According to the Federal Statistics Service, over eight months of 2022, 419,000 people left Russia. Many have already spent more than six months abroad, which means they are no longer Russian tax residents.
Many people confuse citizenship and tax residency. If you spend more than 183 calendar days outside Russia, you lose Russian tax residency, which means that your income tax rate changes. Let’s see how you can become a tax resident in another country and what benefits you can expect.
Cypriot tax residency
There are two ways to obtain tax residency: the rule of 183 days or the rule of 60 days. Like in most countries, the rule of 183 requires residing in the country for more than 183 days in a calendar year. The rule of 60 days is similar but has extra reservations:
- You must not live in any other country for more than 183 days;
- You must be officially employed or run a business in Cyprus;
- You must own or rent property in Cyprus.
When calculating the days, especially if your length of stay is close to 183 days, it is important to remember that the arrival date (even if you left on the same day) counts towards your total stay but the day of departure (even if you returned on the same day) does not.
Cyprus is one of the most appealing and affordable countries in Europe for obtaining tax residency. Cyprus and Russia have an agreement on avoidance of double taxation so, after becoming a tax resident, you will be able to cut and optimize your taxes.
from selling securities, including stocks, bonds and debt instruments;
• Dividends and interest under loan agreements and royalties;
• Property, luxury items and gifts;
Tax residents pay a lower municipal tax on real estate.
from renting out real estate in Cyprus and abroad;
• Employment in Cyprus;
• Income from selling real estate on Cyprus or stocks of companies owning real estate in Cyprus;
• Commercial activity (e.g. a private business).
These kinds of income are subject to a progressive tax rate of up to 35% depending on the amount of income. The first 19,500 euros are tax-free.
Israeli tax residency
A person becomes a tax resident of Israel after spending at least 183 days in the country in a calendar year. There is also a principle of “a center of life interests” that takes into consideration family, social and economic ties with Israel. With proven ties, a person may spend only 30 days in the country in a year to be a tax resident.
The taxable income in Israel includes dividends, interest, royalties, income from purchasing, selling or renting out real estate, insurance premiums and more. The income tax is calculated progressively as follows:
If your annual income exceeds 647,640 ILS, the exceeding amount is subject to extra 3%, the tax on high income with a total tax rate of 50%.
On the face of it, the tax residency of Israel does not look too appealing; however, immigrants can expect certain tax privileges. Abeta Capital founder Dmitry Kotegov, CFA, believes that a major advantage of the local tax system is the ten-year exemption from reporting foreign sources of income and taxes on them. Any income from investment or employment in Israel is subject to reporting and taxation according to the local tax legislation.
UAE tax residency
As compared to Cyprus and Israel, the process to receive tax residence in the UAE is more complicated. In addition, one needs to stay in the country for more than 183 days and submit the following documents:
- Rental agreement or a document that confirms property ownership.
- 6-month bank account statement.
- The UAE residence visa, to receive which it is necessary to purchase property, get employed there or set up a business.
Even though the conditions for receiving tax residency look quite ambitious, the advantages it comes with are totally worth it.
According to the double taxation treaty between the Russian Federation and the United Arab Emirates, foreign nationals who are tax residents of the UAE become participants of the taxation system. Here are the advantages:
- No taxes on company income, personal income, salaries.
- Subject to taxes are only companies engaged in oil and gas production, as well as foreign banks.
- There are certain excise duties and fees that are included in the cost of a list of goods and services, such as tourist fees and sin taxes on goods and services deemed harmful to health like tobacco, alcohol, and energy drinks.
- Since January 1, 2018, there has been a 5% VAT (tourist can return up to 85%).
Taxation of non-residents in Russia
As we already mentioned, a Russian national loses tax residency after spending more than 183 days in another country. However, this does not mean that they are relieved from the obligation to pay taxes, so the following income they receive in Russia is subject to tax:
• Income from renting out or selling property, land plot, vehicle etc.
• Revenue from winning the lottery, ad campaign, contest etc.;
Let’s assume that the Russian citizen has a tax residency of Cyprus and a brokerage account in Russia. They can count on the following tax rates:
• No income tax on coupons;
• 15% income tax on dividends;
• 30% income tax on the revenue from selling non-negotiable securities whose assets consist for more than a half of property located in Russia;
• No income tax on revenue from selling other stocks (it is necessary to monitor the share of Russian property).
Let’s take another example: selling property in Russia. For non-residents, this income will be subject to a 30% tax with the following exceptions:
- The person became the owner of the property before 2016 and has owned it for more than 3 years;
- The person became the owner after 2016 and has owned it for more than five years;
- The person inherited the property and has owned it for more than 3 years;
- The property was sold at a smaller price that it was bought, but no less than 70% of its cadaster value;
- The property was sold at the same price it was purchased and this sum is no less than 70% of the property’s cadaster value.
The most convenient way to notify the tax agency about opening an account or a deposit abroad is to use the taxpayer’s personal account on the Federal Tax Service website. The login and password can be obtained in any tax agency regardless of residence or by registering via Gosuslugi.
It is important to remember that, according to the Russian Tax Code, Russian nationals are not obligated to notify the tax agency about their tax residency status but if the tax rate is calculated wrong in order to reduce it, they will be subject to a penalty of 20% of the total tax amount.
By Vasily Belokryletsky, investor, co-founder of Abeta Capital investment analytics group