High-Tax Country Resident Planning To Go Offshore: Russia

If you are resident and domiciled in Russia (which will be the normal situation for a native-born Russian individual) then you are taxable on your world-wide income and capital gains, although the rate of tax is low.

Resident individuals are taxed on their worldwide income at a flat rate of 13%, with a personal allowance of 400 roubles per month subject to an annual income ceiling of 40,000 roubles. For employees of Russian companies, tax is withheld at source by the employer. Domestic dividends are taxed at 6%, witheld at source.

Deductions are permitted for some types of medical and educational expenses; and a one-time deduction of 2m roubles is available for expenses incurred in the purchase or construction of residential property.

Employed individuals do not pay social security taxes;the employer pays 26% of salary, known as the unified social tax, up to a ceiling of 415,000 roubles (2010). This is due to increase to 32% from 2011.

There is no Alternative Minimum Tax, wealth tax or inheritance tax in Russia.

Capital gains are taxed along with regular income, but many types of asset including real estate are exempt from capital gains tax after three years of ownership.

There is an anual tax on the cadastral value of real estate at 1.5%.

Although some revenue protection measures apply to countries having "preferential" tax regimes, general anti-avoidance legislation has not progressed far in Russia for individuals, and offshore trusts are generally speaking quite effective at sheltering many types of asset.

For an individual who knows she is going to leave Russia, there is therefore a case for switching income-generating assets into capital appreciation assets outside Russia, or at any rate for ensuring that gains are not made during Russian residence which could incur capital gains tax. Gains which crystallise after residence has finished will escape Russian tax.

Once a definite decision to move offshore has been made, careful thought should also be given to existing Russian capital assets, including pension assets. Will it be possible to move them offshore without incurring capital gains tax? Is it desirable to move them early and pay the tax anyway? These are complex questions, and the answer will depend on individual circumstances, but for many individuals there will be interesting tax planning possibilities.

Once Russian residence has been terminated, and if non-residence is expected to be permanent, then an ex-Russian resident is free to invest offshore in order to obtain the best possible returns.

www.lowtax.net contains extensive information on the investment, tax and legal regimes in 50 of the main offshore jurisdictions. Further information is available in our Investment Information Providers Section, and the four main types of offshore investment are described in the Guide to Offshore Investment on this site.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.