Waiver of Russian tax residency

Russian tax residents who are subject to Ukraine related sanctions have the right to give up their Russian tax residency if they also have a foreign tax residency.

The Federal Tax Service of Russia has approved the form of the application for non-recognition as a tax resident of Russia (Order of the Federal Tax Service of 21 June 2019 No MMB-7-17/318@).

As of 2017 an individual who was subject to Australian, Icelandic, Canadian, Norwegian, US, Swiss, Japanese, EU or Lichtenstein Ukraine related sanctions listed in Russian Government Decree of 10 November 2017 No 1348 had the right to apply to the Russian tax authority not to be deemed a Russian tax resident in a tax year commencing from and including 2014 regardless of the term of this individual’s actual presence in Russia during the relevant tax year if the said individual was also a tax resident of a foreign state in that tax year (subsection 4 section 207 of the Tax Code of Russia).

Waiving the Russian tax residency where it actually exists (staying in Russia 183 days or more in the relevant tax year) will allow the sanctioned individual who possesses foreign tax residency not to be deemed a Russian tax resident for Russian personal income tax purposes. This in its turn will allow such individual not to pay the Russian personal income tax (13%) on income from non-Russian sources, for instance, from his controlled foreign companies, foundations and trusts (CFC), not to notify the Russian tax authority of his CFC, not to declare the CFC profit and not to be subject to Russian personal income tax on undistributed profit of the CFC.

Foreign tax residency will have to be confirmed by a tax residency certificate. Alternatively, one must justify in writing why such a certificate cannot be obtained and enclose supporting documents. The latter is a novelty introduced for 2018 and later tax years. And so is the requirement for the tax office to confirm the treatment of the individual in concern as Russian tax non-resident within 30 days of the application for the same.

At the same time waiver of the Russian tax residency will result in the taxation of income from Russian sources (e.g. salary, dividends and interest) at the rates in excess of 13% unless a more favourable treatment of such income can be claimed on the basis of a double taxation treaty. In addition to the existence of such a treaty, it is necessary that the acquisition of the tax residency in the relevant jurisdiction does not require a presence there of more than 182 days in a year and does not result in a tax treatment less favourable than in Russia itself. It is nearly impossible to find such a country amongst those with which Russia has a favourable double tax treaty in relation to income from Russian sources and which has not introduced Ukraine related sanctions.

It appears that the possibility of waiver of the Russian tax residency is envisaged for those sanctioned individuals whose income mainly comes from abroad and is aimed at relieving such income from Russian personal income tax. Presumably, it should not be a problem for such individuals to obtain foreign tax residency necessary for such relief in a low tax jurisdiction.