Russian Federation: Tax Alert - 8/97 - 28 May 1997 - Personal Income Tax

Last Updated: 10 June 1997
This Tax Alert addresses Amendment No. 4 to Instruction No. 35 of the State Tax Service on Personal Income Tax which was published in the attachment to the Finansovaya Gazeta on 18 May 1997.

These amendments to Instruction No. 35 were issued further to the Federal Law of 10 January 1997 No. 11-FZ which introduced basic amendments to the taxation of individuals and was discussed in our Tax Alert No. 2/97 dated 30 January 1997. In particular, the amendments provide substantial guidance on the taxation of deposit interest, insurance premiums and payments, beneficial loans and the application of the housing construction exemption.


Interest received on bank deposits is now subject to personal income tax withholding to the extent that it exceeds the Central Bank refinancing rate for rouble deposits or 15% for deposits in hard currency. Taxable income arises on the date when interest is credited to the taxpayer's account.

This applies to deposits concluded, prolonged or amended after 21 January 1997 and to new amounts deposited after 21 January 1997 under existing deposit agreements.

For rouble deposits, non-taxable income is determined having regard to the Central bank refinancing rate effective during the whole of the period for which interest is accrued on the deposit. If the refinancing rate has changed during the period, then each separate refinancing rate effective within the period should be used for the purposes of the calculation. Any new refinancing rate should be used beginning from the month following the month of its change.

Banks are responsible for completing internal tax cards according to Appendix 7 to Instruction 35. These reflect the amount of benefit received by each individual and the personal income tax withheld at source. Banks however are not required to submit to the tax authorities any information about personal income tax withheld from the deposits.


In respect of insurance agreements concluded or prolonged after 21 January 1997, insurance premiums made by an employer for the benefit of an individual are subject to personal income tax withholding, unless they relate to state obligatory insurance or voluntary medical insurance under which the individuals enjoy only medical treatment and do not receive any monetary payments.

Only a limited number of insurance payments to individuals, (as mentioned in paragraph 7 of our Tax Alert No. 2/97), may be exempt from personal income tax, regardless of from which sources the respective insurance premiums were made, i.e. whether insurance premiums were made by the individual himself or by the employer for the benefit of the individual. All other insurance payments are subject to personal income tax withholding according to the procedure set out below.

Where Insurance Premiums Are Made By An Individual Himself:

personal income tax should be withheld by the insurance company at the rate of 15% of the difference between the insurance payment and the insurance premiums paid increased by a deemed profitability component established by the insurance company. Insurance companies are not required to file any information with the tax authorities about personal income tax withheld from such insurance payments, although they should complete internal tax cards in respect of each individual according to Appendix No. 7 of Instruction No. 35.

Where Individuals Are Insured At The Expense Of The Employer:

Insurance payments are subject to personal income tax withholding at source at a rate of 15% of the difference between the insurance payment and insurance premiums paid by the employer. In this case insurance companies are required to file information with the tax authorities about insurance payments made and personal income tax withheld according to Appendix No. 3 of Instruction No. 35, unless the insurance agreements provide that insurance payments are first to be transferred to the employer who then pays them out to the individuals. Under these circumstances the employer itself is responsible for personal income tax withholding and filing with the tax authorities.

Personal income tax withholding procedures as mentioned above should also apply in respect of long term (not less than five years) voluntary life insurance agreements, if they are terminated before the five year period expires. Under normal circumstances however insurance payments made under such agreements are exempt from personal income tax.

Interest Free Or Low Interest Loans

It has now been confirmed that individuals receiving beneficial loans (which include cash, bank transfers or goods valued at the market price effective on the date of the loan) shall receive deemed income computed as the positive difference between interest payable computed at two thirds of the Central Bank refinancing rate for the rouble loans or 10% for hard currency loans, and the actual interest paid. For interest free loans, loans without established dates of repayment and loans repayable upon request, the deemed income is imputed at two thirds of the Central Bank refinancing rate for the rouble loans and 10% for hard currency loans. This applies to all loan agreements concluded or prolonged after 21 January 1997.

