37392-main

Introductory Business Guide: Russia’s Legal Overview

Nikolay Freytak

Freytak & Sons Law Office

09.08.22 Download PDF


Legal Overview

Executive Summary

The Russian legal system still is in the process of continuous transformation since the USSR’s collapse 30 years ago. In recent years it has become quite modern with the adoption of the best business practices from English law and the rest of the world. The rate of change and complexity does, however, mean that those deciding to do business in Russia find it is beneficial to have a local advisor to assist with compliance and to reduce costs and the administrative burden.

During 2020-2021 Covid-years, the Russian legal system was updated to support new reality of remote work (“udalenka”), to protect of internal IT market and to provide social benefits to Russian people.

Registered Companies and Partnerships

The types of companies in Russia are similar to English law. You can choose among branches of your parent company, partnerships, limited liability companies (public or private) or individuals can register as individual entrepreneurs.

Each type of companies has a number of tax systems applicable to it with various tax rates, periods and other.

In addition, the type of the company should correspond to the business type (for example banking services, international trading, broadcasting, etc.)

Classification of Registered Companies

The most common types of companies in Russia are:

  • Company limited by shares (“OOO” in Russian) (which has a close similarity to “LLC”)
  • Company limited by shares (private or public) (“AO” or “∏AO” in Russian) (which is similar to a JSC)
  • Companies with unlimited liability (partnership), which is very rare Even for companies, in certain limited circumstances courts can extend shareholders’ liability beyond their share interest – see “Share Capital” below.

Memorandum and Articles of Association

Every company should have articles of association the main constitutional document for the company. Usually AoA are very similar to each other for the same types of company. The AoA contain information about type of the company, the size of the share capital, the number and type of governing bodies, the city of incorporation and similar details.

Share Capital

The liability of the shareholders in a company is usually limited to their contribution to the issued shares. Those in partnerships have unlimited liability. In certain situations, when the liability of the company is social or is tax related, the liability could be extended to the private property of the shareholders. To do so, however, requires a court decision.

Public Offer of Shares

There are number of requirements for public companies in Russia such as number of shareholders, minimum share capital etc. The public companies have stricter regulations of their corporate and tax duties, have to have Board of directors, oversight committees and independent auditors. They must also report and publish their results on a quarterly basis.

The steps required to permit a business to provide an initial public offering of its shares (IPO) is broadly similar to other jurisdictions and is based on MoEx (Moscow Stock Exchange) rules.

General Meetings

All companies have to have an Annual General Meeting in a highly regimented order, so every company has its own “corporate calendar” for each year. Depending on company type and the AoA statement, powers should be distributed among three levels of ruling bodies – the General meeting, the Board of Directors and the Managing Committee or Managing Director (CEO/General Director).

Directors

Every company should have at least a Managing Director (CEO) unless it is required by law to have a Board of Directors. For public companies a Board of Directors is mandatory, for private companies, this is a decision of the shareholders. The Managing Director has full power and responsibility for the company except the matters reserved to the Board and General Meeting.

Financing of a Company

The methods of financing private (non-Government) companies are shareholder contribution by equity (including rights) or money by bank or other company loan. It is prohibited for non-shareholders to grant a financing to company without compensation.

Commencement of Business

The process of establishing a company is relatively simple and takes approximately one week to obtain a registration number of the taxpayer (called an “INN”). It takes one further day to open a bank account. There are number of methods, chosen by shareholders, of paying taxes and preparing accounts for tax authorities. The preferable system de- pends on size of the business and its type, number of shareholders and other matters.

Mergers and Acquisitions

In the last two years, the hottest topic for Russian legislation has been “De-offshorisation”. This means a transition of Russian equity to companies incorporated in Russia from widely used offshore and low tax jurisdictions.

Companies based in Russia can, subject to legal requirements, also acquire the share capital of other companies or purchase their businesses.

Corporate Insolvency

The insolvency of a company in Russia is tightly connected to liquidation procedure and usually occurs where one or more shareholders raise a dispute with the company or its management. Otherwise, a more common practice to avoid the formalities of insolvency is to sell the shares of the company to a special law firm’s special purchase vehicle (SPV) but the potential pitfalls in the process and consequent liabilities mean it should only be undertaken by a well-trusted law firm in Russia.

