Moral injury
We will find the definition of the term in the Resolution of the Plenum of the Supreme Court of the Russian Federation dated December 20, 1994 No. 10 “Some issues of application of legislation on compensation for moral damage” (clause 2). Moral harm is understood as moral or physical suffering caused by actions (inaction) that encroach on intangible benefits belonging to a citizen from birth or by force of law, or that violate the personal non-property or property rights of a citizen. Thus, the concept of moral damage does not apply to legal entities. It only has a business reputation (clause 11 of Article 152 of the Civil Code of the Russian Federation).
A common property of intangible goods is their inalienability. Intangible benefits include life and health, personal dignity, personal integrity, honor and good name, business reputation, inviolability of private life and home, personal and family secrets, freedom of movement, freedom to choose a place of stay and residence (clause 1 of Article 150 of the Civil Code RF).
Moral harm, in particular, may consist of moral feelings in connection with the loss of relatives, the inability to continue an active social life, loss of a job, disclosure of family or medical secrets, dissemination of untrue information discrediting the honor, dignity or business reputation of a citizen, temporary restrictions or deprivation of any rights, physical pain associated with injury, other damage to health, or due to illness suffered as a result of moral suffering. Please note: moral damage is not limited to damage to health.
Compensation for moral damage is provided for by both labor and civil legislation. Let's look at each of these areas.
Notes on the law
In accordance with paragraph 1 of Article 213 of the Tax Code, in the process of clarifying the tax base for personal income tax, those types of profits that were received by an individual in the form of any insurance payments accrued in accordance with the norms of current legislation are not taken into account. In this regard, taking into account the instructions of this paragraph, any types of profit in the form of insurance payments are not taken into account.
Moral damage that was caused to the consumer by the manufacturer due to a violation of his legal rights must be compensated by the person who caused the specified damage if there is guilt in this situation.
Article 213. Features of determining the tax base for insurance contracts
The amount of compensation for moral damage in this case is established in accordance with current legislation. Thus, if a legal entity causes moral damage to an individual, the latter must receive an appropriate compensation payment, which will not be subject to personal income tax.
The fines that are imposed for non-compliance with established legal requirements are not specified in paragraph 3 of Article 217 of the Tax Code, and therefore income taxes are already collected from them.
Compensation in labor relations
Based on Article 3 (Part 4) of the Labor Code of the Russian Federation, persons who believe that they have been discriminated against in the world of work have the right to apply to the court for compensation for material damage and compensation for moral damage. Generally speaking, Article 164 (Part 2) of the Labor Code characterizes compensation as a method of reimbursement of costs. But is it legitimate to equate moral and physical suffering with costs? On this basis, we doubt that payments for moral damages are compensation in the generally accepted sense.
Article 237 of the Labor Code establishes:
- moral damage caused to an employee by unlawful actions or inaction of the employer is compensated to the employee in cash in amounts determined by agreement of the parties to the employment contract;
- in the event of a dispute, the fact of causing moral damage to the employee and the amount of compensation for it are determined by the court, regardless of the property damage subject to compensation.
It follows from these provisions that compensation for moral damage can be carried out without going to court - by agreement between the employee and the employer.
However, in cases of dismissal without legal grounds or in violation of the established procedure for dismissal or illegal transfer to another job, it is the court that collects in favor of the employee monetary compensation for moral damage caused to him by these actions. This is stated in Article 394 (Part 9) of the Labor Code.
The court determines the amount of compensation for moral damage based on the specific circumstances of each case - taking into account the volume and nature of moral or physical suffering caused to the employee, the degree of guilt of the employer, other circumstances worthy of attention, as well as the requirements of reasonableness and fairness (clause 63 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated 03/17/2004 No. 2 “On the application by the courts of the Russian Federation of the Labor Code of the Russian Federation”). It is logical to extend this approach to cases of voluntary payment of compensation.
Withholding personal income tax
These organizations are recognized as tax agents and are required to fulfill the duties provided for tax agents, in particular, by Article 226 of the Tax Code.
It should be taken into account that the court in the operative part of the decision may indicate the amount of income to be recovered in favor of an individual, and the amount that must be withheld as tax and transferred to the budget.
In this case, in accordance with paragraph 4 of Article 226 of the Tax Code, tax agents are required to withhold the accrued amount of tax directly from the taxpayer’s income upon actual payment.
If, when making a decision, the courts do not separate the amounts due to an individual and those subject to withholding from the individual, the tax agent organization, when paying an individual, by court decision, income subject to personal income tax, does not have the opportunity to withhold tax from the taxpayer on this income.
