A] The Pension System
The Russian Pension System has changed from a single publicly managed distributive system into a multi pillar pension system.
The Russian Pension System now consists of three pillars:
- Pillar 1: Insured State Pension Fund Pensions;
- Pillar 2: Funded Pensions;
- Pillar 3: Voluntary Pensions.
Until 2014 the employer had to annually pay 16% of the wages for the State Pension Fund and another 6% for the Funded Pensions. As of 2014 all employer contributions were for the funding of the State Pension Fund.
As even this was not providing enough funding, they started to increase the retirement age as of 2019. However, the retirement age will remain the same for some employment sectors like for example healthcare workers and military personnel.
An Expat can only claim a Russian State Pension if he has made social security contributions from his wages. Exemptions are available for some Expats if Russia has a Social Security Agreement with their home country. Claiming a pension from the ‘Pension Fund of the Russian Federation’ is only possible if you have contributed for at least eight years.
Social security contributions are mandatory even if you are on a temporary visa if your stay exceeds six months. The only real exception is for employees on a highly skilled work visa.
Participation in an Occupational Pension Plan is compulsory for employees who are born as of 1-1-‘67.
Employees have the right to choose whether their contributions are paid into the ‘Pension Fund of the Russian Federation’ (PFR) or into the Non State Pension Fund (NPFB). Contributions to the PFR have many investment options. Otherwise payments go to the State’s default asset manager being the Vnesheconombank.
Individual and Corporate Schemes can be of a guaranteed Defined Benefit (DB) or an investment based Defined Contribution (DC) nature. DC plans are most popular. Regarding the pay-out ‘flexibility’, often only lifelong pay-out by means of an annuity is allowed.
These schemes are provided by Non State Pension Funds as Russia considers them as one of the ways to increase pension coverage. Which is made more difficult by the lack of financial knowledge about retirement plans. There are also not many companies that offer Corporate Pension Plans. Private Pension Plans are even rares. Non State Pension Funds are not that popular due to the lack of governmental guarantees.
Between 2014-2019 Russia tried to increase the coverage by means of an Individual Pension Capital (IPC) account. Thus every employee would transfer between 1% - 6% of their wages into a (state/non state) pension fund to secure their retirement income. This plan did not succeed as the population was distrustful due to the new increased retirement age and as it would mean that they would thus lose the employer participation.
As of 2019 Russia stated that IPC’s would be postponed indefinitely and has started to develop the Guaranteed Pension Plan (GPP). Which is to be voluntary, with state guarantees, and a range of tax incentives.
Russia’s pension system is undergoing active changes to adapt to reality and prepare for the long term. The challenge for the government remains the low level of trust in the pension system and the serious negative effects from the retirement age reform.
The Pension Fund of the Russian Federation is funded by a mix of State and Private Employers, through cash transfers into the overall fund from the Russian Central Bank and payments by individual citizens.
Regarding Pension Fund contributions by employers, these are the 2020 figures:
- Earnings of each employee are subject to an annual 22% rate within RUB 1,292,000.
- The remuneration paid in excess of this threshold has an additional 10% top upcharge.
Due to Russia’s policy, basic pensions became near universal for Russian citizens.
Large transfers from the Russian budget to the Russian Pension Fund, along with steady payroll contributions from the newer working class stabilized much of the pension's throughout the 2000s, until further reforms were needed to address demographics issues.
The payment system of the Russian Pension Fund is viewed as instable in the long run at the given standard with a raise in the retirement age being cited as the easiest and most prevalent issue to solve.
Due to the decrease in population for several years and estimates of slow population growth, fears over the Pension Fund's ability to finance the pensions remain prominent in political discussion.
Pensions remain the largest single budgetary obligation of the Russian Federation, which will most likely put increasing strains on future Russian development due to population woes.
B] The Retirement Age
The official retirement age used to be:
- Men : Age 60
- Women : Age 55
The newly set retirement age amounts to:
- Men : Age 65
- Women : Age 60
There is a transition period of 10 years with a gradual increase of pension age of 6 months per additional year. The process is expected to be complete by 2028.
The retirement age will remain the same for sectors like healthcare workers and military personnel and women with three or more children.
There has been criticism about this increase in retirement age. On the one hand it is understandable as most countries face the lack of funds due to the increasingly negative ratio of working/retired persons.
On the other hand the criticism is understandable due to the rather low life expectancy in Russia. The average Russian life expectancy of 71.6 years at birth is nearly 5 years shorter than the overall average figure for the EU/USA.
C] Pensions & Tax
- Contributions are fully tax-deductible as company expenses.
2020 Individual Tax Rates
- Pillar 1 Benefits are paid in the form of life-long payments and remain untaxed.
- Individual Income Tax Rate Residents : 13% / 35%
- Individual Income Tax Rate Non Residents : 13% / 15% / 30%
- Capital Gains Tax Rate : 0% / 13% / 30%
- Residence: Living as of 183 days per calender year in Russia: Tax on global income.
- Non Residence: Only taxed on their Russian income.
- Net wealth tax as well as inheritance tax are not levied in Russia.
A flat rate of 13% applies to Russian Residents on most types of income and a 30% rate for Russian source income of Non Residents unless the rate is reduced by a tax treaty.
The employment income of highly qualitied foreign professionals paid under a contract of employment with a Russian entity is taxable at a rate of 13% rather than the 30% rate that otherwise would apply.
