The Process of Declaring Foreign Income in Russia

For foreign nationals residing in Russia, declaring foreign income is an essential part of staying compliant with Russian tax laws. Russia requires its residents to report income earned both within and outside the country. Failure to comply with tax obligations can lead to significant fines or legal issues. The process of declaring foreign income in Russia can seem complex, especially for expatriates or individuals with multiple sources of income from abroad. This guide will explain the process of declaring foreign income in Russia, including who is required to declare, how to report foreign income, and the implications of this process.

1. Who is Required to Declare Foreign Income?

Why It’s Important

Understanding who is required to declare foreign income is the first step toward ensuring compliance with Russian tax laws. In Russia, the concept of tax residency plays a crucial role in determining whether an individual must declare their foreign income.

Tax Residency in Russia

• Russian Tax Residency: You are considered a tax resident of Russia if you spend more than 183 days in the country within a 12-month period. Tax residents are required to report and pay taxes on their worldwide income.
• Non-Residents: If you are a non-resident (i.e., you spend less than 183 days in Russia per year), you are generally only required to declare income earned within Russia. However, non-residents may still be subject to tax on income derived from Russian sources.

If you qualify as a tax resident, you are obligated to declare your foreign income to the Russian tax authorities. This includes salaries, dividends, rental income, capital gains, and any other sources of income earned outside of Russia.

2. Types of Foreign Income to Declare

Why It’s Important

Knowing the types of foreign income that must be declared is crucial for ensuring that you report all sources of income accurately. Russian tax law applies to a wide variety of income earned abroad.

Types of Foreign Income

• Salary and Wages: Income earned from foreign employment, whether through direct employment or freelance work, must be reported.
• Business Income: Income from a foreign business or self-employment, such as profits from operating a company abroad, must be declared.
• Interest and Dividends: Interest from foreign bank accounts, dividends from foreign stocks, or income from foreign investment funds need to be declared.
• Rental Income: If you rent out property abroad, the rental income is subject to reporting.
• Capital Gains: If you sell property, stocks, or other assets outside of Russia, the capital gains are also considered foreign income and must be declared.
• Pension or Social Security Payments: Foreign pension income and social security benefits, if received by a Russian tax resident, must be reported as well.

All of this income must be declared even if taxes have already been paid in the foreign country. Russia has agreements with certain countries to avoid double taxation, but this does not exempt residents from reporting foreign income.

3. How to Declare Foreign Income

Why It’s Important

Declaring foreign income involves submitting the correct documentation and forms to the Russian tax authorities. Failure to do so can result in fines, penalties, or even criminal charges. Fortunately, the process is relatively straightforward if you follow the proper steps.

Steps to Declare Foreign Income

1. Gather Documentation:
   • Collect proof of your foreign income, including foreign bank statements, pay slips, tax returns from the foreign country, or other documentation verifying the income you earned abroad.
   • You may also need official translations of any documents that are not in Russian.
2. File the Tax Declaration (Form 3-NDFL):
   • Tax residents in Russia must submit a 3-NDFL tax declaration form annually. This form is used to report all sources of income, including foreign income, to the Russian tax authorities.
   • The 3-NDFL form can be filed online through the Gosuslugi portal or by visiting the local tax office in person. The deadline for submitting the 3-NDFL form is typically April 30 of the year following the tax year (for income earned in the previous year).
3. Convert Foreign Income into Rubles:
   • Foreign income must be reported in Russian rubles. Use the official exchange rate on the date the income was received to convert foreign currency into rubles. The Russian Central Bank publishes daily exchange rates, which can be used for conversion.
4. Report Foreign Taxes Paid:
   • If you paid taxes on your foreign income in another country, you must report this in your tax declaration. Russia has tax treaties with several countries to prevent double taxation. If taxes were paid abroad, you may be eligible for a tax credit or exemption based on the double taxation agreement (DTA) between Russia and the foreign country.
5. Submit the Declaration:
   • Once you’ve completed the 3-NDFL form, submit it to the Russian tax authorities, either online via the Gosuslugi portal or in person at your local tax office. If you have foreign income, it’s essential to keep all records of your earnings and taxes paid to avoid penalties in case of a tax audit.
6. Pay Taxes:
   • If you owe additional taxes based on your foreign income, you must pay them by the deadline, which is generally July 15 of the year after the tax year. The tax rate for foreign income is typically the same as for domestic income, but deductions or credits may apply.

Online Filing via Gosuslugi

• The Gosuslugi portal makes the process easier by allowing you to file your 3-NDFL tax declaration online. You will need to create an account on the portal if you don’t already have one, and follow the step-by-step process to submit your tax information.
• The portal also provides an electronic submission option for tax payments, which allows for faster processing and convenience.

4. Double Taxation Agreements (DTA)

Why It’s Important

Russia has signed double taxation agreements (DTAs) with many countries to avoid taxing the same income twice. These agreements allow tax residents to avoid paying double taxes on the same income earned in both Russia and the foreign country.

How to Use a DTA

• Tax Credits: If you paid taxes on your foreign income in the country where the income was earned, you can claim a tax credit for those taxes when filing your 3-NDFL tax declaration in Russia. This helps reduce the total tax burden.
• Exemption: In some cases, the DTA may provide for exemptions, meaning you may not have to pay Russian taxes on income already taxed in the foreign country.
• DTA Claim Process: To claim benefits under a DTA, you will need to submit proof of the taxes you paid abroad, such as tax returns or official documents from the foreign tax authority.

5. Penalties for Non-Compliance

Why It’s Important

Failing to declare foreign income or paying taxes improperly can result in penalties, interest charges, and even legal consequences. Russia enforces strict tax laws, and non-compliance can lead to heavy fines.

Potential Penalties

• Fines: Penalties for late submission or non-declaration can range from 1,000 to 30,000 RUB, depending on the severity of the violation.
• Interest: If you owe taxes on foreign income and fail to pay them on time, the Russian tax authorities may charge interest on the outstanding amount.
• Tax Audits: Failure to comply with tax declaration requirements may lead to tax audits. These audits can result in additional fines, interest, or even criminal charges for tax evasion.

6. Exemptions and Deductions

Why It’s Important

Russian tax law allows certain exemptions and deductions that may reduce the amount of foreign income tax owed. Understanding these benefits can help you optimize your tax situation.

Available Deductions

• Income from Certain Countries: In some cases, foreign income earned in countries with which Russia has a tax treaty may be exempt from Russian taxation.
• Business Expenses: If you are self-employed or have business income, you may deduct allowable business expenses from your foreign income before calculating your tax liability.

Conclusion

Declaring foreign income in Russia is an essential process for tax residents. By understanding the steps involved, the required documentation, and the available deductions or exemptions, you can ensure compliance with Russian tax laws and avoid penalties. Whether you are a freelancer, business owner, or employee earning foreign income, it’s important to file your 3-NDFL tax declaration correctly and on time to meet your tax obligations in Russia. Make sure to take advantage of double taxation agreements and available tax credits to reduce your tax liability, and always keep detailed records of your foreign income and taxes paid abroad.