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RUSSIA
Taxation of Nonresident Entities
Corporate Assessments and Payments
Personal Assessments and Payments
The Russian economy is undergoing a period of rapid change as it struggles to adopt free
market principles. Despite the well-publicized difficulties the country has faced in making
the transition, Russia offers a large and rapidly expanding market for both new and existing
goods and services. The potentially huge consumer demand, coupled with the added
incentive of a well-educated, low-cost work force, has led many investors to take a look at
Russia.
Deloitte & Touche, the Deloitte Touche Tohmatsu International member firm in Russia, has
offices in Moscow, Almaty, St. Petersburg, Tashkent, and Vladivostok. In addition to
accounting, auditing, management consulting, tax, and legal services, Deloitte & Touche
offers banking and foreign exchange services, regulatory counseling, privatization
consulting, investigations and valuations, and human resource services.
Auditing Services: Terry Fuller
International Services: William T. Potvin
Management Consulting Services: Alexey Bereznoy
Tax Services: Brian Deaves
Telephone: +7 (095) 956-5000
Telecopier: +7 (095) 956-5001
Forms of Business Organization. Excluding state enterprises, the main types of business
entities in Russia are the open joint stock company, the closed joint stock company, the full
partnership, the mixed partnership, the sole proprietorship, and the representative office of
the foreign enterprise. The joint stock company (open or closed) and mixed partnership are
the only forms that constitute separate legal entities. The closed joint stock company is
emerging as the form preferred by foreign investors. Two or more stockholders are
required for the proper formation of a joint stock company.
Exchange Controls. The ruble (R) is not fully convertible, but a degree of internal
convertibility has been introduced. Residents and nonresidents are permitted to hold hard
currency and ruble accounts with authorized banks and to import and exchange currency in
accordance with the procedures of the Central Bank of the Russian Federation.
Local Participation or Management Requirements. Foreign investors may own 100% of
an enterprise, and the personnel of a company may be made up entirely of foreign
individuals. Typically, up to five foreign employees of an accredited representation office
may be personally accredited.
Investment Incentives. A deduction from taxable profits is allowed for 30% of capital
expenditure on environmental protection measures. Businesses that hire a prescribed
proportion of retired and disabled persons are taxed at half the normal rate. Social
expenditure of various kinds also qualifies for a tax deduction.
Dividends reinvested by individuals may be deducted from taxable income if they are used
by the company concerned to improve technology, increase production, or improve
research and development.
Enterprises whose work force does not exceed 200 in the industrial and construction
sectors, 100 in the case of those engaged in scientific work, 50 in other manufacturing
sectors, and 15 in the nonindustrial and retail sectors may claim exemption for their profits
to the extent that they are used to develop new technology or improve production. Profits
derived by such small enterprises involved in producing and processing agricultural
products, consumer goods, and construction materials are exempt from tax for two years,
provided that such profits constitute more than 70% of total profits. In the third and fourth
years, these businesses will pay profit tax at the rates of 25% and 50%, respectively, if the
proceeds from the enumerated types of activities constitute over 90% of the total profits.
Manufacturing enterprises, registered after 1 January 1994, in which foreign participants
have invested a minimum of US$10 million and own at least 30% of the equity, enjoy a
four-year tax holiday. The enterprises pay no tax in the first two years, 25% of the tax due
in the third year, and 50% of the tax due in the fourth year. If the enterprise ceases its
activities within five years of its registration, the tax forgiven will be clawed back.
Assets imported by a foreign investor into Russia to be used as the investor's contribution
to a company's capital can be brought in free of customs duty and import value added tax
(VAT), provided that the contribution is made within one year of the company's registration
in the case of VAT.
The proceeds of a share issue that are invested in capital investments can be written off
against profits for tax purposes. In addition, repayments of bank loans used to make capital
investments can be written off against taxable profits.
When the acquisition of assets imported into Russia is financed by loans granted by the
governments of foreign states or by international financial agencies, the assets can be
brought into the country free of import VAT (unless they are subject to excise duty). The tax
authorities consider loans from nonfinancial agencies to be subject to VAT.
Products imported by an enterprise with foreign participation "to meet its own needs" can
be brought in free of customs duty. Products imported for the owner's needs are assets
(materials, components, and equipment) incorporated in the machinery directly employed
in the manufacturing process.
Tax incentives may not decrease the amount of tax payable by more than 50%.
