Resisting Financial Sanctions, Russia Advances the Legalization of Cryptocurrencies

Russia is the world's third-largest Bitcoin "mining" country, with a high prevalence of cryptocurrency usage. According to government data, out of a population of approximately 144 million people, Russia has over 12 million cryptocurrency accounts and crypto assets worth around 20 trillion rubles (approximately 267 billion USD). Due to international developments, the Russian government is increasingly focusing on the cryptocurrency sector, intensifying efforts to establish cryptocurrency infrastructure. This article analyzes Russia's general and crypto tax systems, tariff policies related to crypto mining enterprises, and the regulatory changes in Russia's approach to crypto assets amid the international situation.

1. Basic Tax System in Russia

1.1 Overview of Russia's General Tax System

The Russian tax system is composed of the "Tax Code of the Russian Federation" (referred to as the "Tax Code") and other regulations enacted based on it. According to the Tax Code, taxes in Russia are levied at three levels: federal, regional (also known as "subject" or "territorial"), and local. Federal taxes are determined by the Tax Code and federal laws, regional taxes are determined by the Tax Code and regional laws, and local taxes are determined by the Tax Code and regulations of municipal authorities. Regional and local legislations can establish tax relief, tax rates within specific ranges, tax procedures, and deadlines based on the Tax Code, leading to variations in tax burdens for taxpayers registered in different regions of Russia.

The Federal Tax Service of the Russian Federation, under the Ministry of Finance of the Russian Federation, is the main department responsible for tax administration in Russia. It oversees the implementation of tax laws, ensuring the accurate, complete, and timely payment of taxes and other fees imposed by the state.

1.2 Three-Tier Tax System

According to the provisions of the Tax Code and federal laws, federal taxes include value-added tax, excise tax, personal income tax, corporate income tax, mineral extraction tax, water resource use tax, additional income tax on hydrocarbon extraction, fees for the use of wildlife and aquatic biological resources, government fees, and social insurance contributions, totaling 10 types of taxes. In addition, local governments have certain taxation powers.

Regional taxes are paid within the respective federal subjects and include corporate property tax, gambling tax, and transportation tax. Local taxes are paid within the corresponding cities or districts and primarily include land tax, personal property tax (property tax), and transaction fees.

1.3 Basic Taxation System

1.3.1 Personal Income Tax

The current Russian personal income tax system classifies taxpayers into two categories: resident taxpayers, referring to individuals who are permanent residents of Russia, and non-resident taxpayers, referring to individuals who, within any consecutive 12 months, spend less than 183 days in residence in the Russian Federation but earn income from taxable sources within Russia.

(1) Tax System for Resident Taxpayers

Russian resident individuals are defined as Russian citizens and foreign citizens or stateless individuals who have resided in the Russian Federation for at least 183 days in any consecutive 12 months. Certain situations, such as overseas travel, short-term overseas medical treatment or training lasting less than 6 months, and work or services provided abroad under employment contracts or other obligations, do not interrupt the calculation of residency time. Resident individuals are subject to a progressive tax rate, with a 15% tax rate applied to income exceeding 5 million rubles annually and a 13% tax rate applied to income not exceeding 5 million rubles annually.

The scope of personal income tax for resident taxpayers includes four parts: income from employment, such as salary, allowances in kind, and pension income; business income and professional income; investment income (dividends and interest); and capital gains (e.g., proceeds from the sale of shares and securities). Except for special cases, all types of income are subject to a 13% personal income tax rate. Special cases include a 9% tax rate for interest on mortgage bonds issued before January 1, 2007, and a 35% tax rate for specific types of non-employment income.

(2) Tax System for Non-Resident Taxpayers

Non-resident individuals subject to Russian personal income tax are those who reside in the Russian Federation for less than 183 days within a consecutive 12-month period but earn taxable income from sources within Russia. Similar to resident taxpayers, the personal income tax for non-resident taxpayers is levied based on income derived from sources within the Russian Federation.