For rouble loans, the Central bank refinancing rate effective during the whole period of the loan should be used for the purposes of the tax calculation. New refinancing rates should be taken into account from the beginning of the month following the month of its change.

Deemed income must be calculated on a monthly basis for the entire period of the loan based on the interest discount multiplied by the balance of loan outstanding at monthly rests. Personal income tax based on the total amount of deemed income received during the calendar year appears however to be calculated once a year. Thus, if loan is repaid before the end of the year, the deemed income 'earned' during the period of the loan should still be calculated along with personal income tax due.

It is still unclear whether the individual should file a tax declaration to declare the amount of deemed income 'earned' during the calendar year, or the employer (or other company providing the loan) should withhold the tax from other remuneration paid to the individual. Although the tax authorities may argue that the latter approach is supported by legislation (income received from the enterprises, institutions, organisations an other employers is generally subject to personal income tax withholding at source), there might be practical difficulties with this respect, especially where no other remuneration is paid to the individual by the lender.

Where a loan is provided by an entity other than the individual's employer, it appears that a tax declaration should be filed by the individual to reflect non-employment income received during the calendar year. It also appears likely that a tax declaration should be filed by individuals who receive beneficial loans from unregistered foreign companies.

We believe however that the tax declaration should not be filed if a loan is provided by the individual's employer and personal income tax is withheld by the company in full from deemed income 'earned' by the individual.

No Deemed Income Is Calculated In Respect Of The Following Payments:

  • loans provided by the employer against upcoming salary payments to the individual if given for less than one month and provided that these do not exceed the amount of the monthly salary;
  • loans provided to individuals who have entered into life insurance agreements, unless these exceed the amount of the insurance premium paid;
  • housing loans granted to the individuals under special government or municipal programs.

Housing Construction Exemption

It has now been confirmed that the housing construction exemption may be used by an individual only once in a lifetime. The amount of the exemption has been confirmed as 5,000 minimum monthly wages over a three year period but that the total claim may not exceed the individual's total gross income.

Based on the wording of the Instruction however it is not clear if the exemption is available during any three years of construction or consecutive three years. In addition, according to recent Letter of the Moscow State Tax Inspectorate No. 11-13/6091 dated 27 March 1997, it appears that exemption may be exercised during any ( though possibly not consecutive) years.

The new system applies to all purchase or construction contracts which were concluded after 21 January 1997. For individuals who started claiming the housing exemption in 1995, 1996 or before 22 January 1997, the old procedure should be followed and a maximum of 5,000 monthly minimum wages claimed for each year. Individuals who already used the housing deduction before 22 January 1997 may now apply for the exemption according to the new procedure.

The exemption is also available against repayments of bank loans received for the purposes of purchase (construction). The maximum exempt amount is the actual amount of loan principal and interest payable to the bank within the three year period. Loans provided by the enterprises and other credit institutions which are not licensed to such kind of operations do not attract this relief.

If actual housing expenses incurred by an individual during the calendar year exceed gross income received for the year, the excess may be offset against income received during the next two years, always provided that the 5,000 times monthly minimum wages for the three year period limit is not exceeded.

If an individual improperly claims the housing exemption, any benefit incorrectly accrued thereby may be treated as concealed income. This will create an exposure to severe financial or, in certain circumstances, criminal penalties.

The amended Instruction now clearly states that a spouse or other family member(s) of the individual may apply for this exemption only if they are listed as the joint purchasers (constructors) in the purchase (construction) documentation, regardless of whether they are treated as the joint owners of the property according to Russian legislation.

If you feel that any of the issues discussed above affect you or your employees, please contact your usual representative at Coopers & Lybrand in either Moscow or St Petersburg.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Alla Shaulina on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: or enter a text search 'Coopers & Lybrand' and 'Business Monitor'.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions