Russian Tax Legislation
Tax issues are important part of activity of foreign companies and their Representative and Branch offices on the territory of the Russian Federation. The opinion that Representative Office has no duty to pay taxes and submit accounting reports if it doesn't conduct business activity in Russia is a common delusion. Every Representative Office whether it conducts commercial activity or not should be registered with Tax Authorities within 30 days after its accreditation and should submit accounting reports.
Tax registration is a process separate to accreditation. The same applies to the foreign companies if they have a branch, an office or any subdivision, or real estate on the territory of the Russian Federation. Thus, registration at Tax authorities does not depend on whether an organization has taxable income or not. One should never forget that a Representative Office or a Branch is not a separate legal entity and that the Head company may be held liable for the obligations of its Representative Offices or Branches in Russia.
Value Added Tax (VAT) in Russia
According to the Tax Code of the Russian Federation VAT is to be paid by Russian legal entities, including those with foreign investments, foreign legal entities and legal entities involved in import-export transactions.
Russian VAT legislation provides that turnovers from the sale of goods, works and services in Russia, and goods imported to Russia are to be included in the tax base for VAT purposes.
Rates of VAT in Russia are the following - 0%, 10% and 18%.
The general tax rate is 18%. Tax rate of 10% applies to a wide range of food products, goods for children, periodical press and some medical goods.
Tax rate of 0% is a kind of a tax benefit, and the right to its application has to be proved by certain documents. The tax rate of 0% applies, for example, for exported goods, technological equipment imported.
There are certain kinds of activity that are exempt from VAT, e.g. insurance, banking operations.
There are also some tax exemptions and tax benefits concerning activity of foreign organizations and RepOffices on the territory of the Russian Federation.
Lease of premises by foreign citizens and foreign organizations that have accreditation on the territory of the Russian Federation is exempt from VAT on the reciprocity base, provided that all necessary requirements of the tax legislation are met.
Foreign organizations and RepOffices may also have abatement of VAT assessment even conducting commercial activity but keeping in mind certain legislative conditions and practical issues.
As for foreign legal entities that are not registered with Tax Authorities, VAT payments for sale of goods, works and services by these organizations shall be withheld by tax agents.
Generally speaking, VAT returns are required to be filed and remittances (payments of VAT) paid no later than the 20th day of the month which is the tax period for VAT.
Responsibility for the timely submission of VAT returns and remittances (payments of VAT) lies entirely on the taxpayer.
Small businesses (Russian companies, not foreign RepOffices) can apply for a "simplied accounting system" at the local tax office and, thus, become exempt from paying VAT if their turnover does not exceed a certain amount per annum.
Profits Tax in Russia
According to the current Russian legislation the taxpayers of profits tax are Russian organizations and foreign organizations that conduct their activity through so-called "permanent establishment" and receive profits on the territory of the Russian Federation.
It is very important to know that a Representative Office in its usual meaning is not the same as "permanent establishment" in the meaning of the Tax Code.
For the purposes of profits tax "permanent establishment" is defined as a branch, a Representative Office, a division, a bureau, an office, an agency or another separate subdivision or place of regular activity of a foreign organization on the territory of the Russian Federation. This activity may be connected with rendering of services and performance of other kinds of activity involved in the receipt of income on the territory of the Russian Federation. However, preparatory and ancillary (subsidiary) activity of a foreign legal entity doesn't establish "permanent establishment" on the territory of the Russian Federation.
Rates for profits tax in Russia are fixed in the following range:
24% is a general tax rate, 20% tax rate applies for income from foreign organizations' activity that does not establish "permanent establishment" on the territory of the Russian Federation,
15% tax rate applies if a foreign organization has profits in the form of dividends if it takes participation in a Russian legal entity, 10% tax rate applies for the income from use, maintenance and lease of ship, craft, planes and other means of transport in international carriage.
For taking advantageous and legally acceptable decision of profits tax payment for a foreign organization (or its Representative office), the following criteria should be taken into account: the kind of activity of a foreign legal entity, its duration, application of double tax treaties.
Foreign legal entities that conduct their activity on the territory of the Russian Federation should distinguish two meanings that may apply to them in accordance with the Tax Code: "source of incomes" and "source of payment". If a foreign legal entity is not registered with Tax Authorities, but has the "source of payment" on the territory of the Russian Federation, its tax agent has the duty to pay tax from the "source of payment".
