Russian Businesses Grapple with Escalating Wartime Tax Burden

New Tax Policies Implemented to Fund War Efforts

The Russian Federation has introduced a series of stringent tax reforms aimed at bolstering state revenue amidst its ongoing military campaign in Ukraine. These measures, which include a hike in corporate tax, an increase in Value-Added Tax (VAT), and significantly lowered revenue thresholds for businesses, are placing considerable financial pressure on enterprises across the country. The Ministry of Finance has proposed these changes to generate an estimated 2.6 trillion rubles ($29 billion) annually, with many amendments set to come into force from 2025.

One of the most impactful changes is the planned increase in the corporate tax rate from 20% to 25%, projected to add 1.6 trillion rubles ($18 billion) to the budget in 2025 and 11.1 trillion rubles ($125.3 billion) by 2030. Additionally, the Value-Added Tax (VAT) has been raised by 2%, moving from 20% to 22%. The revenue threshold for VAT liability has also been drastically reduced, dropping from 60 million rubles (approximately $783,000) to 20 million rubles ($261,000) in 2024, with a further reduction to 10 million rubles ($130,500) anticipated by 2028. The patent taxation system, often utilized by small businesses, has also been tightened, requiring businesses with revenues exceeding 20 million rubles to pay at least a 6% tax on revenues and a minimum of 5% VAT.

Businesses Report Mounting Struggles and Closures

The new tax policies are reportedly causing significant hardship for Russian businesses, particularly small and medium-sized enterprises (SMEs). Entrepreneurs across various sectors, from bakeries to beauty salons, are reporting a steady decline in demand, a sudden increase in operational costs, and a substantial rise in their overall tax burden. This has led to many businesses downsizing or, in some cases, closing their doors permanently.

A notable instance involved Denis Maksimov, a bakery owner in Moscow, who publicly appealed to President Vladimir Putin during a televised call-in show in December. Maksimov highlighted the increased tax burden on small businesses, warning that 'Many (businesses) will close down.' Similarly, Darya Demchenko, who owns a chain of beauty salons in St. Petersburg, expressed profound anxiety, stating, 'I've never felt so scared as this year, so unprotected, so anxious.' Social media has also shown evidence of the economic fallout, with vacant commercial spaces appearing on prominent streets like St. Petersburg's Nevsky Prospekt. Concerns are also rising that upcoming tax deadlines in April could trigger a wave of bankruptcies.

Economic Context and Future Outlook

These tax increases are part of a broader strategy by the Kremlin to secure stable funding for its military objectives, as the Russian economy shows signs of strain after four years of conflict. Oil revenues are reportedly dwindling, and the national budget deficit has increased, while military spending that previously fueled robust growth has leveled off. Analysts suggest that while these measures aim to stabilize state revenue, they are likely to impede the growth and innovation of SMEs, which constitute over 20% of Russia's economy. Some small business owners are contemplating moving into the informal economy or shutting down entirely rather than facing the increased tax liabilities. Further tax increases are anticipated for 2027 and 2028, as even smaller firms are expected to be brought into the expanded tax system.