A proposal on amending the procedure for taxation of individual’s income fr om disposal of assets

The Ministry of Finance of Russia  has  published  a blueprint of The Guidelines of the Fiscal  Policy of  the Russian Federation in 2014 and Planning Period of 2015 and 2016 and 2017.  Overall,  the  blueprint  contains  no  proposals  which  previously  were  not  considered.

At the  same time,  the  foregoing  document  contains  a few  proposals  which  may be  regarded as  material. In particular,  it has  been  suggested that  the  procedure  for  taxation of  individuals’ income  generated  from  the disposal  of assets  (property) should be changed.  

The currently  applicable  procedure  for taxation of  individuals’ income  generated  from  the disposal  of assets  has  some  weak  points.  For example, even where  a single  residential  property  is owned at the moment of disposal of  the living  quarters  and  purchase  of  a new  residential  apartment,  if  the  former  has  been  owned  for  less  than  three  years,  the  owner as physical  body  is to  pay  the  tax.  In practice,  many  individuals (physical  bodies)  tended to  understate  the  value  of  purchase and sale  transaction  to  avoid  taxation  and  were exposed to  the  risk of  losing  their  property.  

The blueprint  suggests  the income generated from the disposal of  residential real  property  should be   exempted from  taxation  regardless of   ownership  period, provided that  the taxpayer  owns  no  residential  real  property  other than  this  one.  Should  the  physical  body (individual)  owns  more  than  one  real  property  at  the  moment  of  disposal of the  residential real  property,  the income from the  disposal  of the same  is  to be  exempted  from  taxation  if  the following  terms and  conditions  are  met:

  • income generated from selling this real property is not beyond Rb 5m (the amount may be reduced by the government authorities of a constituent entity of the Russian Federation on whose territory the residential property for sale resides);
  • the real property has been owned within three years or beyond (the government authorities of a constituent entity of the Russian Federation on whose territory the residential property for sale resides may extend the period up to 10 years).

It should  be noted  that  if  this  proposal  is  introduced  in the  Customs Union  member  countries,  the  terms of  taxation   of  individuals’ income  generated  from  the disposal  of assets would  look  less  appealing.  In Kazakhstan,  income from sold  assets   are  subject  to taxation,  provided that   the  real  property  is  owned  less than  a year, while in Belarus, to the  extent that  more  than one  real property of the same type  have been  sold  within 5 years, i.e. the  rule doesn’t  cover  the disposal of  a  residential  apartment  or  a dacha (country house).  

This  proposal  will  prevent  the usage  of  tax avoidance  schemes  where  no more than one residential property is owned,  however  residential apartments  may  become  less  appealing  in terms of  investment  while   revenues  from  taxation of  individuals’ income  generated  from  the disposal  of assets  (property) are  expected  to  grow.

 Elena Velikova, a senior researcher of  Gaidar  Institute’s  Tax System Development Department  

The Ministry of Finance of Russia  has  published  a blueprint of The Guidelines of the Fiscal  Policy of  the Russian Federation in 2014 and Planning Period of 2015 and 2016 and 2017.  Overall,  the  blueprint  contains  no  proposals  which  previously  were  not  considered.

At the  same time,  the  foregoing  document  contains  a few  proposals  which  may be  regarded as  material. In particular,  it has  been  suggested that  the  procedure  for  taxation of  individuals’ income  generated  from  the disposal  of assets  (property) should be changed.  

The currently  applicable  procedure  for taxation of  individuals’ income  generated  from  the disposal  of assets  has  some  weak  points.  For example, even wh ere  a single  residential  property  is owned at the moment of disposal of  the living  quarters  and  purchase  of  a new  residential  apartment,  if  the  former  has  been  owned  for  less  than  three  years,  the  owner as physical  body  is to  pay  the  tax.  In practice,  many  individuals (physical  bodies)  tended to  understate  the  value  of  purchase and sale  transaction  to  avoid  taxation  and  were exposed to  the  risk of  losing  their  property.  

The blueprint  suggests  the income generated from the disposal of  residential real  property  should be   exempted from  taxation  regardless of   ownership  period, provided that  the taxpayer  owns  no  residential  real  property  other than  this  one.  Should  the  physical  body (individual)  owns  more  than  one  real  property  at  the  moment  of  disposal of the  residential real  property,  the income from the  disposal  of the same  is  to be  exempted  from  taxation  if  the following  terms and  conditions  are  met:

  • income generated from  selling  this  real  property  is not  beyond Rb 5m (the amount may be  reduced  by  the  government  authorities  of  a constituent  entity of the Russian Federation on whose territory the residential  property for sale resides);
  • the  real  property  has  been  owned  within  three years  or  beyond  (the  government  authorities of  a constituent entity  of the  Russian Federation  on whose territory the  residential  property for  sale resides  may  extend  the  period  up to 10 years).  

It should  be noted  that  if  this  proposal  is  introduced  in the  Customs Union  member  countries,  the  terms of  taxation   of  individuals’ income  generated  from  the disposal  of assets would  look  less  appealing.  In Kazakhstan,  income from sold  assets   are  subject  to taxation,  provided that   the  real  property  is  owned  less than  a year, while in Belarus, to the  extent that  more  than one  real property of the same type  have been  sold  within 5 years, i.e. the  rule doesn’t  cover  the disposal of  a  residential  apartment  or  a dacha (country house).  

This  proposal  will  prevent  the usage  of  tax avoidance  schemes  where  no more than one residential property is owned,  however   residential apartments  may  become  less  appealing  in terms of  investment  while   revenues  from  taxation of  individuals’ income  generated  from  the disposal  of assets  (property) are  expected  to  grow.

 Elena Velikova, a senior researcher of  Gaidar  Institute’s  Tax System Development Department