In the face of financial sanctions, Russia pushes ahead with the legalization of crypto assets

Depth | Author | TaxDAO**

Russia is the world’s third-largest Bitcoin “mining” country, and its Crypto Assets usage penetration rate is high. According to government data, there are more than 12 million Crypto Assets accounts and crypto assets worth about 2 trillion rubles ($26.7 billion) in Russia’s population of about 144 million. Affected by the international situation, the Russian government is paying more and more attention to the Crypto Assets field and has increased its efforts in building Crypto Assets infrastructure. This article analyzes Russia’s general and crypto tax regimes, the tariff policies involved in crypto mining companies, and the transformation of Russia’s regulation of crypto assets in the international context.

1. Basic tax system in Russia

1.1 Overview of the General Tax System in Russia

The Russian tax system consists of the Tax Code of the Russian Federation (hereinafter referred to as the “Tax Code”) and other laws promulgated thereunder. According to the Tax Code, taxes in Russia are levied at three levels: the Russian Federation, federal subjects (also translated as “regions”) and localities. Federal taxes are determined in accordance with the Tax Code and federal law, federal subject taxes are determined in accordance with the Tax Code and federal subject laws, and local taxes are determined in accordance with the Tax Code and municipal regulations. Federal subject legislation and local legislation may determine tax deductions for federal subjects and localities in accordance with the provisions of the Tax Code, determine tax rates within specific ranges, tax payment procedures and deadlines, etc. As a result, the tax burden of taxpayers registered in different regions of Russia is different.

The Federal Tax Service of the Russian Federation, which is subordinate to the Ministry of Finance of the Russian Federation, is the main department responsible for tax collection and administration in Russia, and performs the functions of monitoring the implementation of tax laws, whether taxes and other fees collected by other countries are paid accurately, in full and on time in accordance with the relevant legal provisions.

1.2 Three-tier taxation system

In accordance with the provisions of the Tax Code and federal law, federal taxes and fees include value-added tax, excise tax, personal income tax, corporate income tax, tax on the exploitation of mineral resources, tax on the use of water resources, tax on additional income from the exploitation of hydrocarbons, fees for the use of wildlife and aquatic biological resources, government fees and social insurance premiums, a total of 10 taxes. In addition, local governments have certain taxing powers.

The federal subject tax is paid within the scope of the corresponding federal subject, including three types of taxes: corporate property tax, gaming tax and transportation tax. Local taxes and fees are paid in the corresponding cities and districts, mainly including land tax, personal property tax (real estate tax), and transaction fees.

1.3 Basic Tax System

1.3.1 Personal Income Tax

At present, there are two categories of individual income tax payers in Russia, one is resident taxpayers, i.e. individuals who are habitually resident in Russia, and the other is non-resident taxpayers, i.e., non-resident individuals who receive income from the territory of Russia.

(1) Tax system for resident taxpayers

An individual who is habitually resident of Russia means a Russian citizen and a foreign citizen or stateless person who has resided in the Russian Federation for at least 183 days in any consecutive 12-month period. Among them, the calculation of the period of residence without suspension of overseas travel, short-term overseas treatment or training of less than 6 months, and overseas work or provision of services due to employment contracts or other responsibilities. According to the progressive tax rate, the personal income tax rate of the resident is 15% for the part of the annual income exceeding 5 million rubles, and the tax rate is 13% for the part of the annual income not exceeding 5 million rubles.

The scope of personal income tax of resident taxpayers includes four parts, one is salary, allowances in kind and pension income from employment; second, business income and professional income; third, investment income (dividends and interests); and fourth, capital income (such as gains from the sale of shares and securities). A personal income tax rate of 13% applies to all types of income, except in exceptional circumstances. Interest on mortgage bonds issued before 1 January 2007 are taxed at 9 per cent and specific types of non-employment income are taxed at 35 per cent.

(2) Tax regime for non-resident taxpayers

A non-resident individual income tax payer in Russia refers to a natural person who has resided in the Russian Federation for less than 183 days in a 12-month period, but has taxable income derived from the territory of Russia, and does not suspend the calculation of the period of residence in the case of overseas travel, short-term overseas treatment or training for less than 6 months, and work or provision of services abroad due to employment contracts or other responsibilities. The personal income tax of non-resident taxpayers is levied in accordance with the scope of taxation of resident taxpayers, but is taxed only on the basis of income of non-resident taxpayers from sources in Russia.