Winding Up of Companies

Liquidation is very complicated process in Russia as the legislation system is trying to protect shareholders equity in the best way. A special institution appoints Arbitrary managers to lead the process when the company has a large number of shareholders or there is a dispute about companies assets. Every liquidation of a significant company will usually trigger criminal courts trial which can last for several years.

Tax

Despite the relatively low tax rates in Russia (personal tax 13%, corporate tax 20%, VAT 20%), the tax system remains quite complex for a layman to understand. Choosing a tax regime and preparing the required package of documents for reporting to the tax authorities is not an easy task even for experienced people that have been doing business in Russia for a long time. Tax violations are punished inevitably and severely, and monitoring is carried out by one of the world’s best computer systems.

A notable change in 2021 was the transition to a progressive scale of personal income taxation from 13% to 15% when the threshold of about USD 70,000 per year is exceeded.

  Nikolay Freytak & Mikhail Myshlyaev

Contact

Moscou

Freytak and Sons
St. 2E Rybinskaïa, 13 ans
107113 Moscou
Tel. +7 495 276 276 6
www.freytakandsons.com
Nikolay Freytak
office@freytakandsons.com

Tax overview

Company registration

From 1 January 2021 the following main changes in the legal rules of taxation are in force in the Russian Federation:

  • It will be progressive rate system for individual tax, 23 of RF Tax Code.
  • From 1 April 2020, organizations and individual entrepreneurs who are listed on the register of small and medium-sized enterprises can apply reduced rates of obligatory social payments:
  • Rates of obligatory social payments for organizations and individual entrepreneurs will be for compulsory pension insurance;
  • 22% (if the payment is less than minimum wage fixed by law), within the limit or over 10% instead of 22%;
  • Obligatory health insurance fund 5% instead of 5.1%; payments to social insurance fund are not paid.
  • The list of goods subject to mandatory labeling has been expanded, and labeling allows you to track the entire chain of movement of goods from the manufacturer or importer to the final buyer. Alongside with those that are used to be labeled as tobacco products, shoes, medical drugs, in 2021 such goods groups as cameras and lamps-flares, tyres and perfumes were added. In the future it will continue to expand.
  • The tax on imputed income has been abolished.
  • Revenue limits for the simplified taxation system were increased, the so-called buffer zone was introduced.

In this way, if the income of the simplified taxation system payer exceeds RUR 150,000,000 rubles, but still not more than RUR 50,000,000, and the average number of employees is 100 people, but no more than 30 people, then it will be possible to continue to use this tax regime.

During the transition period, the tax rate will be slightly increased from:

  • 6% to 8% for taxpayers applying the object of taxation in the form of income;
  • 15% to 20% for taxpayers applying the object of taxation in the form of income, reduced by the amount of expenses.
  • Some figures of the state duties are changed.
  • The list of countries and territories with which the automatic interchange of tax data is realized, is changed.

Company registration

Every new business, whatever its legal form, must register with the Regional Fiscal Body within a territory, where a new legal entity is going to be known as a local resident. As almost all payments to the social funds in the Russian Federation are now collected by Taxation Bodies, who are also responsible for all administrative procedures related to the payments to the social funds, all necessary registration with those funds is also provided by such Regional Fiscal bodies.

Tax year and filing

The tax year in Russia is the calendar year.

Generally, a corporate income tax return must be filed by 28 March. Corporate income tax reports for every reporting period must be filed within 28 days after an end of an appropriate reporting period.

The reporting periods are the 1st quarter, a half year and 9 months. For taxpayers using the regime of monthly advance payments of Tax the reporting periods are 1 month, 2 months etc.

Tax value for every reporting (taxation) period is calculated by a tax- payer as a percentage of a taxable profit for the period using an appropriate rate of Tax.

A sum of monthly advance payable in the 1st quarter shall be equal to the monthly advance paid in the previous quarter.

A sum of monthly advance payable in the 2nd quarter shall be equal to 1/3 of the sum of tax calculated for the 1st quarter.