D) Pensions From Abroad
Expats who retire in Russia often do not have a Russian Pension Claim. But they might have an International Pension Claim.
Russia has several Social Security Agreements with other countries that are applicable to State Pensions only. Thus if you have a Private Pension Plan, you will have to check your plan details and Russian tax legislation in order to see if there are any tax obligations in Russia. Also advisable to check a possibly existing tax exposure at source and what possibly existing international double tax treaties might stipulate.
International Pension Funds cannot be directly transferred into Russia. You will have to use an Offshore Account. If it regards a UK Occupational Pension Claim, you might look at the QROPS option. Which stands for ‘Qualifying Recognised Overseas Pension Schemes’ and which under certain conditions takes such a claim out of the realm of the UK Tax Law without any UK tax exposure at the moment of transfer to a QROPS.
In this regard it is relevant that Russia has a strict exchange control. Furthermore many banks charge a percentage fee on withdrawals. So if you are living in Russia and receive pension payments from an International Pension Plan, chances are that in order to draw money you would have to pay exchange rate charges.
E] Expats To Retire In Russia
Although Expats can retire in Russia, it does not have a real open policy for foreigners.
Russia does not offer retirement visas. Obtaining a Russian Residential Permit can take several years. Even if you have a Russian partner. Thus it seems advisable to start the process at least two years in advance.
US, UK and Australian citizens must have a valid passport and apply for a visa well in advance of traveling to Russia to have access to the healthcare system.
If you're a US citizen with an expired visa, Russian authorities won't allow you to leave the country. You may be unable to leave the country for 20 days while you wait for the government to grant you an exit visa.
Visa laws can change quickly and the changes aren't always widely and clearly communicated. As citizens who don't comply with visa laws are subject to fines, arrest and/or deportation, it’s important to keep yourself knowledgeable on the current statutes.
Russia does not offer a retirement visa. Retirees should apply for a temporary residence visa, which lasts for three years but must be re-authorized every year.
To obtain a temporary residence permit, you must fulfill one of the following obligations:
- Been born in Russia;
- Be related to a Russian citizen;
- Be married to a Russian citizen;
- Have invested a certain amount of money in a Russian business.
After you have obtained a residency, you can apply for a permanent residence visa.
F] Apply For Russian Pension
You can claim existing Russian Pension Claims only as of pension age unless you fall in the category of exempted occupations/branches.
To recoup your Russian State/Company Pensions, your applications can be send to the PFR on the address below (unless you opted to pay into a NFP investment).
PFR International Cooperation Department
4 Donskaya Street
Telephone: +7 495 986 4167
G] Financial Links
These following links might be useful to Expats:
- Pension Fund Of The Russian Federation : https://pfr.gov.ru/en/
- Non State Pension Fund : https://npfb.ru/
- Federal Tax Service Of Russia : https://www.nalog.ru/eng/
H] News February 2021
Revision Tax Treaty Russia/The Netherlands
Russia is renegotiating double tax treaties with Cyprus, Luxembourg, Malta and the Netherlands.
On 11 September 2020 Russia and Cyprus signed a protocol to amend the treaty. It is also having discussions about renegotiating treaties with Hong Kong and Switzerland. Russia is pressing for a withholding tax rate of 15% to be applied to most dividend and interest payments to residents of these countries. This will have an impact on holding and financing structures with Russian assets. Royalties remain not subject to tax in Russia per the renegotiated treaty (the general rate in Russia is 20%).
The Finance Ministry has not published its proposal regarding the treaty with the Netherlands. We understand that Russia has told Cyprus that other countries would be offered substantially the same terms as below and this is borne out by the published protocol with Malta.
Under the protocol with Cyprus and the published protocol with Malta, dividends will be subject to a 15% tax rate unless the recipient is a listed company with at least 15% free-floating shares (or GDRs) and at least 15% participation in the Russian subsidiary held for more than 365 days. Interest will be subject to a 15% tax rate unless it relates to state bonds, corporate bonds or Eurobonds. A 5% rate of tax on interest will apply if the recipient is a listed company with at least 15% free-floating shares (or GDRs) and at least 15% participation in the Russian subsidiary held for more than 365 days.
Further exemptions may be provided for licensed pension funds and insurance companies. The changes would be in effect from 1 January 2021. The Russian Ministry of Finance has publicly stated that Luxembourg and Malta have also agreed to the proposed changes.
The outcome of the discussions with the Netherlands is not yet known but it is worth being prepared and we should therefore expect that the treaty with the Netherlands would be amended in a similar fashion.
As we understand it, earlier Russia was also having discussions with the Netherlands in relation to the clarification of other double tax treaty-related tax matters. The outcome of such discussions is not known also taking into account the domestic market in the Netherlands versus other jurisdictions.
It is possible that Russia and the Netherlands could agree for the amendments to take effect in 2021. The new requirements introduced by the Multilateral Instrument (e.g. the principal purpose test, the minimum shareholding period of 365 days for dividends etc.) are expected to be present in the renegotiated treaty.
Under the current Dutch dividend withholding tax Act, the possible amendment of the treaty would not affect the qualifying Russian shareholders in a Dutch company since a domestic Dutch dividend withholding tax exemption can be relied upon. It remains to be seen whether the Netherlands would agree with in effect a one-sided adjustment but the negotiation and the parliamentary process should be carefully monitored.