The applicable tax rates for non-resident taxpayers are divided into four scenarios. The tax rate is 13% on the income derived from the employment of foreign employees with the status of highly qualified specialists in Russia, as well as on the income derived from the employment of non-resident aliens who stay in Russia on a visa-free basis and by individuals who work for personal, family and similar needs on the basis of a special permit. The second scenario refers to the tax rate of 15% on dividend income received by non-resident individuals from Russian companies. Scenario 3 refers to the tax rate of 30% on the income of non-resident individuals from sources in Russia except for scenario 1 above. Scenario 4 refers to a specific type of non-employment income that is taxed at a rate of 35%.

1.3.2 Corporate Income Tax

Russian corporate income tax is paid in the tax year by all legal entities that receive taxable income. The profit of Russian corporate income tax (translated as “group corporate income tax” in the Sino-Russian tax treaty) is the balance calculated by subtracting the deductible expenses stipulated in the tax law from the income calculated in accordance with the tax law, which is basically the same as the income accounting principle in China’s enterprise income tax. The statutory rate of corporate income tax is 20%. Between 2017 and 2020, 3% of corporate income tax revenues were paid to the federal budget and 17% to the federal subject budget (2% and 18% before 2017). Each federal constituent entity has the right to introduce preferential tax rates in the form of legislation for specific taxpayers, with a minimum preferential tax rate of 12.5 per cent. The entities subject to corporate income tax in Russia are divided into resident and non-resident enterprises.

(1) Resident enterprises

A Russian resident company is a company that is registered in Russia and has an actual management establishment in Russia. In the case of Russian resident enterprises, the tax is levied on the income minus the expenses listed in Chapter 25 of the Tax Code. The corporate income tax period is one calendar year. Resident enterprise taxpayers are required to prepay corporate income tax on a monthly basis, but they can prepay it on a quarterly basis when certain conditions are met.

(2) Non-resident enterprises

A Russian non-resident business is a foreign company that carries out activities in Russia through a permanent establishment or receives income from Russia. For Russian non-resident enterprises, corporate income tax is levied on the income attributable to the permanent establishment minus the expenses listed in Chapter 25 of the Tax Code. The corporate income tax liability and tax administration of the income attributable to the permanent establishment of a foreign enterprise engaged in business activities in Russia through a permanent establishment are similar to those of a resident enterprise, and the income derived from sources in Russia that is not related to the permanent establishment is subject to the source tax jurisdiction, and the withholding agent in Russia withholds and pays the corporate income tax.

1.3.3 Value Added Tax

The VAT implemented in Russia is a consumption-based VAT, and the applicable destination principle is based on the final place of consumption of goods and services, and the system includes all sectors of the national economy in the scope of VAT, which means that income from the sale or provision of goods, services and services in Russia is subject to VAT, but the export of goods or services used outside Russia is exempt from VAT. The tax base of VAT is the taxable sales, which is determined by the value of the goods sold (services, services), which is calculated at the price excluding VAT. Since January 2019, the VAT rate has been divided into three levels: 0, 10% and 20% (the tax rate before January 1, 2019 was 0%, 10% and 18%), and the tax rate implemented in practice is divided into five types: zero tax rate, standard tax rate, sub-standard tax rate, settlement tax rate and special tax rate. Settlement tax rate is derived from the basic tax rate, based on the basic tax rate based on income including VAT, for example, the settlement tax rate of 20% is 16.67%. The special VAT rate is the same as the Settlement rate, but is substantially different from the Settlement rate, and applies to the taxation of fines, late fees, liquidated damages for breach of obligations under the supply contract.

1.3.4 Tariffs

Russian import tariffs are generally levied ad valorem, but about 10% of imported goods such as clothing, shoes and hats, bags, plastic products, records, video tapes, and some household appliances are still subject to ad valorem or compound taxes. At present, Russia’s ad valorem tariff rates are mainly divided into five levels: 0%, 5%, 10%, 15% and 20%, with an average rate of about 12.4%.

Russia’s Customs Tariff stipulates that Russia will levy tariffs at most-favored-nation rates on goods imported from countries enjoying most-favored-nation status. Tariffs are levied on goods imported from other countries at twice the MFN rate. At the same time, Russia also imposes preferential tariffs on GSP countries, LDCs and CIS countries with which Russia has a free trade agreement, of which goods imported from CIS countries and LDCs with which Russia has a free trade agreement are exempted from tariffs, and goods imported from GSP countries are subject to tariffs at 75% of the most-favored-nation rate.

In terms of imports, since 1993, the Russian trade management system has gradually relaxed restrictions on imported goods. At present, except for a small number of commodities that require import licenses, national registration, compulsory certification and health and epidemic prevention identification, the rest of the commodities can be imported freely. In terms of exports, Russia has imposed export restrictions, mainly including some raw materials and resource-based products. Export restriction measures mainly include export bans, export quotas, export licenses and export tariffs.

2. Russia’s Crypto Tax System

Russia’s regulatory policy on digital assets has changed at different times, from the initial proposal to strengthen regulation in 2007, to the later tax policy and the revision of the Digital Money Act, after many modifications, the Russian government has tried to find a balance between regulation, taxation and market protection. In recent years, Russia, the world’s third-largest Bitcoin “Mining” country, is trying to provide better regulations to regulate the rapid development of the cryptoasset industry.

2.1 Taxation of Crypto Assets in Russia

Compared to other countries, Russia’s crypto asset tax system is relatively simple, and taxes related to Crypto Assets are mainly levied from two sources, namely taxes on legal entities such as Crypto Assets exchanges and service providers, and taxes on individuals who invest in Crypto Assets. Among them, for Crypto Assets exchanges and service providers, income from the sale of Crypto Assets is included in corporate income tax, which is 13% for domestic companies and 15% for foreign companies, and is exempt from VAT for Crypto Assets issuers. For Russian citizens, income earned through the sale of Crypto Assets is included in personal income tax, and the applicable tax rate is 13%. Gains from investing in Crypto Assets are taxed under Capital Gains Tax at a rate of 13%. While Russia’s crypto tax system is relatively simplified, the government may collect up to 1 trillion rubles (about $13 billion) in crypto taxes per year, and even the most direct tax collection can generate between 146 billion rubles and 1 trillion rubles in crypto tax revenue.

2.2 Tariff Policies Involved in Crypto Mining Enterprises

With the legalization of crypto assets in Russia, more and more Crypto AssetsMining companies are beginning to set their sights on the Russian market. Crypto miners need to use Crypto AssetsMining machines to get Crypto Assets. Crypto AssetsMining machines are computers used to earn Crypto Assets, referred to as “Mining Rig”, such as ASIC Mining Rig, graphics card Mining Rig, and exclusive Mining Rig (PFS Mining Rig) for some currencies. According to the current policy of Russia, the import of crypto mining rigs is not prohibited, but the customs service of the Russian Federation indicates that mining rigs belong to the category of crypto equipment, so the legal import of mining rigs should follow the customs rules for the import of crypto equipment.

At present, the Customs Service of the Russian Federation implements non-tariff control measures for the import and export of encryption equipment in accordance with the Regulations on the Import and Export of Encryption Equipment of the Eurasian Economic Union. In accordance with the provisions of the Regulation, if an imported cryptographic device product falls into the list of products in the category of Section 2.19 of the Regulation, the following documents are required: (1) Notification from the Federal Security Service (Нотификация ФСБ). The Russian government has included mining rigs that can currently be imported into Russia in the list of encryption equipment products, and if they are not included in this list, they need to apply;(2) Federal Security Service certificate (Заключение ФСБ). There are two types of certificates: one is the identification of imported equipment for self-use (note: even if it is for self-use, an import declaration is required), and the other is the identification of imported equipment, which is imported for general commercial purposes. In the absence of the above-mentioned FSB notices and identifications, the direct use of relevant equipment for mining carries a high risk of administrative and criminal liability. Combined with the enforcement records of local customs in Russia and the current penalty regulations, anyone who illegally imports and uses mining rigs can be fined up to double the value of the mining rigs and confiscated the mining rigs.

In April 2018, the Federal Customs Service of the Russian Federation issued an open letter explaining the import of mining rigs (ASICs), which clearly stated that mining rigs imported into Russia are subject to two technical specifications of the Eurasian Economic Union: “Technical Specifications on the Safety of Low-Voltage Equipment” and “Technical Specifications on the Electromagnetic Compatibility of Technical Equipment”. Customs officials mainly evaluate whether the mining rig meets the requirements based on these two technical specifications. Only mining rigs that pass the assessment receive a mandatory uniform label for the circulation of products for circulation on the market of the Eurasian Economic Union.

The Customs Service of the Russian Federation (RFCS) strictly monitors the customs duties payable on the import and export of mining rigs. Russia conducts price review and imposes import duties on the basis of the contract price of imported mining rigs, that is, the transaction value, and on the basis of the sales price of exported mining rigs minus export taxes. In July 2019, RFCS opened a criminal investigation into a BitcoinMining Rig importer for underpaying $1.2 million in customs fees (import duties), CoinDesk reported. Therefore, in the process of engaging in the import and export business of mining rigs, enterprises should strengthen daily trade compliance management and avoid legal risks.

