Significant changes in the taxation of remote workers from 1 January 2024

Significant changes in the taxation of remote workers from 1 January 2024

On 20 June 2023 the State Duma adopted in the first reading draft Law № 369931-8 of the Ministry of Finance of the Russian Federation “On the Amendments to the Part One and Part Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation”. Consideration by the State Duma of the draft Law in the second reading is scheduled for 12 July 2023. This draft Law contains a large number of significant changes in the taxation of individuals working remotely¹.

Conceptually, these changes can be divided into two parts:

1. The draft Law proposes that from 1 January 2024 remuneration of remote workers under employment contracts with a Russian employer or a subdivision of a foreign company in Russia would be treated as income from sources in Russia.

Personal income tax (hereinafter, PIT) on such remuneration will be charged at a rate of 13%/15% irrespective of the individual's Russian tax residency status.

With respect to civil law contracts, it is proposed that from 1 January 2025 remuneration received by an individual who uses Russian domains, programs or technical facilities hosted in Russia in his / her work should be considered as income from Russian sources, provided that one of the conditions is met:

  • the individual is a Russian tax resident;
  • the income is credited to an account in a Russian bank;
  • payments come from Russian organisations or individual entrepreneurs, or from branches of foreign companies in Russia.

Such remuneration under a civil law contract will be taxed at 13%/15% irrespective of the individual's Russian tax residency status.

On the one hand, it simplifies the PIT withholding procedure for Russian employers. On the other hand, double taxation may arise for remote workers (contractors) working from abroad for a Russian company. This is because the foreign state in which the employee (contractor) works could also claim taxation of income from such activities, since the employee (contractor) actually works from the territory of a foreign state. Thus, the proposed amendments simplify the PIT procedure for Russian employers, however, they could contradict the rules established in other states.

In addition, there is a certain “asymmetry” in approaches to taxation of income of remote workers (contractors): income from Russian sources includes both remuneration for performing labour duties (or under a civil law contract) from Russian companies for work abroad as well as from foreign companies for work in Russia. In other words, the question arises:

What is the main criterion for determining the source of income: the location of the company (employer / payer of income) or the place where the labor function is actually performed (service is provided)?

2. At the same time, the draft Law provides for assigning from 1 January 2025 to foreign companies the functions of tax agents in respect to income paid to individuals who perform work or provide services in Russia, including in the field of information technology by using the Internet.

It is expected that these functions will be performed by foreign companies through a Personal Taxpayer's Account; to this end the Tax Authorities will receive the authority to register and deregister foreign companies which pay income to individuals. The draft Law establishes the procedure and terms for this process.

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¹ Other changes provided in draft Law № 369931-8 are not reviewed in this article.

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