A sum of monthly advance payable in the 3rd quarter shall be equal to 1/3 of the difference between the sum of Tax calculated for the first half year and the sum of tax calculated for the 1st quarter.

A sum of monthly advance payable in the 4th quarter shall be equal to 1/3 of the difference between the sum of Tax calculated for the 9 months and the sum of tax calculated for the 1st half year.

Russian legal entities with sales revenue for the previous 4 quarters less than RUR 10,000,000, non-profit organizations, representations of foreign companies and certain other types of taxpayers shall pay only quarterly advance payments. Tax is payable 25 March, 25 April, 25 July and 25 October for quarterly advance payments. In the case of monthly advance payments tax is payable till the 28 of each month.

In general, a personal tax return should be filed by 30 April after the end of the tax year concerned.

After filing, a return on assessment is received. Provisional assessments are used which are payable in the course of the year.

Setting-up taxation

There are no setting-up costs in terms of taxation in the Russian Federation except for a small fee for registering the company with the Regional Fiscal Body.

Residence and non-residence

A legal entity registered in the Russian Federation is considered to be resident in Russia.

A foreign company shall be considered to be resident in Russia if:

  • this follows from the appropriate double taxation treaty of the Russian Federation;
  • the place of its effective administration is located in the Russian Federation if the opposite does not follows from the appropriate double taxation treaty of the Russian Federation.

The legal entity being resident in the Russian Federation is charged on all worldwide income, unless the income is exempt under a double taxation agreement. If there is no double taxation agreement, the fully liable taxpayers may charge the tax to be paid abroad to the corporate income tax to be paid in the Russian Federation in order to cushion the effect of the double taxation. This setoff shall be made on the basis of an approved tax payment certificate issued by a taxation body of a country where the payments have been actually processed.

Foreign legal entities which have neither their headquarters nor effective administration in Russia are liable for tax due to their economic attachment within the Russian Federation with deductions concerned to be an appropriate double taxation agreement.

The place of residence of a person is his place of main dwelling (not less than 183 days during 12 subsequent months). If a person’s main dwelling is a place within the Russian Federation, then the person shall be recognized as a tax resident of the Russian Federation.

The period of residence shall not be interrupted via short-term departures off site the Russian Federation (for less than 6 months) for the purposes of medical care, education and to carry out labor duties on site of sea oil and gas fields.

If an individual is judged resident in the Russian Federation, the charge to income tax is on all his worldwide income. However, some income may be exempted under the terms of a double taxation agreement.

Types of income

Tax assessment is based on the profits received during the financial year (taxation period), sometimes increased by quasi-distributions and some non-deductible payroll costs.

All legal entities may deduct a total sum of profit related to their commercial activities, for an annual amount of depreciation of fixed assets, intangible assets and capital results of scientific researches and production.

Land property and shares do not attract a depreciation allowance.

Group income and grouping arrangements.

A consolidated group can be formed where one company has a direct or indirect participation of 90% in the other company. The amount of net assets of the companies must exceed their share capital and there are certain significant size requirements. A group shall be formed for at least two tax years.

Capital gains

Generally, capital gains are treated as an ordinary income. Where a loss is made on a depreciable asset that loss should be taken over the remainder of the useful life of the asset.

Losses

Losses of the tax period may be deducted from the net profit for the current period as follows (deductible losses may comprise of economically reasonable and approved expenditures):

  • During the same taxation period, set off of loss against another element of the company’s income;
  • Against profit of the following ten annual taxation period succeeding the taxation period in which losses arise.

Above mentioned rules are not applicable to losses arisen in the taxation period when a taxpayer applied the tax rate equal to 0%.

Those rules are not also applicable to losses related to sales or other retirement of shares of Russian legal entities.

Losses on depreciable assets should be spread over the period of the remaining life of an asset.

Exemptions

A tax rate of 0% is applies to the profit of Russian legal entities arising in the form of dividends in the case if as for the date of the decision on the payment of dividends, the receiving legal entity had been a legal owner of minimum of 50% of shares continuously for no less than 365 days.