Companies registered under Russian law are regarded as resident and are taxable on their
worldwide profits.
Profit Tax Rates. Profit tax, which is the corporate income tax levied in Russia, is
charged at the standard rate of 35%, of which 22% is payable to regional authorities. The
regional contribution can be increased to 25%, as in Moscow, and result in an overall tax
rate of 38%. Different rates apply to the taxable income of particular sectors (for example,
banking or insurance).
Taxable Income. Taxable income is gross income (excluding some types) less prime
costs, value added tax, excise duties, and allowable deductions. Enterprises (including
those having suffered losses) whose actual expenditure for the payment of wages to their
employees exceeds the standard rate as prescribed by the government will pay tax on such
excess wages, based on the profit tax rate.
Dividends and interest. Dividends and interest are excluded from the tax base for profit
tax but are subject to final withholding taxes.
Inventory valuation. The tax law is unclear as to inventory valuation. Recent legislation
has indicated that only a weighted average cost method is appropriate. Clarification as to
the use of the last-in, first-out method or first-in, first-out method is expected.
Foreign-source income. Foreign income taxes may be credited against Russian profit tax
payable, but the credit is limited to the amount of profit tax payable on the foreign income.
Capital gains. Capital gains on business assets constitute ordinary business income subject
to profit tax.
Exchange gains and losses. Exchange gains and losses are not included in computations of
taxable income.
Deductions. Deductions are allowed in general for the costs of production and obtaining
income.
Depreciation. The old Soviet regulations with regard to depreciation are still valid in
Russia. They prescribe using the straight-line method. To promote new technology and
capital investment, accelerated depreciation may be charged with the specific approval of
the tax authorities.
As of 1 January 1995, Russian legal entities had to adjust the balance sheet value of fixed
assets to their fair market values. Accrued depreciation is subject to revaluation using the
same coefficients.
Interest. Interest on credits from suppliers is deductible, but loan interest is generally not
deductible.
Reserves and provisions. Companies may make provisions for bad and doubtful debts.
They may also deduct sums transferred to reserves earmarked for social needs, but reserve
funds must not exceed 25% of the charter fund of the company or 50% of taxable profit.
Tax Treatment of Losses. Losses incurred in the course of general business activities
may be carried forward in equal amounts for a maximum of five years, but reserved funds
must be fully used first. Losses and a number of other concessions must not reduce taxable
income by more than 50% in aggregate.
Taxation of Nonresident Entities
Nonresident entities with permanent establishments in Russia pay profit tax at the same
rates as resident entities, but on Russian-source profits only. Nonresident concerns unable
to compute such profits may pay on the basis of an estimate by the tax authorities that
assumes a 25% margin of profitability.
Nonresident entities operating a permanent establishment usually pay tax once a year. Final
withholding taxes are levied on a number of types of payments to nonresidents. Click for
more information about Withholding Taxes.
There are no provisions regarding groups of companies. Separate returns must be filed, and
no provisions exist for setting off losses. The normal provisions apply to inter-company
dividends. There are no provisions regarding thin capitalization and no specific provisions
on transfer pricing, other than a requirement that all transactions be made at arm's-length
prices.
Representative Office or Subsidiary? The rules for computing income and deductions are
broadly the same for representative offices as they are for subsidiaries, although a
representative office may have to pay tax on the basis of the estimate referred to at 6.03.
Rates of tax are the same for representative offices and subsidiaries.
Dividends paid abroad by a subsidiary are subject to withholding tax. In contrast,
remittances paid abroad by representative offices are not subject to withholding tax.
Corporate Assessments and Payments
The tax year is the calendar year. Resident companies with foreign participation must file
final returns by 15 March of the year following the tax year. Other rules apply to resident
companies without foreign participation. Nonresident entities with a permanent
establishment in Russia must file by 15 April. The returns must be audited by an auditing
firm as well.
Companies with foreign participation must make advance payments equal to one-twelfth of
their estimated annual tax by the fifteenth day of every month. Other advance payment rules
apply to wholly Russian-owned entities.
If any balance of tax is due when a company files its final return, it has ten days in which to
make a final payment. Interest is charged on late payments. Refunds also qualify for interest
payments.
Individuals resident in Russia are subject to personal income tax on their worldwide
income. Nonresidents are subject to tax on Russian-source income only (income paid by a
Russian entity). Individuals are considered resident if they stay in Russia for 183 days or
more in a calendar year.