In this case, the tax agent is obliged, in accordance with paragraph 5 of Article 226 of the Tax Code, no later than March 1 of the year following the expired tax period in which the relevant circumstances arose, to notify in writing the taxpayer and the tax authority at the place of his registration about the impossibility of withholding tax, about the amounts income from which tax has not been withheld, and the amount of tax not withheld.
In accordance with paragraph 6 of Article 228 of the Tax Code, taxpayers who have received income, information about which is submitted by tax agents to the tax authorities in the manner established, in particular, by paragraph 5 of Article 226 of the Tax Code, pay tax no later than December 1 of the year following the expired tax period, on the basis of a tax payment notice sent by the tax authority.
Moreover, according to subparagraph 1 of paragraph 1 of Article 223 of the Tax Code, when receiving income in cash, the date of actual receipt of income by the taxpayer is determined as the day of payment of income, including the transfer of income to the taxpayer’s bank accounts or, on his behalf, to the accounts of third parties.
Civil compensation
In civil law relations, compensation for moral damage is also carried out in cash (clause 1 of Article 1101 of the Civil Code of the Russian Federation). But its size is determined exclusively by the court (clause 2 of Article 1101 of the Civil Code of the Russian Federation, letter of the Federal Tax Service of Russia dated May 16, 2012 No. ED-4-3/8057). Consequently, if compensation is paid to a citizen by agreement of the parties - for example, in the manner of pre-trial settlement of a dispute (clause 7, part 2, article 131 of the Code of Civil Procedure of the Russian Federation), then formally such an amount does not fall into the category of compensation established by the legislation of the Russian Federation. Take note of this.
How much can an injured citizen expect? Article 1101 (clause 2) of the Civil Code of the Russian Federation explains: the amount of compensation is determined depending on the nature of the physical and moral suffering caused to the victim, as well as the degree of guilt of the harm-doer in cases where guilt is the basis for compensation for harm. When determining the amount of compensation for harm, the requirements of reasonableness and fairness must be taken into account. The nature of physical and moral suffering is assessed by the court, taking into account the actual circumstances in which moral harm was caused and the individual characteristics of the victim.
Please note: moral damage caused to the consumer as a result of violation of his rights by the manufacturer (performer, seller, authorized organization or authorized individual entrepreneur, importer) is compensated according to the rules of Article 15 of the Law of the Russian Federation of 02/07/1992 No. 2300-1 “On the Protection of Consumer Rights”. This article expressly stipulates that the amount of compensation is determined by the court. Resolution of the Plenum of the Supreme Court of the Russian Federation dated June 28, 2012 No. 17 “On the consideration by courts of civil cases in disputes regarding the protection of consumer rights” (clause 45) explains: a sufficient condition for satisfying a claim is the established fact of a violation of consumer rights. Thus, the consumer does not have to specifically prove the presence of suffering. At the same time, the amount of monetary compensation collected for moral damages cannot be made dependent on the cost of the goods (work, service) or the amount of the penalty to be collected.
Who and in what situations can count on compensation for moral damage? Well, for example, a tourist who has suffered from the actions of a travel company (Article 6 of the Federal Law of November 24, 1996 No. 132-FZ “On the Fundamentals of Tourism Activities in the Russian Federation”). The insured person (Article 8 of the Federal Law of July 24, 1998 No. 125-FZ “On compulsory social insurance against industrial accidents and occupational diseases”). A citizen about whom the media has disseminated information that does not correspond to reality (Article 62 of the Law of the Russian Federation of December 27, 1991 No. 2124-1 “On the Mass Media”). Finally, any citizen as a subject of personal data (Article 8 of the Federal Law of July 24, 1998 No. 125-FZ “On compulsory social insurance against industrial accidents and occupational diseases”).
Income tax expenses
In connection with the assignment of compensation, the company causing moral damage bears costs. Do such expenses generate expenses for tax purposes?
This question must be answered in the negative. After all, such costs are generated by a violation of the constitutional rights and freedoms of man and citizen (Chapter 2 of the Constitution of the Russian Federation), that is, they are immoral in nature. Consequently, they do not meet the criteria of paragraph 1 of Article 252 of the Tax Code, although they were incurred in the course of carrying out activities aimed at generating income. This basis is specifically provided for in paragraph 49 of Article 270 of the Tax Code of the Russian Federation.
We emphasize: compensation for moral damage cannot be equated to compensation for damage caused. Consequently, subparagraph 13 of paragraph 1 of Article 265 of the Tax Code of the Russian Federation does not apply to it. This position is presented in letters of the Ministry of Finance of Russia dated March 19, 2010 No. 03-03-06/4/22 and the Federal Tax Service of Russia dated May 16, 2012 No. ED-4-3/8057.