If the state where a foreign legal entity is incorporated has a double tax treaty with the Russian Federation, its provisions may apply in two ways:
1. A foreign legal entity that is not registered with Tax Authorities may obtain (seek for) preliminary exemption from taxation upon condition that this legal entity submits the document confirming its permanent place of business and payment of taxes on the territory of the state where it is incorporated.
2. The second way is "tax refund". In this regard a foreign legal entity should submit to Tax Authorities the following documents:
• a claim (application) to Tax Authorities for tax refund
• a document confirming a permanent place of business of a foreign legal entity in the state of its incorporation that has double tax treaty with the Russian Federation
• a copy of a contract (or other document) according to which a foreign legal entity received income
• copy of payment documents confirming payment of taxes to the budget of the Russian Federation
According to the Tax Code refund of a tax sum is to be made in one month from the day of submission of all necessary documents to tax authorities.
Assets Tax in Russia
Assets tax is one of the most important among the regional taxes. If a Representative Office, or a foreign organization, or its branch, or subdivision has the assets on the territory of the Russian Federation, it should pay assets tax.
The legislative body of each region of the Russian Federation determines (fixes) the final size of assets tax rate, but the latter can't exceed 2% of the tax base (which equals the annual average value of the assets).
From January, 1, 2004 a new chapter to Tax Code that governs assets tax came into force. The following main provisions of this chapter should be mentioned:
1. The maximum size of assets tax rate will not exceed 2.2%
2. Representative Offices that don’t conduct commercial activity, i.e. not create “permanent establishment” on the territory of the Russian Federation, will not pay assets tax on the assets/property other than real estate that it owns.
Unified Social Tax
Unified Social Tax (UST) represents a social tax package that every employer has to pay to state funds. UST consists of contributions to the Pension Fund, Social Security Fund and Obligatory Medical Insurance Fund. The total rate of UST is 35.6%.
The somewhat high rate of 35.6 % can be reduced quite considerably. The Tax Code of the Russian Federation provides for the so called regression scale, enabling a reduction of the 35.6% rate depending on employee's total earnings. The "the-higher-the-wage - the-less-is-the-rate" rule is applied.
Until January, 1, 2003 remuneration and benefits paid to foreign citizens did not generate a UST liability, provided that the foreigner concerned was unable to benefit from the funds either by law or contract. Starting from January 1, 2003 employers of foreign citizens are subject to UST on all remunerations and benefits paid to such foreign citizens. These changes have risen the issues of double taxation with respect to UST. Double taxation is generally avoided by the conclusion of social security agreements (so called “totalization agreements”). However, Russia doesn't have any of such agreements signed. The only consolation at this time is that the rate of UST in Russia is insignificant in comparison with the rates applicable in many other countries.
There are different ways of avoiding UST liability, one of the most popular one being the outsourcing of services (so called "secondment") agreements. However, in this regard other issues may arise: on the one hand, VAT should be taken into account, but on the other hand, the Tax Code allows the deduction of expenses on services for profit-tax purposes.
There may be many peculiarities in every situation, thus the professional advice taking into consideration all advantages and disadvantages is recommended.
Personal Income Tax
The taxpayers of personal income tax are individuals - residents of the Russian Federation and individuals - non-residents of the Russian Federation who receive income from the sources on the territory of the Russian Federation.
A foreign citizen is a tax resident of the Russian Federation if he/she resides on the territory of the Russian Federation not less than 183 days of the calendar year.
The tax rates for personal income tax are the following: 13% - on income received by tax residents, 30% - on income received by tax non-residents on the territory of the Russian Federation, 35% - on certain kinds of income, and 6% - on income in the form of dividends.
An individual who is a non-resident of the Russian Federation may be exempt from taxation by Russian tax authorities, provided that he/she introduces (forwards) to Russian tax authorities an official confirmation that he/she is a resident of the state that has double taxation treaty with the Russian Federation.
It is also important to note that if the organization pays for the lease of apartments for its foreign employee, the latter shall pay personal income tax of 13% or 30% tax rate depending on the period of time he/she resides on the territory of the Russian Federation.