3.Crypto Asset Regulatory Journey in Russia

In May 2017, the Central Bank of Russia stated: “Since Vitual Money has been released on the market and because it does not have gold reserves and its quantity is not controlled, Vitual Money should be regulated tightly.” If people are involved, then they will have to pay money for it", but no specific tax policy has been proposed.

In early 2018, the first bill in Russia’s history to tax digital assets was submitted to the State Duma, Russia’s legislature, but there was no clear tax framework for Crypto Assets. On May 17, the Russian Ministry of Finance released a document stating that Russian citizens should declare capital gains on investments in Crypto Assets. In Russia, capital gains are included in personal income and the personal income tax rate is 13%.

On July 23, 2020, the Russian State Duma passed the Law on Digital Financial Assets (DFA) bill, which agreed to give legal status to digital assets on behalf of the Russian legislature, which entered into force on January 1, 2021. The DFA Act provides a legal definition of digital assets in Russia and legalizes Crypto Assets trading in Russia, but still prohibits the use of Crypto Assets such as Bitcoin as a payment method. On December 10 of the same year, Russian President Vladimir Putin signed a decree requiring Russian officials or individuals in public office to disclose their digital assets, as well as those of their spouses and children, and prohibiting certain Russian officials from holding any Crypto Assets, which has been added as part of the DFA bill. The new decree is designed to ensure that the government complies with local financial reporting rules like ordinary citizens, and reflects Russia’s anti-corruption measures.

Before the Russia-Ukraine conflict, many departments such as the Central Bank of Russia, the Ministry of Finance and the government have not reached a unified concept of Crypto Assets supervision, and the Central Bank has always been skeptical of Crypto Assets. In December 2021, the Central Bank of Russia issued a report banning mutual funds from investing in Crypto Assets, warning about the risks associated with digital assets, and even proposing a total ban on the mining and trading of Crypto Assets. After the outbreak of the Russia-Ukraine conflict, in the face of multiple rounds of Western sanctions, many departments such as the Russian Central Bank, the Ministry of Finance and the government began to take a unified attitude, embrace the Crypto Assets field, and implement a series of measures to support Crypto Assets. In 2022, Putin denied the Central Bank of Russia’s ban plan, arguing that Russia has some advantages in terms of Crypto AssetsMining and should tax and regulate Crypto AssetsMining, supporting limiting mining to areas with excess electricity, such as Irkutsk, Krasnoyarsk and Karelia.

On February 13, 2022, Russia amended the law “On Digital Money” to restrict the purchase of Crypto Assets by non-qualified investors, stipulating that they must pass an exam before purchasing, and those who pass can purchase up to $7,000 worth of Crypto Assets per year, and those who fail can purchase up to $600. The bill also defines digital money as property, providing a legal basis for crypto assets payments. In addition, the bill stipulates that platforms operating in digital money need to meet certain capital requirements, with exchanges retaining at least 30 million rubles of capital and digital trading platforms or organizing auction platforms at least 100 million rubles.

On June 28, 2022, the lower house of the Federal Assembly of the Russian Federation approved a draft bill that exempts Crypto Assets issuers from value-added tax (VAT) and also provides for a more favorable tax rate on income earned through the sale of Crypto Assets. The current tax rate for such transactions is 20%, but under the bill, the new tax rate will be reduced to 13% for Russian companies and 15% for foreign companies, and the bill must be approved by the upper house of the federal parliament and approved by President Putin before it can be passed into law.

On April 20, 2023, the governor of the Russian Central Bank, Elvira Naiullina, said that the Russian Central Bank is working on a bill that will introduce an “experimental legal system” that will allow Crypto Assets to be used exclusively for import and export transactions, or will create specialized organizations to Crypto AssetsMining and process cross-border trade payments, but crypto transactions and payments within Russia will still be banned. Altukhov, a member of the Russian parliament’s economic policy committee, added that the Russian government is also working on a bill that would create a state body to license and supervise Crypto Assets platforms operating in Russia. In addition, as part of the regulation, new tax laws will be introduced for Miners.

To sum up, the Russian government has been regulating the digital asset market, promoting legal tax payment, and encouraging the development of digital assets. This policy evolution is a response to the growing interest and application of digital assets around the world. But at the same time, policies will be adjusted accordingly according to the continuous changes in the market and technology. Investors should pay close attention to the international situation and policy trends and make reasonable investment decisions.

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