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An employee has the right to demand compensation for moral damage even for delayed wages (clause 63 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated March 17, 2004 No. 2, appeal ruling of the Sverdlovsk Regional Court dated November 22, 2016 in case No. 33-20855/2016).
The fact is that the legislation connects damage with the presence of expenses for the injured party (clause 13 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated June 23, 2015 No. 25 “On the application by courts of certain provisions of Section I of Part One of the Civil Code of the Russian Federation”). In the case of moral damage, such is not seen. Moreover, the legislator specifically stipulates: compensation for moral damage is made regardless of the property damage subject to compensation (part 2 of article 237 of the Labor Code of the Russian Federation, paragraph 3 of article 1099 of the Civil Code of the Russian Federation).
True, the resolution of the Arbitration Court of the East Siberian District dated June 4, 2015 No. F02-1262/2015 in case No. F02-1612/2015 presents the opposite conclusion. The arbitrators found that subclause 13 of clause 1 of Article 265 of the Tax Code of the Russian Federation does not specify what kind of damage is subject to compensation - material or moral, and does not contain a prohibition on including the costs of compensation for moral damage in non-operating expenses. Although this resolution was supported by the ruling of the Supreme Court of the Russian Federation dated August 27, 2015 No. 302-KG15-9847, the latter did not examine the issue of recognition of compensation for moral damage in expenses.
A similar conclusion is presented in the resolution of the Arbitration Court of the Ural District dated July 30, 2015 No. F09-5159/15.
In this regard, let us ask ourselves: is there an official term “moral damage”? Yes. In particular, it is presented in the Law of the Russian Federation dated July 21, 1993 No. 5485-1 “On State Secrets” (Article 7) and in the Decree of the President of the Russian Federation dated June 14, 2012 No. 851 “On the procedure for establishing levels of terrorist danger...” But specific situations, which regulate these sources of law are not typical for the activities of commercial organizations. At the same time, this example shows: you can try to claim a violation of your rights even in doubtful cases. The inconsistency of your position may go unnoticed.
So, on the issue of accounting for compensation in expenses, we are on the side of the Russian Ministry of Finance, and do not share the position of the above-mentioned arbitration courts. But for personal income tax it’s the other way around.
The court's decision
In accordance with the general rules, all payments that were accrued as a result of a court decision in the process of labor disputes must be subject to personal income tax, and a similar rule is prescribed in paragraph 3 of Article 217 of the Tax Code, since in this case even former employers are recognized as tax agents, and are responsible for calculating, withholding and transferring the amount of tax to the state budget.
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In accordance with the official position stated by representatives of the Ministry of Finance, the Tax Service and the Arbitration Court, if the judicial body in the process of making its decision did not separately allocate the amount of tax, then in this case the tax agent has the right not to withhold it from the transferred payment.
In such a situation, the company will need to send a notification to the Tax Service that tax withholding is impossible, and this must be done before January 31 of the next year by filing a declaration in Form 2-NDFL.
Personal income tax
According to the author, the issue of calculating personal income tax on the amount of compensation for moral damage has not been properly studied. Let's try to fill this gap.
Taxable income of an individual is recognized as economic benefit in cash or in kind, taken into account if it is possible to evaluate it and to the extent that such benefit can be assessed (clause 1 of Article 41 of the Tax Code of the Russian Federation). Does compensation for moral damage generate economic benefits? The court answered this question in the negative (clause 7 of the Review of the practice of courts considering cases related to the application of Chapter 23 of the Tax Code of the Russian Federation, approved by the Presidium of the Supreme Court of the Russian Federation on October 21, 2015). The judges did not provide a detailed argument. But let’s think about it: in essence, this compensation is a “payment” for suffering. To classify it as an economic benefit to an individual is immoral. The victim receives a sum of money not due to economic relations with the harm-doer.
Meanwhile, regulatory authorities consider this compensation as income that can be exempt from taxation on the basis of paragraph 3 of Article 217 of the Tax Code of the Russian Federation - as a compensation payment established by the current legislation of the Russian Federation. Officials interpret compensation for moral damage either as compensation for harm caused to health (letters from the Ministry of Finance of Russia dated November 11, 2016 No. 03-04-06/66353, Federal Tax Service of Russia dated March 5, 2018 No. GD-4-11 / [email protected] ), or as payment related to the performance of labor duties (letter of the Ministry of Finance of Russia dated November 11, 2016 No. 03-04-05/66167). At the same time, they invariably emphasize that only compensation ordered by the court is exempt from personal income tax.
We cannot agree with these approaches. Our objections are as follows.
