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Establishing business in Russia. Tax Aspects

Taxation of the Russian legal entity depends on the specific tax system which applies to the organization.

Russian Legal Entities

Taxation of the Russian legal entity depends on the specific tax system which applies to the organization.

The most common systems of taxation in Russia are:

·        Generaltaxationsystem,

·        Simplified taxationsystem,

·        Imputed taxationsystem.

Regardless of the type of taxation system, organizations are obligated to hand over their payroll registers to the Social Insurance Fund and pay the appropriate taxes.

All companies work according to the general tax system, unless they have filed an application to use the simplified taxation system.The main taxes payable under the general tax system are:

·        Value Added Tax (VAT).

·        Tax on the organization’s profits.

·        Property tax.

·        The tax on personal income (PIT).

Apart from these major taxes, an organization may also have to pay excise taxes, motor vehicle taxes, taxes on gambling, taxes on mineral extraction, and others depending on their specific business activities.

Many organizations prefer to use the simplified tax system (STS).When using STS, income tax and property tax are replaced by a single unified tax payment.Organizations using STS are not obligated to pay VAT.Two tax rates are applied for this system depending on the object of taxation:

·        6% - objectof taxation - income;

·        15% - object of taxation - income minus expenses, a list of which is specified in Article 346.16 of the Tax Code.

There are restrictions on using this system depending on the type of business activity, volume of business, organizational and legal aspects.

Another system of taxation used is the unified tax on imputed income (UTII) for individual activities. This mode can be used by organizations providing services listed in Article346.26 of the Tax Code and by a decision of a territorial subject of the Russian Federation where is this activity takes place.The tax base for the single tax is recognized as the amount of imputed income, calculated as the product of the benchmark return for the tax period, and the amount of the physical indicator which characterizes the type of activity.Actual indicators and the benchmark return can be obtained from the tables in Article346.29 of the Tax Code.The tax rate for the system is 15% of imputed income.

For foreign organizations acting as foreign investors, it is important to know that STS and UTII do not apply to Russian legal entities if their share in the registered capital of other legal entities (including foreign) is more than 25%.

It is also important to pay attention to taxes on income of foreign legal entities that is not related to their business activities:

·        dividends;

·        interest on debt;

·        income from use of intellectual property rights in the Russian Federation;

·        income from sales of real estate located in the Russian Federation;

·        other income listed in Article 309 of the Tax Code.

Branch and Representative Offices

According to Russian legislation pertaining to taxation of rep offices, affiliates, branches, bureaus, offices, agencies, and any other economically autonomous subdivisions or other places a foreign legal entity conducts business (including construction sites) are combined into one group and referred to as "permanent establishments."If there is a double taxation treaty between Russia and the country where the foreign legal entity is permanently located, then the criteria which establishes the absence or presence of a permanent establishment is determined based on the conditions of such an agreement, since the norms of international agreements concerning taxation issues in the Russian Federation shall have precedence over domestic law.

The permanent establishment shall pay all taxes in the same manner as that of a Russian legal entity, with the exception of particular points stipulated by the Russian Tax Code and the conditions of international agreements.Therefore, permanent establishments are taxed on:

·        Income earned by a foreign organization as a result of doing business in Russia through its permanent establishment, reduced by the amount of expenditures produced by this permanent establishment;

·        Income from a foreign organization from owning, using, and/or disposing of property belonging to the permanent establishment of said organization in Russia, deducted by the costs associated with obtaining such proceeds;

·        Other income from sources in the Russian Federation as listed in Article309 of the Tax Code relating to the permanent establishment.

A general procedure for recognizing income and expenses applies to permanent establishments.They are required to keep tax records in the manner prescribed by Russia’s Tax Code: to produce analyses of tax accounting registers and calculations of their tax base.One of the mandatory requirements for the permanent establishment in keeping tax records is the presence of supporting primary documents for all business transactions: bills, invoices, receipts and certificates confirming the information transmitted from the head office of the foreign organization.The legislation does not make it mandatory for accounting records to be kept in its Russian conception.

The benefits of performing the activities through a permanent establishment include:

·        Tax assessments are handed in no more than once per quarter;

·        Depreciation can be calculated by the rules of the country that the foreign legal entity is registered in;

·        Bank accounts can be opened in other countries without the permission of the Russian Central Bank, as in the case of a Russian legal entity ;

·        Permanent establishments (with the exception of a few countries) are not obligated to pay VAT when renting residential or office spaces, etc.

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