Russia: Domestic Taxation
Calculation Of The Tax Base
The taxable profit of Russian companies and permanent establishments of foreign companies is defined as gross income received less deductible expenses.
Gross income includes income from sales of goods, works and services, and non-sales income (which can be reduced by expenses related to such income). Taxpayers with monthly sales over 1m roubles must use accrual accounting for tax purposes.
The tax reforms of 2002 introduced an 'ordinary and necessary' test for deductible expenses, a considerable improvement on the detailed and restrictive list of deductible expenses which applied previously. In particular, training and advertising expenses are now deductible, except for certain specific types of advertising.
There are limitations on expenses for insurance of a company's employees, aimed at abusive tax evasion schemes.
Interest paid is deductible subject to arm's length and thin capitalization tests. The debt to equity ratio above which restrictions apply is 12.5:1 for banks and leasing businesses, and 3:1 for other RLEs.
Fixed asset depreciation involves the grouping of assets into ten groups, depending on the type of asset and useful life, and the application of separate depreciation rates to each group. For most groups there is a choice between straight-line and reducing-balance depreciation methods.
There is no controlled foreign company (CFC) legislation in Russia at present. Transfer pricing provisions restrict profits if prices exceed market levels by more than 20%. In practice these provisions are little used due to the difficulty of establishing market price levels.
The Russian government replaced Article 40 of the Tax Code with effect from January 2012 and replaced it with an entirely new section (V1), which deals with all aspects of transfer pricing. The 20% "safe harbour" regulations were also abolished. The new law defines clearly the nature of arm's length related party transactions and increases penalties for failure to adopt this approach to 40%. It also outlines procedures for Advance Pricing Agreements.
The terms have been brought more in line with Organization of Economic Cooperation and Development (OECD) standards with a broadening of definitions of related parties and the inclusion of intellectual property rights as controlled transactions.
Foreign taxes paid by a Russian legal entity are creditable against Russian tax, but may not exceed the amount of tax payable in Russia. Foreign tax on dividends received from foreign sources, however, can be credited against Russian tax on dividends only if such credit relief is provided for by an applicable double tax treaty.