In the case those dividends would be paid by a foreign company, the above mentioned rule might be applied provided that foreign company were not a resident of any state listed in the special list of so called “offshore territories” approved by the Ministry of finances of the Russian Federation.

A tax rate of 13% is applied to the profit of Russian legal entities arising in the form of dividends by Russian and foreign legal entities in other cases.

A tax rate of 15% is applied to the profit of foreign legal entities arising in the form of dividends by Russian legal entities.

Rates

A standard rate of Corporate Income tax is 20% regardless whether profits are distributed to shareholders or not (where 3% in 2017-2024 years should be paid to the federal budget and 17% in 2017-2024 years to the regional budget).

Legal entities processing educational activities and providing medical services, shall use tax rate equal to 0% with special provisions stated in the Article 284.1 of RFTC.

Legal entities receiving profit arisen from sales or other retirement of shares of Russian legal entities, shall use tax rate equal to 0% if those shares had been in the property of tax-payers for more than five years.

Residents of special technology innovative economic zones might also apply tax rate equal to 0% to profits arisen from respective activities proceeded within those special economic zones.

A tax rate 0% might be also applied by agricultural manufacturers meeting criteria stated in the Article 346.2 of RFTC.

Legal entities participating in the regional investment projects have a right to apply tax rate 0% related to payments to the federal budget.

In the following cases a corporate income tax is levied and paid on withholding basis:

  • A tax rate 30% is applied to revenues arisen from securities issued by Russian companies and deposited by foreign holders.
  • Tax rates for foreign companies are as following:
  • 10%: for profits arisen from freight of aircrafts, vessels and other running transport units used for international carriages;
  • 15%: for dividends arisen from shares of Russian legal entities;
  • 20%: for profit arisen from all other revenues.

Double tax relief

Double taxation relief acts due to the appropriate double taxation conventions of the Russian Federation.

National current benefit taxation

Corporate income tax

Taxable profits of both companies and branches doing business in the Russian Federation are subject to 20% corporate income tax rate except some groups of small enterprises for whom special taxation plans can be applied (6% turnover tax, 15% income tax or deemed income tax instead of all applicable taxes).

Controlled foreign companies legislation was implemented in the Russian Tax Code in 2014.

The Russian Federation has developed tax facilities in order to stimulate activities and innovation. These include special economic regions with a reduced rate of the corporate income tax, even down to 0% in some cases.

Trade levy

There is a special so-called “trade levy” established on retail sales in the Russian Federation with a rate specific for the every municipality of the Russian Federation (except the cities of federal significance (Moscow, Saint Petersburg and Sevastopol) the levy applicable there shall be established by the Tax Code and laws of those cities).

Other taxes(VAT, property taxes)

VAT is levied at a standard rate of 20% from 1 January 2019 for most goods and services. A reduced rate of 10% applies to food, books and certain other necessities. There is a zero rate for the list of goods/services, including export of goods. Certain operations are VAT exempt, including medical services, banking services and school education.

VAT is charged on the transaction value. The tax collected by the business from its customers is balanced with the deductible tax paid by the business to its suppliers, and the resulting balance is paid to the tax authorities on the basis of a tax return declaration, which is filed on a quarterly basis. Any negative balance of these amounts is refunded. foreign company may, under certain conditions, reclaim Russian input VAT.

There are the following taxes levied on the property of legal entities in the Russian Federation: Land tax and Property Tax.

Legal entities and individuals who have “rights in rem” to the land (right to ownership, the right of the inherited life possession of the land plot, the right of the permanent (perpetual) use of the land plot), are the payers of the land tax. Legal entities and individuals who possess a right of the fixed term use of land without consideration or who are lessees of that land, shall not be recognized as taxpayers of Land Tax.

Land Tax is paid on the annual basis and is determined by a cadastral value of a land plot multiplied by 0.3% for land plots of agricultural, housing funds, private subsidiary farming plots and others (listed in the

article 394 of the Tax Code), and multiplied by 1.5% for land plots of other types.

For legal entities Property Tax can apply both to real estate and other immovable property (except land, water resources and other natural resources) that count as fixed assets according to the Russian standards of accounting.

