Interest on Loan Agreements Subject to Personal Income Tax, Not Self-employment Tax

Can a passive individual investor reduce the tax burden on interest income by paying the self-employment tax at a rate of 6% instead of personal income tax (at progressive rates from 13% to 22%)?

The Supreme Court’s answer is no. The position is outlined in the Supreme Court’s Review of Judicial Practice No. 2 dated 18 June 2025, which includes the Supreme Court’s stance as expressed in Ruling No. 305-ES24-14436.

Fact pattern:

·         A company paid interest under a loan agreement to an individual lender, acting as a tax agent by withholding personal income tax from the interest payments.

·         However, in 2021, the individual lender started to apply the self-employment tax regime, and based on this, the company ceased withholding personal income tax from the interest payments made to them.

·         The Supreme Court ruled that interest from a loan agreement constitutes passive income unrelated to the sale of goods or services.

·         Therefore, such interest cannot be classified as income from the sale of goods (works or services), does not constitute taxable income under the self-employment tax regime and is subject to personal income tax.

Outcome:

·         Interest from a loan agreement provided by an individual is subject to personal income tax, not self-employment tax.

·         A Russian entity paying interest to an individual lender is obligated, as a tax agent, to withhold and remit personal income tax from such payments.

Key takeaways:

·         Passive income of an individual investor, other than income from the sale of goods (works or services), is subject to personal income tax; applying the self-employment tax regime to such income is unlawful.

·         Some types of passive income (e.g., dividends) are taxed at special rates of 13–15%.