The Russian Ministry of Finance (“MOF”) recently issued Guidance Letter 03-04-06/64102 (dated October 31) regarding the taxation of gifts from Russian legal entities to nonresidents (i.e. the Russian taxation of gifts to nonresidents). This Letter will have a direct impact on the tax planning for Russians who are tax residents of the United States.
Russian Taxation of Gifts to Nonresidents: Russian-Source Gifts are Taxable
In the letter, the MOF stated that, under the Russian Tax Code Article 209, Section 2, the Russian-source income of individuals who are not tax residents of the Russian Federation is subject to the Russian income tax (the Russian tax residents are taxed on their worldwide income – i.e Russian-source and foreign-source income).
Furthermore, the MOF determined that gifts received by nonresidents from a Russian legal entity are considered to be Russian-source income. This means that these gifts are taxable beyond the exemption amount. According to Tax Code Article 217, section 28, the exemption amount is 4,000 Russian roubles per tax year. Hence, a gift from a Russian legal entity to a non-resident of Russia will be subject to the Russian individual income tax if it exceeds 4,000 rubles.
Russian Taxation of Gifts to Nonresidents: the Place of Gift Does Not Matter
It is important to emphasize that, in this situation, the sourcing of the gift is determined by the giftor – i.e. if the giftor is a Russian legal entity, the gift is considered as Russian-source income irrespective of the actual location of the place where the gift took place. For example, if a Russian legal entity gifts 10,000 rubles in Switzerland, the gift is still considered to be Russian-source income.
Russian Taxation of Gifts to Nonresidents: Tax Withholding Rules
The general rule is that the Russian legal entity who makes the gift to a nonresident is considered to be the withholding agent who is required to withhold from the gift and remit to the MOF the individual income tax due. However, the MOF specified that, if a gift is a non-monetary one or of such a nature that a tax cannot be withheld, then the entity must notify the Russian Federal Tax Service that it could not and did not withhold the tax (with the amount of the tax due). The nonresident would be responsible for the payment of the tax due in this case.
Impact of the Changes in the Russian Taxable of Gifts to Nonresidents on US Tax Residents
The Guidance Letter 03-04-06/64102 will have an important impact on the Russian tax and estate planning strategies with respect to US tax residents. One of the most common strategies for business succession and estate planning in Russia has been gifting of assets to children who were non-residents of Russia and US tax residents. The guidance letter directly impacts this strategy forcing the re-evaluation of the desirability of this entire course of action.