All foreign employees working in Russia may lose their tax resident status as of January 1, 2007 and, consequently, their right to pay income tax at a rate of 13%. This will take place if legislators do not take steps before the New Year to repair the legal conflict that has emerged because they forgot to establish a beginning and end for the fiscal period when making amendments to the Tax Code. An individual living in Russia for at least six months is recognized as a tax resident and his/her employer may tax the individual’s income at a rate of 13%. Until the employee achieves this status, he/she is liable for taxes at the rate established for foreigners—30%.

However, an extremely unpleasant New Year’s surprise awaits foreigners working in Russia.

New articles defining tax residence will become effective on January 1, 2007. Foreigners who have been in Russia for 183 days not just during the past fiscal period (calendar year), but also during the past 12 calendar months which begin or end in the current fiscal period will be recognized as tax residents, according to these new amendments. However, the words “begin or end in the current tax period” simply “fell out” of the new bill draft. Officials are promising to “reinstate” the missing phrase at some point in time. They have not said exactly when, however.

Tax consultants maintain that in practice, this conflict may result in a situation where the time that foreigners spent living in Russia in 2005 will not count toward 2006. For example, if a foreigner lived in Russia for three months during one fiscal period and three months during another, these two periods may not be combined. Thus, even if the foreigner actually lived in Russia for six months, his/her employer will not receive the reduced tax rate.