Property Tax is calculated as an average annual historical total value of the fixed assets deducted by the amortization values. Tax rates vary depending on the regional laws and should not exceed 2.2%.

Land tax is levied on all legal entities and individuals being the legal proprietors of land, legal perpetual users of land and legal proprietors of a right of usufruct of land.

Legal entities and individual who possess a right of fixed term use of land without consideration or who are lessees of land, shall not be recognized as taxpayers of Land Tax.

Land Tax is an annual tax. An amount of Land tax payable is determined as a cadastral appraisal of a land plot multiplied by 0.3% for land plots of agricultural, housing funds and private plots, and multiplied by 1.5% for land plots of other types.

Transport Tax is levied on legal entities and individuals being the registered legal proprietors of the objects of taxation.

The objects of taxation are vehicles, motorcycles, buses, other tracked vehicles, aircrafts, helicopters, ships, yachts, wave runners and other transport vessels registered due to laws of the Russian Federation. The following types of transport shall be exempted: boats without engine or with engine with power up to 5 kW, harvesting and passenger sea and river vessels, tracks and other transports for agricultural needs and some other certain types of transports.

Rates of Transport Tax are determined on the basis of the engine power defined in horse powers (for vehicles, buses, vessels and other objects of taxation), gross capacity on tonnes (for non-powered vessels) and kilogram force (for jet-motor aircrafts), which shall be multiplied by a certain rate fixed in the RFTC.

Tax with respect to the extraction of mineral resources

Taxpayers should be all legal entities and individual contractors recognized as users of mineral resources.

A taxable basis and rates of tax are calculated according to the special rules stated in the RFTC and governmental instructions.

Excise duties

Excise duties are levied on all legal entities and individual contractors processing business activities upon excisable goods, which, in particular, include:

  • Alcohol and alcohol-containing goods;
  • Tobacco;
  • Passenger cars;
  • Motor petrol.

Excise duties are paid on a monthly basis.

Types of income and rates on personal taxes

There exist the following categories of Income for tax-payers in the Russian Federation:

  • Income of a Profession

Includes all income received in cash or in-kind form arising from the fulfillment of person’s responsibilities under labor contracts (salaries and wages) and other forms of legal agreements related to the Civil _ Code of the Russian Federation (hereinafter – RF Civil Code).

For the purposes of taxation in-kind-form of income include:

  • Receipt of goods for labor and other duties provided;
  • Coverage of utility charges, insurance, leisure, education etc.

The basic rate of taxation is 13% with the possible deductions. The tax related to the salaries, wages and similar revenues is withheld and paid by the revenue payers. The income above 5 million rubles will be imposed by rate 15%.

  • Income in the form of financial benefits includes income received via:
  • General purpose loan percentage economy – calculated as the positive difference between actual loan interest rate and 2/3 of key interest rate. The rate of taxation is 35% and is withheld by the bank – lender;
  • Percentage economy due to the loans related to the construction or acquirement of apartments, private houses etc. – Shall not be the object of taxation in the case of existence of the deductible expenditures (Article 220 of RFTC);
  • Benefits arising from the acquirement of goods and services of mutual dependent parties calculated as the difference between the actual cost of the acquisition and the market cost of the similar goods and services (Item 3, Article 212 of RFTC);
  • Benefits arising from the acquirement of shares, securities and futures – calculated as the difference between the actual cost of the acquisition and the market value of the acquired financial instruments (Item 4, Article 212 of RFTC).
  • Income in the form of insurance payoffs (see Articles 213, 213.1 of RFTC) the rate of taxation is 13%.
  • Income in the form of dividends arising off site the Russian Federation – calculated by the taxpayers using the rate 13% with the possible deductions arising from double taxations treaties.
  • Income in the form of dividends arising in the Russian Federation – calculated at the rate 13% and withheld and paid by the dividends’ payers.
  • Income from deals with financial instruments (see Articles 214.1, 214.3, 214.4, 214.6 of RFTC) the rate of taxation is 13%.
  • Income in the form of capital gain – calculated as the difference between the actual capital gain rate and “key interest rate + 5%”; taxation rate is 35%, and the tax is calculated and withheld and paid by the actual payers of capital gain revenue.
  • Income in the form of betting winnings and other similar revenues calculated at the rate equal to 35% and is withheld by the sources of the revenue.
  • Income in the form of the lottery winnings and other similar revenues calculated at the rate equal to 35% and is withheld by the sources od the revenue.
  • All revenues of foreign citizens not recognized as tax residents of the Russian Federation received as salaries and wages, are taxed with the rate 13%.
  • All revenues of persons not recognized as tax residents of the Russian Federation received as dividends arising from the Russian legal entities, are taxed with the rate 15%.
  • All other revenues of persons not recognized as tax residents of the Russian Federation are taxed with the rate 30%.

