Taxation of Income in the Form of Interest on Bank Deposits in Foreign Currency
In connection with enactment from January 1, 2001 of Chapter 23 of the Tax Code of RF, one may say that the rules contained in the above Chapter worsen the status of taxpayers as regards taxation of income as interest on foreign currency deposits in the banks located in Russia.
If under the Law of RF On Income Tax Payable by Individuals the amount of material benefit received from individuals’ foreign currency deposits in the form of interest computed at the rate of over 15% per annum is subject to taxation at the rate of 15%, then, in compliance with Article 224 of the Tax Code of RF, the individuals’ income in the form of interest accrued on foreign currency deposits is subject to taxation at the rate of 35% applicable to the amount exceeding the sum computed proceeding from 9% per annum.
Hence, the Tax Code of RF worsens the status of the taxpayers as regards taxation of the above income both from the viewpoint of the tax rate and the amount exempt from taxes.
However, the increased tax rates introduced by the Code or a wider tax base are not repugnant to Russian law. There is only one restriction set forth by Article 57 of the Constitution of RF which states that «the laws introducing new taxes or worsening the taxpayers’ status have no retroactive effect».
The rule concerned complies with Article 31 of the Federal Law On Enactment of Part 2 of the Tax Code of RF and Amendment of Certain Legislative Acts of RF on Taxes specifying that Part 2 of the Code is applicable to those legal relations regulated by laws on taxes and levies which come into existence after enactment of Part 2. As regards legal relations which had appeared prior to enactment of Part 2 of the Code, the latter is applicable to the rights and obligations which would come into existence after its enactment.
Correspondingly, income in the form of interest on foreign currency deposits under agreements concluded after January 1, 2001 and income on foreign currency deposits under agreements concluded prior to January 1, 2001, are subject to taxation, as regards the interest accrued after January 1, 2001, in a manner prescribed by the Tax Code of RF.
With enactment of Chapter 23 of the Tax Code of RF the provisions of the Law of RF On Income Tax Payable by Individuals lose their effect. At the same time, provisions of Article 2 of the Federal Law On Enactment of Part 2 of the Tax Code of RF and Amendment of Certain Legislative Acts of RF on Taxes which recognize the tax laws as having lost their effect, including the Law of RF On Income Tax Payable by Individuals, actually ride on the legal technique requirements to law making. The Law of RF On Income Tax Payable by Individuals will lose its effect from the moment Part 2 of the Tax Code of RF is enacted from January 1, 2001.
The only alternative which could make it possible to apply rules of the Law of RF On Income Tax Payable by Individuals after enactment of Part 2 of the Tax Code of RF is application in the situation under review of part 2, Article 9 of the Federal Law On State Support to Minor Business in RF under which «in case the change of the tax laws create conditions, less favorable for the subject of minor business as compared to earlier conditions, the said subjects, during the first four years of their business, will be taxed in the same manner as was in effect at the time of their statutory registration.».
The subjects of minor business are defined as individuals carrying out entrepreneural activities without forming a legal entity (para 1, Article 3).
In this connection a question arises whether conclusion of a bank deposit agreement may be attributed to entrepreneural activities. In accordance with part 3, para 1, Article 2 of the Civil Code of RF, entrepreneural activities are defined as activities carried out independently, at one’s own risk, with the purpose of deriving profit from use of property, sale of goods, doing a job or rendering services by persons registered as entrepreneurs in a manner prescribed by law.
Formally, the purpose of conclusion of a bank deposit agreement is to receive profit from using the assets of an individual, which may be done systematically and, by all means, is connected with great risk in Russia. However, as we deem it, in the case under review there is no independent activity of an individual. In our opinion, an individual signing a bank deposit agreement consumes services provided by the bank, and not undertakes any activity. This is also confirmed by the absence of such activity in the All-Russian classifier of commercial activities, products, and services. Registration of a natural person as an individual entrepreneur is not required for conclusion of bank deposit agreements, even systematic ones, either. And the fact that the natural person has a status of an individual entrepreneur has absolutely no effect on the terms and conditions of and procedure for conclusion of bank deposit agreements.
Therefore, we find it reasonable to conclude that the above provisions of the Federal Law On State Support to Minor Business in RF are not applicable in the situation under review.