Taxation of income of remote workers. Changes are coming.

Taxation of income of remote workers. Changes are coming.

What happened?

The Russian Ministry of Finance has prepared a draft law which changes the procedure for taxation of income of distant employees located outside Russia (hereinafter - the "Draft Law").  

In particular, the Bill proposes to qualify "remuneration and other payments when a distant worker performs the work function remotely under an agreement with an employer which is a Russian organization (except for the agreement concluded with a separate division of a Russian organization registered outside the Russian Federation) with a separate division of a foreign organization registered in the Russian Federation" as income received from a source in Russia. 

Regarding the purposes of the Draft Law the Ministry of Finance of Russia notes that "the main objective of the proposed amendments to the Tax Code of the Russian Federation is to exclude the practice of non-payment (optimization) of personal income tax from payments to remote workers who do not receive the status of a tax resident in any state or receive such status in a low-tax jurisdiction. This artificially makes working in Russia for Russian companies - both in the office and remotely - less attractive compared to the same work, but remotely outside the country".

The new changes may come into force on January 1, 2023. 

What does this mean for businesses?

Currently, individuals who are not Russian tax residents pay personal income tax only on income from Russian sources. At the same time, remuneration for the performance of work duties outside the Russian Federation is recognized as income received from sources outside the Russian Federation[1].

In fact, the above regulation creates conditions under which the income of remote workers may not be subject to personal income tax at all (for example, if a remote worker does not acquire tax residency in another country).

In case the Draft Law is adopted, remote workers who have left Russia will be required to pay personal income tax: (1) at a rate of 13% or 15% as long as they remain a Russian tax resident; (2) 30% - after they lose their tax residency status in Russia. 

We believe that businesses should assess the impact of the Bill's provisions on labor relations with remote workers and prepare for possible changes in advance. 


[1] In 2022, the Ministry of Finance of Russia already confirmed this legal position, for example, in a letter dated March 4, 2022, N 03-04-06/15886