First of all, moral harm is not equivalent to harm to health. Federal Law of November 21, 2011 No. 323-FZ “On the fundamentals of protecting the health of citizens in the Russian Federation” defines health as a state of physical, mental and social well-being of a person, in which there are no diseases, as well as disorders of the functions of organs and systems of the body. The rules for determining the severity of harm caused to human health were approved by Decree of the Government of the Russian Federation dated August 17, 2007 No. 522. Based on the Rules (clauses 1-3), harm to health is understood as a violation of the anatomical integrity and physiological function of human organs and tissues as a result of exposure to physical, chemical, biological and mental environmental factors. Harm caused to health is determined based on the results of a forensic medical examination depending on the degree of its severity (severe harm, moderate harm and minor harm). However, this approach does not apply to claims for compensation for moral damage. However, officials insist on the “medical” nature of “moral” compensation even in relation to payments made in accordance with decisions of the European Court of Human Rights (letter of the Ministry of Finance of Russia dated October 3, 2013 No. 03-04-07/41151, Article 41 of the Convention on protection of human rights and fundamental freedoms).
On the other hand, the position according to which only compensation for moral damage caused to employees is exempt from taxation is discriminatory. It violates the basic principles of the legislation on taxes and fees (clauses 1, 2, article 3 of the Tax Code of the Russian Federation). The degree of suffering does not depend on the circumstances under which it was caused - within the framework of labor or civil law relations.
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In cases where the interests of a citizen require it, intangible benefits belonging to him can be protected, in particular, by the court recognizing the fact of violation of his personal non-property right, publishing a court decision on the violation, as well as by suppressing or prohibiting actions that violate or create a threat of violation personal non-property right or encroaching or creating a threat of encroachment on an intangible benefit (clause 2 of article 150 of the Civil Code of the Russian Federation).
For the same reasons, exemption from personal income tax cannot be made dependent on who exactly awarded the compensation - the court or the employer (even though the latter is permitted by law). Moreover, by resolution of the Federal Antimonopoly Service of the West Siberian District dated June 13, 2006 No. F04-3386/2006 (23325-A27-31), compensation for moral damage paid to the relatives of deceased workers by agreement of the relatives with the employer was exempt from personal income tax.
We noted above that the concept of compensation implies reimbursement of material costs. But in connection with moral damage there are none. As a result, it seems that the term “compensation for moral harm” should be considered as indivisible and integral, without tearing out the concept of “compensation” from it. In our opinion, the problem deserves a legislative settlement or, as a preliminary option, a decision at the level of the Constitutional Court of the Russian Federation. In the meantime, irremovable doubts and ambiguities in tax legislation should be interpreted in favor of the taxpayer and the tax agent, without punishing the latter (Clause 7, Article 3, Article 123 of the Tax Code of the Russian Federation).
Please note: the unregulated taxation of compensation for moral damage allows employers to pay injured employees (based on an agreement of the parties) amounts limited only by the financial capabilities of the company (!). How can tax inspectors not worry?
Personal income tax and insurance premiums
The employee receives compensation outside the scope of employment agreements concluded with the organization. Compensation paid on the basis of a court decision is not subject to personal income tax (clause 3 of article 217 of the Tax Code of the Russian Federation).
What if compensation is paid not on the basis of a court decision, but by agreement between the organization’s administration and the employee? Then the payment cannot be considered as compensation for harm established by law (Article 394 of the Labor Code of the Russian Federation). Therefore, personal income tax will have to be withheld from this amount.
These conclusions are in letters of the Ministry of Finance of Russia dated September 25, 2012 No. 03-04-06/9-288, dated March 26, 2008 No. 03-04-06-01/65, Federal Tax Service of Russia dated October 24, 2013 No. BS-4-11/19074.
There is no need to withhold personal income tax from the amount of compensation for legal costs for an employee reinstated after illegal dismissal. Such payments are not subject to personal income tax (clause 61, article 217 of the Tax Code of the Russian Federation).
If we are talking about compensation for moral damage, then insurance premiums for compulsory pension (medical, social) insurance do not need to be charged in only one case. A person who has suffered moral harm must prove the fact of damage to his health (for example, based on documents from medical institutions). It does not matter whether compensation for moral damage is paid by court decision or by agreement of the parties. In all other cases, insurance premiums must be calculated. The same procedure applies to contributions for insurance against accidents and occupational diseases.
This follows from Article 151 of the Civil Code of the Russian Federation, subparagraph “a” of paragraph 2 of part 1 of Article 9 of the Law of July 24, 2009 No. 212-FZ, subparagraph 2 of paragraph 1 of Article 20.2 of the Law of July 24, 1998 No. 125-FZ.
These conclusions are in letters of the Ministry of Labor of Russia dated February 1, 2013 No. 17-6/3098271-185 and dated October 21, 2011 No. 3701-19, PFR, FSS of Russia dated July 29, 2014 No. NP-30-26/ 9660/17-03-10/08-2786P.
