Russia Tightens Tax Screws on Super Wealthy

Russian leader Vladimir Putin is tightening the tax screws on the country’s super-rich.

The Kremlin last week secured major changes to Russia’s double-tax treaty with Cyprus, where last year oligarchs and Russian corporations deposited $25 billion in the island’s banks, avoiding higher taxes in Russia.

Russian finance officials had threatened to scrap the treaty altogether, triggering Cypriot authorities to agree to amendments that will see Moscow levy a new 15% tax on dividend payments that flow from Russian businesses to parent companies incorporated on the island.

Interest payments and royalties will be taxed at 20%.

Previously, Russian residents in Cyprus and Russian companies headquartered on the island faced only a 5% tax bill from the Cypriots. Now they will have to pay taxes to Russia, too.

In its bid to tax Russian capital outflows to low-tax jurisdictions, the Kremlin also is targeting tax treaties with other popular tax havens, including Malta, Luxembourg, the Netherlands, Switzerland and Hong Kong. It is threatening to scrap the agreements altogether if they are not amended. 

Most tax havens are likely to agree to the rewrites or risk seeing Russian assets being withdrawn en masse by fearful Russian investors instead of just seeing much reduced financial flows, according to analysts.

The Kremlin’s crackdown on massive tax avoidance has taken many analysts by surprise, even though Putin indicated earlier in the year he might make such a move. He had threatened before to tax offshore wealth but failed to follow through. 

“Back in March, President Vladimir Putin declared that he was fed up with how much money was pouring out of the country into tax havens. He said it was unfair that ordinary Russians had to pay tax at 13%, while the wealthy owners of corporations paid a fraction of that when exporting their wealth offshore,” said Oliver Bullough, a journalist specializing in financial crime and author of the bestseller Moneyland.

“At the time, I assumed this would go the way of his various other ‘de-offshorization’ initiatives, which never amount to much, but — surprisingly enough — the budget crunch caused by COVID-19 and the oil price slump, on top of the budget crunch that was already happening, seem to have focused minds in Russia’s finance ministry,” he wrote in his newsletter Oligarchy.

The rewriting of the double-tax treaties follows recently announced changes in the tax code aimed at the country’s richest individuals. The changes were announced in June days before Russians began voting in a constitutional referendum, a plebiscite that’s opened the way for Putin to remain head of state until 2036.

“From January 2021, Russians earning more than 5 million rubles a year [$74,000] will pay a 15% tax on income over that amount. This is the first change to the flat 13% rate of income tax, which Putin introduced for all Russians in 2001,” according to Elisabeth Schimpfössl, an academic at Britain’s Aston University and author of the book Rich Russians: From Oligarchs to Bourgeoisie.

The pre-referendum announcement was viewed as a populist gesture, likely to resonate with voters frustrated by their falling incomes and the ever-increasing wealth of the country’s oligarchs. The tax hikes also will affect Russia’s middle class, but to a much lesser extent, say analysts.

“Putin’s populist reasoning makes strategic sense. Significant numbers of Russians still resent the wealth some of their fellow citizens acquired in the 1990s as the country transitioned from communism to capitalism,” according to Schimpfössl.

Not that Russia’s super-wealthy likely will kick up much of a fuss about the tax changes, say analysts, who indicate the country’s oligarchs know they will remain wealthy only if they stay in line and avoid antagonizing the Russian leader. Putin has looked to them before to come up with more cash for state coffers — during the 2008 financial crisis and in 2014 after Russia’s annexation of Ukraine’s Crimea, which triggered a cash in the value of the ruble.

“People who possess a large fortune, a large business in Russia, realize that they do not own this because everything depends on Putin,” Sergei Pugachev, once a member of Vladimir Putin's inner circle, told a BBC documentary team that recently explored the Russian leader’s own personal wealth, estimated by some to amount to $49 billion. “They depend 100% on his mood,” Pugachev added.