On August 4, 2023 the President of the Russian Federation signed Federal Law No. 414-FZ dated 04.08.2023 "On Excess Profit Tax" (hereinafter - the Law), which comes into force on January 1, 2024.

The law provides for the obligation of large companies to pay excess profits tax, which has the status of a tax of a one-time nature. [1] The tax is a federal tax and in full is subject to enrollment in the federal budget. [2]

Taxpayers

Taxpayers are recognized as taxpayers: [3]

1. Russian organizations;

2. Permanent representative offices of foreign companies;

3. Foreign companies that are tax residents of the Russian Federation.

The above categories do not pay tax if they were established after 01.01.2021 (except in cases of reorganization). [4]

Taxpayers are not recognized as taxpayers: [5]

1. Organizations that are small and medium-sized enterprises as of 31.12.2022;

2. Organizations that produced hydrocarbons in 2022;

3. Organizations engaged in coal mining in 2022;

4. Organizations that perform oil refining operations and have been producing products for at least 6 months in 2022;

5. Organizations that are members of a consolidated group of taxpayers (hereinafter - CTG), which in 2022 included organizations specified in p. 2 and p. 4; organizations that are members of a consolidated group of taxpayers (hereinafter - CTG). 4;

6. Organizations performing operations on refining of oil raw materials as of 31.12.2022 to customers who are at the same time persons specified in p. 2 and p. 4.4;

7. Liquefied natural gas producers exporting as of 12/31/2022;

8. Russian organizations that have at least 75% interest as of 31.12.2022 in the organizations specified in p. 2 and p. 4; 

9. Organizations that were payers of the unified agricultural tax continuously in 2018-2022;

10. Organizations with no sales revenue for 2018-2019;

11. Financial organizations to which bankruptcy prevention measures were applied as of 01.01.2023;

12. Organizations-developers implementing shared construction projects that did not pay dividends in 2021-2022.

In addition, the Law establishes special rules in relation to members of a consolidated group of taxpayers:

Pay the tax on their own:

• participants in the CGU, which in 2022 included coal mining organizations (other than the miners themselves);
• Organizations that were participants in the CHS in 2018-2021 and/or 2022, but not as of 12/31/2022;

Pay the tax on the entire CGN:

• Organizations which as at 31.12.2022 were CGT participants (other than those mentioned above) merely transmit the necessary information to the responsible CGT participant, which in turn performs the duties of a taxpayer.

Object of taxation.

The object of taxation is excess profits, which is the excess of the arithmetic average of profits for 2021 and profits for 2022 over the arithmetic average of profits for 2018 and profits for 2019. [6]

The following income shall not be taken into account for taxation purposes: [7]

• Profits of controlled foreign companies;
• Profit of participants in investment protection and promotion agreements received from activities related to the implementation of the investment project;
• Profit of participants of a special investment contract, if the other party to that contract is the Russian Federation;
• Income received in the form of dividends;
• Income received on transactions with certain types of debt instruments;
• Income from the sale or other disposal of interests in the authorized capital of Russian and/or foreign organizations, as well as shares of Russian and/or foreign organizations;
• Income received from an international holding company when it utilizes its intellectual property rights;
• Income received by an international holding company in the form of income from its grant of intellectual property rights;
• Profit earned by the Bank of Russia from activities related or unrelated to the performance of its functions.

There are special rules for determining the arithmetic average of profits for the relevant years for organizations established as a result of reorganization: [8]

Merger - determined based on the data of reorganized organizations, the legal successor of which is the newly created organization.

Split - is determined  based on the data of the reorganized organization, the legal successor of which is the newly created organizations, in the share determined at the split.

Affiliation - is determined taking into account the data of the affiliated organization.

Conversion - determined on the basis of the data of the reorganized organization, the legal successor of which is the newly created organization.

In determining profits, carryforward losses from previous tax periods are taken into account. [9]

If a taxpayer has submitted revised profits tax returns for 2021 and (or) 2022, the revised data shall be accepted for the calculation of excess profits. [10]

In the event of additional accrual of profits tax based on the results of a tax audit, the profit for the relevant year included in the tax base for excess profits tax shall be increased by the product of the amount of additional accrual of profits tax based on the results of the audit and coefficient 5. [11]

The procedure for determining the tax base.

