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 no 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 24%. Of this amount, 5% (6% until 2003) is payable to the central government, 17% (16% until 2003) is payable to the regional government, and 2% is payable locally. Regional governments have the power to reduce the regional element by up to 4%, giving a minimum overall rate of 20%.

Capital gains are usually taxed at the corporate profits tax rate of 24%, but some types of gain in the hands of foreign legal entities are taxed at 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 20%; but certain types of state and municipal security attract a rate of only 15%;

Freight expenses 10%, but only if the payor does not have a Permanent Establishment in Russia;

Royalties from patents, know-how, etc. 20% (ditto);

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.

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.

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.

Capital Gains Tax:

Capital gains on the disposal of securities are subject to profits tax at 24%. 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.

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.

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:

35.6% on the first 100,000 roubles;

20% on earnings from 100,001 to 300,000 roubles;

10% on earnings from 300,001 to 600,000 roubles; and

2% on all earnings over 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.

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 20 percent (18 percent after 1 January 2004) 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 monthly revenue over RR1m 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, inventory, and deferred expenses incurred as of the balance sheet date. For 2004, final products, stocks, raw materials, goods, and inventories will probably be excluded from the tax base.

The maximum permitted rate in 2004 is 2.2% annually, and this is what is charged by Moscow, St. Petersburg, and Novosibirsk.The tax is paid quarterly based on current balance sheet values.

Excluded assets include 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.

updated: 16.07.07