Treatment of Families. Married couples are assessed separately.
Personal Income Tax Rates. Final withholding taxes apply to some payments to
nonresidents.
Taxable Income. Taxable income comprises gross income from all sources, less exempt
income and allowable deductions.
Income from employment. Employment income includes salaries, wages, and other
remuneration, including almost all payments in kind. Tax is also charged on casual earnings
and earnings from secondary employment.
Income from private enterprise. Self-employed individuals are taxed on the difference
between gross income and expenses incurred in conducting business activities. Losses
cannot be carried forward. The income of a private company wholly owned by one
individual is considered to be income of the individual.
Capital gains. Sums derived from the sale of assets other than business assets are exempt
up to specified limits. Gains on business assets are treated as taxable income.
Other sources. Special rules apply to income derived from private agricultural activity
and copyright and patent royalties.
Exempt income. Exempt income includes most social security benefits, pensions,
compensation for injuries sustained at work, alimony, insurance proceeds, student grants,
inheritances and gifts below a specified level, redundancy pay, and interest and gains from
deposits in state banks and state savings schemes.
Deductions and Reliefs. Individuals are entitled to a deduction equal to the officially
determined minimum wage. Some categories of individuals are entitled to higher
deductions. A further deduction is available to both parents for the cost of maintaining each
child under eighteen years of age, each child from eighteen to twenty-four years of age
pursuing higher education, and each dependent.
Deductions can also be made for social security contributions and unreimbursed expenses
incurred on business trips.
Personal Assessments and Payments
When a Russian legal entity is the employer, it withholds at sources personal income tax
from employment income and accounts for the withholding.
Residents employed by Russian concerns and having no other source of income do not have
to file returns. Other individuals must file returns by 1 April in the year following the tax
year concerned. Individuals engaged in private enterprise must make advance payments
based on the previous year's income by 15 June, 15 August, and 15 November of the tax
year. When the return filed shows a further amount of tax owing, it must be paid by the
following 1 June.
Foreigners expecting to become resident must file a preliminary tax return within one
month after arriving in Russia. They are required to pay 75% of the tax on their estimated
income in three installments on 15 May, 15 August, and 15 November during the tax year.
Final returns must be filed by 1 April in the following year and include an estimate of
income for that year. Any balance of tax arising on submission of the final return must be
paid within one month of receipt of an order to pay. A resident intending to leave the
country permanently must file a return one month before departure.
Basic Rates. Dividends paid to resident and nonresident companies are subject to a final
withholding tax at 15%. Dividends paid to resident individuals are subject to income tax at
the appropriate personal income tax rate (deducted at source), but final withholding tax at a
flat 20% rate applies to dividends paid to nonresident individuals.
Taxable interest payments are subject to withholding at the same rates as dividends.
Final withholding tax at the rate of 20% is levied on all payments abroad of royalties and
other income from copyrights, patents, and lease payments. The 20% withholding applies
to all income paid to nonresident individuals, with the exception of income from
employment, casual earnings, and secondary employment income. Exemption may be
granted on the grounds of reciprocity.
Rates Under Double Tax Treaties. Russia honors the treaties concluded by the former
Soviet Union. Among these treaties are those concluded by the Council for Mutual
Economic Assistance (COMECON). Signatories of these treaties also included Bulgaria,
the former Czechoslovakia, Hungary, Mongolia, Poland, and Romania, but a new treaty has
been signed with Poland that supersedes the COMECON treaty. Furthermore, Hungary no
longer recognizes the COMECON treaties, nor do some of the other states formed out of the
former Soviet Union -- in particular, the Baltic states. Click to see table of treaties in force
with other countries.
Value Added Tax. Value added tax (VAT) is charged on the supply of goods and services
in the course of a business. The tax is payable by all corporate businesses and all
individual businesses with turnover in excess of R 500,000. Effective 1 February 1993,
VAT is charged on imports (with exceptions) into Russia.
VAT is usually charged on the whole consideration received for the sale of goods or
provisions of services, excluding the VAT itself. In the case of imports, the tax base is the
customs value, plus customs duty and excise duty when applicable.
Input tax is deducted from output tax, and the balance is generally accounted for by the
fifteenth and twenty-fifth of the current month (and the fifth of the following month, as well,
for payments that average more than R 3 million per month). In the case of imports, VAT is
accounted for at the same time as customs duties.
Certain enterprises are allowed to recover the full amount of VAT paid on fixed assets
acquired for the business ratably over a six-month period.
The standard rate of VAT is 20%. A reduced rate of 10% applies to certain foodstuffs not
subject to excise duty and to children's items designated by the government. A special tax
of 3% is charged in addition to the general VAT rate. The effective rate is therefore 23% of
the tax exclusive value of the item (a rate of 13% is applicable to foodstuffs and designated
children's items).
Exempt services include financial and insurance services, gambling, education provided by
state schools and universities, and funeral services. Individuals engaged in business as sole
traders are exempt from VAT.
Social Security Contributions. Employers and employees must contribute to the state
pension fund, the rates being 28% and 1%, respectively, and the tax base being the gross
remuneration paid. Employers account for the contributions. The self-employed must
contribute 5% of their income.
Employers must pay a general social security contribution equal to 5.4% of remuneration.
They must also pay 2% of remuneration to the state employment fund.
Effective 1 January 1993, employers are liable for a medical insurance payment equal to
3.6% of remuneration.
All employer's contributions are deductible for tax purposes.
Inheritance and Gift Taxes. Inheritance tax is charged on resident and nonresident
individuals who inherit property located in Russia. Property includes real estate, vehicles,
works of art, precious metals, and securities. Separate rates are prescribed for each of
three categories of heirs, and the levels to which they are applied are based on the state
monthly minimum wage. The rates vary depending on the relationship between the
deceased and the heir. The spouse, children, and parents are taxed at rates between 5% and
15%. Siblings and grandparents are taxed at rates between 10% and 30%. Other heirs are
taxed at rates between 20% and 40%.
The gift tax rules are similar to those applied to inheritance tax. The tax levels are also
based on the state monthly minimum wage, and the rates vary according to the relationship
between the donor and the donee. Children and parents are taxed at rates between 3% and
15%, and other donees are taxed at rates between 10% and 40%.
Personal Property Tax. Personal property tax is a local tax that has not been implemented
in all regions. It applies to individuals who own homes and other buildings and various
forms of transportation, excluding private automobiles, motorcycles, and trucks. Homes
and other buildings are generally charged at the rate of 0.1% of their values for inventory
or insurance purposes. Vehicles are charged at fairly low rates.
Business Property Tax. All companies must pay business property tax. An average value
of the fixed and current assets of an enterprise is used, but various exemptions and
deductions apply. Rates are fixed by the regional governments and cannot exceed 2%.
Transportation Taxes. A number of taxes have been established to provide for the state
road fund. Most Russian manufacturing enterprises must pay 0.8% of the volume of
turnover (excluding VAT) each month. The rate for traders is 0.6%.
Owners of motor vehicles must pay tax on each of their vehicles, the rate depending on the
type of vehicle and size of the engine. Tax of 20% per vehicle is also payable on vehicles
purchased.
Land Tax. Owners and users of land must pay a land tax calculated on a prescribed price.
The rate is fixed in rubles and is insignificant for large concerns.
Advertising Tax. Companies and individuals that advertise their goods or services are
subject to advertising tax. The rate is set by local authorities and must not exceed 5% of the
cost of the advertisement.
Education Tax. All Russian legal entities operating in Moscow and having revenues from
commercial activities will be subject to a special education tax. The rate of tax is 1% of
total payroll and is to be remitted on a monthly basis.
Excise Duties. Excise duties are payable on various types of products based on the value
of duty applicable to the factory gate prices. The specific rate will depend on the type of
product.
This outlines the law as of 28 February 1995; however, a number of changes to the Russian
tax legislation were recently proposed. These proposals await enactment. While the
proposals would amend the current law, they would not affect the fundamentals of the
Russian tax system. Readers should contact the Moscow office of Deloitte & Touche to
ensure that they have the most recent information.
Major proposed changes are:
Profit Tax. The rate of profit tax at the federal level would decrease from 38% to 35%.
Regional authorities would have the right to fix a rate not to exceed 22%. Enterprises with
foreign investments would be required to make advance tax payments twice a month.
Value Added Tax. The VAT exemption applicable to certain imported foodstuffs would
be eliminated. A VAT rate of 20% would apply to certain imported foods.
A VAT recharge provision or similar mechanism has been proposed for certain payments
made from Russian sources to foreign service providers.
The special tax rate may be reduced from 3% to 1.5% of taxable turnover.
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