The applicable tax rates for personal income tax for non-resident taxpayers vary in four situations. Situation one applies to income earned by high-skilled foreign employees employed in Russia, as well as to non-resident foreign individuals staying in Russia without a visa and individuals with special permits engaged in work for personal, family, and similar needs in Russia. The tax rate for earned income is 13%. Situation two applies to the tax rate on dividend income received by non-resident individuals from Russian companies, which is 15%. Situation three applies to income earned by non-resident individuals from Russia, excluding the situations in the first scenario, and the tax rate is 30%. Situation four applies to specific types of non-employment income, with a tax rate of 35%.

1.3.2 Corporate Income Tax

Corporate income tax in Russia is paid annually by all legal entities that generate taxable income. The profit for Russian corporate income tax (referred to as "corporate profit tax" in the China-Russia Tax Agreement) is calculated as the balance between income, as per tax law calculations, and deductible expenses. This is similar to the income calculation principle in China's corporate income tax. The statutory tax rate for corporate income tax is 20%. From 2017 to 2020, 3% of corporate income tax revenue was allocated to the federal budget, and 17% was allocated to the federal subject budget (2% and 18% before 2017). Federal subjects have the legislative authority to implement preferential tax rates for specific taxpayers, with the lowest rate not falling below 12.5%. The entities subject to corporate income tax are classified into resident and non-resident entities.

(1) Resident Entities

Russian resident entities refer to companies registered in Russia with actual management located in the country. For these entities, the taxable object is the profit derived from income minus expenses listed in Chapter 25 of the Tax Code. The tax period for corporate income tax is one calendar year. Resident entities are required to make monthly advance payments of corporate income tax, although under certain conditions, quarterly advance payments are allowed.

(2) Non-Resident Entities

Russian non-resident entities are foreign companies conducting activities in Russia or earning income from Russia through a permanent establishment. For non-resident entities, corporate income tax is levied on income attributable to the permanent establishment, subtracting expenses listed in Chapter 25 of the Tax Code. Foreign companies engaged in business activities within Russia through a permanent establishment follow similar taxation obligations and management as resident entities. Income not related to a permanent establishment and sourced within Russia is subject to source-based tax jurisdiction, with tax withheld and remitted by the withholding agent within Russia.

1.3.3 Value Added Tax (VAT)

Russia implements a consumption-based VAT with the destination principle, meaning that taxation is based on the final consumption location of goods and services. This system encompasses all sectors of the national economy, requiring income from the sale or provision of goods, labor, and services within Russia to pay VAT. However, export goods or services used outside Russia are exempt from VAT. The VAT base is the taxable sales amount, calculated based on the value of the sold goods (labor, services), excluding VAT. Since January 2019, VAT rates are divided into three tiers: 0%, 10%, and 20% (previously 0%, 10%, and 18%). Practically, the applied rates include zero rate, standard rate, reduced rate, settlement rate, and special rate. The settlement rate is derived from the basic rate and is calculated as a percentage of revenue including VAT. For example, the settlement rate for a 20% tax rate is 16.67%. Special VAT rates are numerically the same as settlement rates but differ in their application. They are used for taxing fines, penalties for violation of supply contract terms, and other similar obligations.

1.3.4 Customs Duties

Russia generally imposes ad valorem import duties, but approximately 10% of imported goods, including clothing, footwear, headgear, plastic products, records, videotapes, and some household appliances, are still subject to specific or compound duties. Currently, Russia's ad valorem import duties are divided into five tiers: 0%, 5%, 10%, 15%, and 20%, with an average rate of about 12.4%. According to the Customs Tariff of Russia, goods imported from countries enjoying most-favored-nation treatment are subject to duties at the most-favored-nation rate. For goods imported from other countries, duties are calculated at twice the most-favored-nation rate. Russia also grants preferential duties to countries under the generalized system of preferences, least developed countries, and those with which Russia has a free trade agreement. Goods imported from countries with a free trade agreement or least developed countries are exempt from duties, while goods from countries enjoying generalized system of preferences are subject to 75% of the most-favored-nation rate.

In terms of imports, Russia has gradually relaxed restrictions on imported goods since 1993. Currently, with the exception of a few goods requiring import licenses, national registration, mandatory certification, and sanitary and epidemiological assessment, most goods can be freely imported. For exports, Russia has implemented restrictions, mainly on certain raw materials and resource-based products. Export restrictions include prohibition, export quotas, export licenses, and export duties.

