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Russian
Tax Legislation: Value Added Tax VAT, Profits Tax, Assets Tax,
Unified Social Tax, Personal Income Tax in Russia.
Most
of the information below has been provided by the Russian
law firm VISTA Foreign Business Support (www.vfbs.ru).
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.
VISTA
Foreign Business Support provides consulting, law, and accounting
services for organisations and individuals.
Phone: +7 095 933 7822, Fax: +7 095 933 7823
E-mail: info@vfbs.ru
Web: www.vfbs.ru
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