Capital Gains

Income in the form of capital gain calculated as the difference between the actual capital gain rate and “key interest rate + 5%” is taxed 35%, and the tax is calculated and withheld and paid by the actual payers of capital gain revenue.

Losses

There exist several types of deductible expenditures applicable to the calculation of the taxable income:

  • Standard monthly deductions applied to persons participated in Chernobyl Catastrophe conservation and similar situations;
  • Monthly deductions related to the birth of the first and subsequent children provided up to 18th birthday (24th birthday of students);
  • Social deductions related to the reimbursement of self-education expenditures and expenditures for the education of children (younger than 24 years) – this deduction is valid if the education is processed in the appropriately licensed institution and if a taxpayer presents confirmation of expenditures (except the cases of usage of “mother capital”);
  • Social deductions related to the reimbursement of expenditures for medical services – in the cases defined in Para.3), Article 219 of RF Tax Code;
  • Social deductions related to the reimbursement of expenditures for retirement investments – in the cases defined in Para.4), Article 219 of RF Tax Code;
  • Property deductions equal to the total sum of approved expenditures related to the acquisition of the appropriate real estate;
  • Property deductions equal to RUR 1,000,000 (RUR 250,000) in the case of sale of the real estate (other property) which had been in possession of a taxpayer for less than 3 years. Property deductions shall be given to a certain taxpayer under the rules defined in Items 3 – 10 of Article 220 of RFTC;
  • Professional deductions equal to the total sum of the actually made and approved expenditures directly related to the revenues received – applies to all persons registered as individual contractors and to private notaries, attorneys founded a private legal practice, and other persons (e.g. private patent attorneys, private apprai, bankruptcy executive officers) involved in private practices. The applicable set of expenditures shall be defined by the tax- payers themselves according to the rules of Chapter 25 of RFTC;
  • Professional deductions applied by taxpayers who receive revenues arising from activities based on the agreements made upon RF Civil Code – in the total sum of the actually made and approved expenditures directly related to the revenues received;
  • Professional deductions for the authors of scientific, art, literature creations etc. – in the total sum of the actually made and approved expenditures directly related to the revenues received, but not less than 20% of the revenues. The applicable expenditures also include all mandatory taxes and duties paid in relation to the above-mentioned activities, all mandatory payments to social funds.

Losses cannot generally be carried forward or back although capital losses relating to the disposal of

securities may be set off in later years. Listed securities are treated separately from other securities.

Exemptions

The following revenues are not charged by personal income tax:

  • Government allowances of all types (public welfare payments, social security disability payments etc.);
  • Retirement pensions (including all legal social additions);
  • All legally stated reimbursements (within the legally stated limitations);
  • Redresses of all health and other similar injuries;
  • Dismissal compensations stated by the Labor Code of the Russian Federation, excluding compensations for the unused vacation, special extra compensations to executives and chief accountants;
  • Reimbursement of expenditures for the professional skill upgrading;
  • Reimbursement of business trip expenditures (within the legally stated limitations – see Para.3), Article 217 of RFTC);
  • International and Russian grants, premiums and awards –see Para. 6), 7), Article 217 of RFTC;
  • Sale revenues of real estate and sale revenues of other property in the case a certain tax-payer had been an approved proprietor during 3 years or more;
  • Sale revenues of shares in the equity of legal entities of the Russian Federation – in the case a certain tax-payer had been an approved proprietor during 5 years or more;
  • Revenues in the form of gifts made and received by close relatives;
  • Other tax exempts defined in the Article 217 of RFTC.