2. Russia's Cryptocurrency Tax System

Russia's regulatory policies on digital assets have undergone changes over different periods. From the initial proposal to strengthen regulation in 2007 to subsequent revisions of taxation policies and cryptocurrency bills, the Russian government has been striving to strike a balance between regulation, taxation, and market protection. In recent years, as the world's third-largest bitcoin mining country, Russia is attempting to provide more comprehensive regulations to control the rapid development of the cryptocurrency industry.

2.1 Taxation of Russian Cryptographic Assets

Compared to other countries, Russia's taxation system for cryptographic assets is relatively straightforward. Taxes related to cryptocurrencies are mainly levied on two fronts: legal entities such as cryptocurrency exchanges and service providers, and individuals investing in cryptocurrencies. For cryptocurrency exchanges and service providers, income obtained from selling cryptocurrencies is subject to corporate income tax. The tax rate is 13% for domestic companies and 15% for foreign companies in Russia, with an exemption from value-added tax for cryptocurrency issuers. For Russian citizens, income derived from selling cryptocurrencies is subject to personal income tax at a rate of 13%. Profits from investing in cryptocurrencies are taxed as capital gains at a rate of 13%. Despite the simplified nature of Russia's cryptocurrency tax system, the government could potentially collect up to 1 trillion rubles (approximately $13 billion USD) in cryptocurrency taxes annually, generating significant tax revenue even with the most direct tax collection methods.

2.2 Customs Duties Involved in Cryptocurrency Mining Enterprises

As the legalization of cryptocurrency assets progresses in Russia, an increasing number of cryptocurrency mining enterprises are turning their attention to the Russian market. Cryptocurrency mining enterprises use cryptocurrency mining machines to obtain digital currencies. Cryptocurrency mining machines, including ASIC machines, GPU machines, and specific machines for certain currencies (PFS machines), are not prohibited from importation in Russia. However, the Russian Federal Customs Service emphasizes that mining machines fall under the category of cryptographic devices, and the legal importation of mining machines must adhere to customs rules for cryptographic device imports.

Currently, the Russian Federal Customs Service follows the Eurasian Economic Union Cryptographic Device Import and Export Regulations, which impose non-tariff regulatory measures on cryptographic device imports and exports. According to these regulations, if the imported cryptographic device falls under the product category listed in Section 2.19 of these regulations, it must have the following documents: (1) Federal Security

Service Notification (FSB Notification). The Russian government has included mining machines that can be imported into Russia in the notification list of cryptographic device products. If a machine is not listed, an application is required. (2) Federal Security Service Appraisal (FSB Appraisal). This appraisal comes in two types: one for the appraisal of imported self-use devices (note: even for self-use, import declaration is required), and the other for the general appraisal of devices imported for commercial purposes. If the FSB Notification and Appraisal are missing, using related devices for mining carries high administrative and criminal liability risks. Based on the enforcement records and current penalty regulations of local customs in Russia, individuals who illegally import and use mining machines may face fines up to double the value of the mining machines and confiscation of the machines.

In April 2018, the Russian Federal Customs Service issued a public letter explaining the importation of ASIC mining machines. It clarified that imported mining machines bound for Russia are subject to two technical standards within the Eurasian Economic Union: "Technical Regulation on Safety of Low Voltage Equipment" and "Technical Regulation on Electromagnetic Compatibility of Technical Equipment." Customs officials primarily assess whether mining machines meet the requirements based on these two technical standards. Only machines that pass the assessment can obtain the mandatory product circulation unified label for the Eurasian Economic Union market.

The Russian Federal Customs Service strictly monitors the customs duties payable on the import and export of mining machines. Import duties are levied based on the contract price of imported mining machines, and export duties are levied based on the sales price of exported mining machines minus the export tax. In July 2019, the Russian Federal Customs Service initiated a criminal investigation against a bitcoin mining machine importer for underpaying $1,200,000 in customs fees. Therefore, enterprises engaging in the import and export of mining machines should strengthen daily trade compliance management to avoid legal risks.