The tax base is the monetary value of excess profits, which is the difference between the arithmetic average profits for 2021-2022 and 2018-2019. [12]

The tax base is recognized as zero when:

• If the difference between earnings for 2021-2022 and 2018-2019 is negative; [13]
• if the arithmetic average of profits for 2021 and for 2022 does not exceed 1 billion rubles. [14]

If the tax base exceeded half of the profits for 2022 and, at the same time, the book value of assets at the end of 2021 and 2022 increased more than the arithmetic average profit in relation to 2018 and 2019, the tax base is recognized as equal to half of the profits for 2022. [15]

Tax Rate.

The tax rate is set at 10%. [16] The tax is payable no later than 28.01.2024, [17] and its amount is calculated by taxpayers themselves.

However, the amount of tax payable can be halved to an effective rate of 5% by remitting the security payment from 01.10.2023 to 30.11.2023. 

The mechanism of realization of such a decision is very unusual and is carried out through the institution of tax deduction:

• the security payment is recognized as a tax deduction for which the tax payable is reduced; [18]
• from 28.01.2024 the amount of paid security payment is recognized as the amount of paid tax. [19]

The security payment may not exceed one-half of the excess profits tax calculated under the general rules. [20]

It is worth noting that if the taxpayer applies to the tax authority for a refund of the security payment, the tax deduction will be recognized as zero. [21]

Thus, the taxpayer will have to pay tax at the general rate of 10% of the excess profit received.

Tax Return.

A tax return must be submitted no later than 25.01.2024. [22] If the tax base is zero, no declaration shall be submitted. [23]

Once again, we note that if a taxpayer files a revised income tax return for 2021 or 2022, the amount of excess profits tax is subject to calculation based on the figures of the revised return. [24]

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Based on a study of the provisions of the Law, it can be concluded that the following companies could potentially be excess profits tax payers:

• taxpayers with profits approaching 1 billion rubles;
• participants in investment projects;
• taxpayers with losses (if challenged by the tax authority);
• taxpayers applying preferential income tax rates.

In this regard, businesses may consider taking steps to reduce excess profits tax by:

• diagnostics of the company's current financial performance and compliance with a number of statutory criteria;
• identification of tax reserves for corporate income tax and, if they exist, implementation of measures aimed at their accounting;
• making inquiries to financial authorities (Ministry of Finance of Russia, Federal Tax Service of Russia) and receiving official responses regarding potential disputes and issues arising in determining the amount of the tax base.

***

Tax Compliance has extensive experience in providing services for the identification of income tax provisions (analysis of expenses not deductible for tax purposes, the possibility of applying benefits, the possibility of retrospective application of new provisions of legislation and positions of law enforcement practice, creation of provisions, etc.).

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[1] Art. 1 of the Law

[2] Art. 7 of the Law

[3] п. 1, Art. 2 of the Law.

[4] subparagraphs 2 and 3 of paragraph 4 of Article 2 of the Law

[5] п. 4, Art. 2 of the Law

[6] п. 1 and 2 of Art. 3 of the Law

[7] п. 3, Art. 3 of the Law

[8] п. 7-10 of Art. 3 of the Law

[9] п. 3, Art. 3 of the Law

[10] п. 12, Art. 3 of the Law

[11] п. 11, Art. 3 of the Law

[12] п. 1 Art. 4 of the Law

[13] п. 3, Art. 4 of the Law

[14] п. 4 Art. 4 of the Law

[15] п. 6 of Art. 4 of the Law

[16] Art. 5 of the Law

[17] п. 1 Art. 7 of the Law

[18] п. 2, Art. 6 of the Law

[19] п. 2, Art. 7 of the Law

[20] п. 3, Art. 6 of the Law

[21] п. 5, Art. 6 of the Law

[22] п. 1 Art. 8 of the Law

[23] п. 3, Art. 8 of the Law

[24] п. 12, Art. 3 of the Law