Rates

There are certain extra reductions in tax for people in certain circumstances.

Social security

In the Russian Federation, there are compulsory contributions for:

  • Pension provisions;
  • Health insurance;
  • Social insurance for sickness and motherhood liabilities (including pregnancy and after-birth baby care);
  • Accident insurance.

Contributions are payable by the employers. From 1 January 2017 all contributions to the above mentioned targets are recognized and considered as the new type of taxes payable to the russian budget.

Rates for the contributions are:

  • Pension contributions 22% (10% in the case if an annual gross income of an employee exceeds RUR 1,021,000);
  • Health insurance: 5.1%;
  • Social insurance: 2.9%.

The rate for contributions towards accident insurance depends on what class of risk hazard a company is classified and varies from 0.2% to 8.5% of the gross wage.

Expatriates

There are no special rules for the taxation of expatriates.

Options

Stock options are taxable when exercised on the difference between the market price and the price paid for the option.

Partnerships

Partnerships (which are named as “Full partnerships” in RF Civil Code and joint arrangements) are treated as fiscally transparent, the tax being levied on the individual members of those partnerships.

Pensions

State pensions are exempt from taxation. Where an individual contributes to a pension fund the pension received is also exempt. Payments to other non-governmental pension plans in the basis of contributions by the employer are treated as taxable income.

Treaties for the avoidance of the double taxation

There are a number of double taxation treaties between the Russian federation and other countries which cover almost all of the greater industrially developed countries and many others.

Benefit distribution

(National withholding taxes, international tax exemption options)

The Russian federation levies a dividend withholding tax on profit distributions by resident companies to foreign shareholders. The Russian dividend withholding tax rate is 15%. This rate may be reduced, often to 5% or to 0% on the basis of double tax treaties. However these preferences are applicable only if the shareholding is not held with the main objective or one of the main objectives to avoid taxation and the structure is not artificial.

Tax treatment of losses

Losses of the tax period may be deducted from the net profit for the current period as follows (deductible losses may comprise of economically reasonable and approved expenditures):

  • during the same taxation period, set off of loss against another element of the company’s income; and
  • against profit of the following annual taxation periods succeeding the taxation period in which losses arise but for the tax periods from 1 January 2017 to 31 December 2020 tax base for the current tax period may not be reduced by losses for more than 50 %.

The above rules are not applicable to losses arising in any taxation period when a tax-payer applied the tax rate equal to 0%.

Those rules are not also applicable to losses related to the sale or other transfer of shares in Russian legal entities at certain conditions.

Amounts of amortization charged are also considered as deductible expenses. These amounts, in general, should be spread over the period of the remaining life of an asset.

Employee obligations(taxes on salary, social security payments)

In general, an employer is obliged to calculate and withhold personal income tax equal to 13% from payments to employees and must pay this to the tax authorities. Withholding and paying over the correct amount of tax on wage is the responsibility for the employer as a tax agent. An employer is also obliged to calculate and pay to the tax authorities social security / social insurance payments: mandatory pension insurance, mandatory medical insurance and mandatory social insurance. The total amount of social insurance payments varies but relates to the different businesses and is normally 30% of monthly wages.

Withholding personal income tax and social insurances are normally paid on a monthly basis up to the 15th day of the month after that in which the benefit or wages were paid.

Foreign income

Subject to double taxation conventions, tax is levied on all income. The income derived from activities carried out abroad, of permanent establishments and real estate located abroad, are nevertheless exempt. However they are, with regard to the rate of taxation, taken into consideration.

Where those conventions are available a double tax relief is normally given on a tax credit basis.

Sergey ELIN

Contact

Moscow
Joint-stock company Audit-consulting groupe «AIP»
Dukhovskoy pereulok, 17,
p.a1, POM. 25
115191 Moscow
www.ap-group.ru
Tel. +8 495 236 77 50
esv@ap-group.ru
Sergey Elin Viktorovitch

Join our Legal Network