3. Regulatory Development of Cryptocurrency Assets in Russia

In May 2017, the Central Bank of Russia expressed the need for strengthened regulation of virtual currencies due to their market presence, lack of gold reserves, and uncontrolled quantity. While specific tax policies were not outlined at that time.

In early 2018, Russia saw its first-ever bill on taxing digital assets submitted to the State Duma, the legislative body. However, there was no explicit tax framework for cryptocurrencies. On May 17, the Ministry of Finance released a document stating that Russian citizens were required to declare capital gains from investing in cryptocurrencies. In Russia, capital gains are considered part of personal income, subject to a 13% income tax rate.

On July 23, 2020, the State Duma passed the Digital Financial Assets (DFA) law, granting legal status to digital assets and legalizing cryptocurrency transactions in Russia, though the use of cryptocurrencies for payments remained prohibited. On December 10 of the same year, President Vladimir Putin signed a decree requiring Russian officials and public servants to disclose their digital assets, including those of their spouses and children. Additionally, certain Russian officials were prohibited from holding any cryptocurrency, a measure added as part of the DFA law. This new decree aimed to ensure government officials comply with local financial disclosure rules, reflecting Russia's anti-corruption efforts.

Before the Russia-Ukraine conflict, various departments, including the Central Bank, Ministry of Finance, and the government, had differing views on cryptocurrency regulation. The Central Bank maintained a skeptical stance. In December 2021, the Central Bank issued a report banning mutual funds from investing in cryptocurrencies, warning of risks associated with digital assets, and even proposing a comprehensive ban on cryptocurrency mining and trading. However, following the Russia-Ukraine conflict and facing multiple rounds of Western sanctions, various Russian departments, including the Central Bank, Ministry of Finance, and the government, began adopting a unified approach, embracing the cryptocurrency sector and implementing supportive measures. In 2022, President Putin denied the Central Bank's plans for a ban, suggesting that Russia, with certain advantages in cryptocurrency mining, should tax and regulate cryptocurrency mining. The support was conditional on restricting mining to regions with excess electricity, such as Irkutsk, Krasnoyarsk, and Karelia.

On February 13, 2022, Russia revised the "Digital Currency" law, imposing restrictions on the purchase of cryptocurrencies by unqualified investors. According to the law, individuals must pass an exam before purchasing, with qualified individuals allowed to buy a maximum of $7,000 worth of cryptocurrencies annually, while unqualified individuals are limited to $600. The law also defined digital currencies as property, providing a legal basis for cryptocurrency payments. Additionally, the law stipulated capital requirements for platforms operating digital currencies, with exchanges required to retain a minimum capital of 30 million rubles, and organizations operating auction platforms required to retain at least 100 million rubles.

On June 28, 2022, the lower house of the Russian Federal Assembly approved a draft law that could exempt cryptocurrency issuers from value-added tax (VAT) and provide more favorable tax rates for income generated by selling cryptocurrencies. The current tax rate for such transactions is 20%, but according to the draft law, the new tax rate for Russian companies will be reduced to 13%, and for foreign companies, it will be 15%. The law must be approved by the upper house of the Federal Assembly and receive President Putin's approval to become law.

On April 20, 2023, Elvira Nabiullina, the head of the Central Bank of Russia, announced that the bank is developing a bill introducing an "experimental legal regime," allowing the specific use of cryptocurrencies for import and export transactions or establishing specialized organizations responsible for cryptocurrency mining and processing cross-border trade payments. However, domestic cryptocurrency transactions and payments within Russia will remain prohibited. Altukhov, a member of the Russian Parliament's Economic Policy Committee, added that the Russian government is also working on a bill to create a national agency to license and oversee cryptocurrency platforms operating in Russia. As part of the regulation, new tax laws will be introduced for miners.

In conclusion, the Russian government has been consistently working to regulate the digital asset market, promote legal taxation, and encourage the development of digital assets. This policy evolution responds to the growing global interest and application of digital assets. However, policies may be subject to adjustments based on continuous changes in the market and technology. Investors should closely monitor international developments and policy trends to make informed investment decisions.