded Russian corporate bonds for both residents and nonresidents and also the current procedure for taxing interest income from bank deposits in Russia.
The changes are to take effect on 1 January 2021, and the provisions on the taxation of coupon income under Article 214.2 of the Russian Tax Code will apply to income received beginning on 1 January 2021.
Individuals - Russian tax residents and non-residents.
Bank deposits in Russia:
- The amount by which a taxpayer’s interest income in the tax period from all foreign-currency and ruble deposits (account balances) exceeds an amount equal to RUB 1 million multiplied by the Central Bank’s key rate on the first day of the tax period.
- Ruble accounts whose interest rate per annum does not exceed 1% in the tax period are excluded, as are escrow accounts.
Debt securities (for the present purposes, corporate ruble bonds and state securities):
- The amendments remove interest income on corporate ruble bonds and state securities from the category of nontaxable income.
- Interest income (coupon/discount) on Russian issuers’ traded ruble bonds issued after 1 January 2017 (corporate ruble bonds) is also no longer deductible from income on securities transactions.
- At the same time, the deduction provided by clause 13 of Article 214.1 of the Tax Code remains in force: for purposes of determining the financial result of securities transactions, income from the purchase/sale (redemption) of state securities does not include interest (bond) income, which is taxed at a rate different from that stipulated in clause 1 of Article 224 of the Tax Code and is paid in accordance with the terms of issue.
- The currency revaluation of state securities remains unchanged, meaning that they do not become less attractive vis-à-vis deposits.
- The previous rate of 35% on interest income from deposits and debt securities no longer applies.
- For deposits, the rate is now 13% for both Russian tax residents and nonresidents.
- Interest income on state securities and corporate ruble bonds will be taxed at a rate of 13% for residents and 30% for nonresidents.
- The current changes do not limit the ability to reduce tax or obtain a tax exemption for personal income of this kind under double tax treaties.
Tax payment mechanism
Bank deposits in Russia:
- The tax authority uses information provided by banks to calculate tax on the results of the tax period.
- By 1 February of the year following the reporting year, a bank must provide the tax authority with information on all amounts of interest paid to individuals, except for information on deposits (balances of accounts) on which the rate of interest in the tax period did not exceed 1%). The procedure and format for providing this information to the tax authority has yet to be determined.
- The taxpayer pays tax before 1 December, based on a notice from the tax authority.
- It is still unclear how social, property-related and other deductions are to be declared for such income (deductions for charitable contributions and home purchases are among the most important).
Debt securities (bonds)
If there are no further clarifications of a tax agent’s functions, it is our understanding that these functions will be determined and performed in accordance with Article 226.1 of the Russian Tax Code.
Under clause 2, subclauses 1-2, of Article 226.1, the trustee or broker will act as the tax agent for interest income on corporate ruble bonds. However, in the case of interest income on state securities, there is a technical risk that in some cases an individual will have to declare such income independently and calculate and pay the related personal income tax.
It remains unclear whether tax that is not withheld by a tax agent can be collected from the tax agent (the amended clause 9 of Article 226 of the Tax Code) and whether this applies to relations under Article 226.1 of the Tax Code.
We will be monitoring further developments in law and legal practice in these areas.
How can EY help?
- Analyze client assets and accounts to identify potential risks and tax implications
- Analyze and calculate tax liabilities
- Prepare personal tax declarations and sets of supporting documents
- File documents with the Russian tax authorities and handle communication with tax inspectors
1 Draft Law No. 862653-7 “On Amendments to Parts One and Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation”