| Liability
To Corporate Tax In Russia
Profits tax is levied on Russian legal entities and foreign legal
entities that carry on business activity in Russia
through permanent establishments and/or receive income
from sources in Russia.
Russian Legal Entities (which would include business forms incorporated
by foreign owners such as the Joint Stock
Company or the Limited Liability
Company) are taxed on their worldwide income.
There is limited consolidation or group relief for
tax purposes; each company within a group is a separate
taxpayer.
A permanent establishment of a foreign legal entity
in Russia - typically meaning a Representative Office
but including a branch, division, bureau, office,
agency or any other economically autonomous subdivision
- is taxed on Russian-source income, which includes
income received by the permanent establishment from
whatever source.
A PE is deemed to be formed from the moment when entrepreneurial
activities begin to be regularly carried out. Certain
activities do not lead to the creation of a PE, including
those of a preparatory and auxiliary nature, the possession
of securities, share interests and other assets in
Russia, the mere conclusion of a simple partnership
agreement to be carried out in Russia, the secondment
of personnel to work in Russia, and the export and
import of goods.
Tax
Rates
The
rate of corporate profits tax in Russia is currently
20% (reduced from 24% in 2008). Of this amount, 2%
is payable to the central government, and the remainder
is payable to the regional government. Regional governments
have the power to reduce the regional element by up
to 4%.
Capital
gains are usually taxed at the corporate profits tax
rate of 20%.
There
is no branch remittance tax, but there are withholding
taxes as follows:
- Dividends 9% (15% if either the payor or recipient of the dividends
is a foreign legal entity);
- Interest: 0% on domestic payments; and 20% on payments to non-treaty
countries.
- Freight expenses 10%, but only if the payor does not have a Permanent
Establishment in Russia;
- Royalties from patents, know-how, etc. 20% (for payments to non-treaty
countires; exempt for domestic payments);
- Payments of other Russian source income to foreign companies 20%
(ditto)
From
1st January 2007 there is unlimited carry-forward
of prior-year losses from the previous 10 years, and
a FIFO basis is applied; there is no carry-back. Until
2006, only 30% of current year profits could be sheltered
with prior year losses.
There
is no tax credit with the domestic 9% dividend tax,
but if a Russian legal entity pays the dividend onwards
to its own investors, this is untaxed. Thus an RLE
deducts dividends received from dividends paid out
before calculating tax payable on the balance.
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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 has approved a draft law on transfer
pricing ready for debate in the Duma in early 2010.
The proposed 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.
In the first year,
the minimum level of controlled transactions, which
must be reported to the tax authorities, will be RUB100m
(USD3.5m), but five years on, the limit will reduce
to RUB10m.
Article 40 of the
Tax Code, which sets current pricing guidelines, would
be deleted and replaced by an entirely new section
(V1) on all aspects of transfer pricing. Russia's
20% "safe harbor" regulations would also
be abolished.
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.
The new transfer
pricing rules are scheduled for introduction in January
2011.
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.
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Capital
Gains Tax
Capital
gains on the disposal of securities are subject to
profits tax at 20% (reduced from 24% in 2008). Capital
losses are available for deduction and carry forward
against gains on the same category of securities (ie
quoted or unquoted).
Capital
gains are computed as gross proceeds less net book
value (for depreciable assets) or acquisition cost
(for other assets). Incidental costs of disposal also
are deductible. Capital losses on the disposal of
depreciable property are deductible with the deduction
allocated evenly over the residual useful life of
the property. If the expenses related to such income
are not recognized as deductible, tax of 20% is applied
to gross proceeds.
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Reporting
And Payment Of Tax
Taxpayers must submit quarterly tax returns within 28 days of the
end of a quarter, and annual tax returns by 28th March
of the following year. Russian companies with offices
in more than one tax district have to register a separate
subdivision and file separate tax returns in each
district. They must also allocate taxable profits
between the head office and the “separate subdivisions”
in different regions. The apportionment should be
based on net book value of fixed assets or the number
of employees on the payroll.
Profits
tax can be paid on either a monthly or quarterly basis.
If a monthly basis is used, the profits tax is paid
28 days after the end of the month based on actual
profit. Quarterly payments are due 28 days after the
end of the quarter based on actual profit, however,
monthly advance payments which are due on the 28th
of each month of the quarter and are equal to one-third
of the total advance payments for the preceding quarter
are still required.
Certain
types of taxpayers, including PEs of foreign legal
entities, are exempt from the obligation to make monthly
advance payments within each quarter and, hence, make
quarterly tax payments only.
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Social
Security Contributions
Some
social security contributions are combined in the
'unified social tax' which is payable to the Federal
budget, the Social Insurance Fund and Medical Insurance
Fund.
Payments
are made by the employer according to the following
scale of annual payments: 26% on the first 280,000
roubles; then for income of 280,001–600,000 roubles,
the tax rate is 72,800 roubles plus 10% of the amount
of income exceeding 280,000 roubles. For income in
excess of 600,000 roubles, the tax rate is 104,800
roubles plus 2% of the income exceeding 600,000 roubles.
Part
of the Federal portion of the unified social tax is
paid as pension insurance to the Pension Fund.
In
addition, there are mandatory contributions for injury
and professional illness which vary according to the
nature of an employment between 0.2% of payroll and
8.5% of payroll.
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Other Significant Taxes
Value Added Tax (VAT)
All types of organisation are subject to VAT, and
it applies to sales of goods and services in the territory
of Russia, certain types of internal transfer and
expense, and the importation of goods and services
into the customs territory of Russia. Registration
for VAT purposes is automatically a part of tax registration
as such.
VAT is levied at a general rate of 18% on taxable supplies, which
include the majority of domestic sales of goods and
services. There is a reduced rate of 10% for certain
basic food products, children’s goods, certain medical
products, medicines, drugs, and newspapers and magazines,
including services related to their production.
Exempt supplies include the provision of financial, insurance, educational,
cultural, or medical services, and the provision of
certain medical equipment, prosthetics, and facilities
for disabled persons. There is no right to offset
input VAT on such supplies. Exemptions from import
VAT are few but include specific technological equipment
and spare parts contributed to the charter capital
of Russian entities.
VAT due to the government is calculated as the difference between
VAT collected from customers for goods, works or services
sold, and VAT paid to suppliers. VAT paid to suppliers
is generally recoverable as long as the underlying
costs relate to business activity of the company.
VAT refunds are made only to tax registered persons
making taxable supplies in Russia, and in practice
obtaining refunds of input VAT is extremely time-consuming
if possible at all.
Taxpayers with aggregate revenue over 2m roubles in the preceding
three-month period are required to pay VAT and file
VAT returns on a monthly basis (by the 20th of the
following month); otherwise, VAT accounting and payment
is quarterly.
Assets Tax
The assets tax is levied by local authorities on property belonging
to Russian legal entities and representative offices
of foreign legal entities. The tax is based on the
net book value of fixed assets, intangible assets
and deferred expenses incurred as of the balance sheet
date.
The maximum permitted rate since 2004 has been 2.2% annually, charged
by regional governments.The tax is paid quarterly
based on current balance sheet values.
Excluded assets include final products, stocks, raw materials, goods,
and inventories, monetary assets, securities, social
and cultural assets, environmental protection assets,
agricultural equipment, pipelines, electricity lines,
and land. Prepaid rent is specifically included in
the tax base.
Advertising Tax
Advertising tax is levied at 5% all direct and indirect advertising
expenses, excluding VAT. Tax is paid in full to the
local budgets. Local authorities may decrease the
tax rate but in Moscow and St. Petersburg, the maximum
rate of 5% applies. Advertising tax is deductible
for profits tax purposes.
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