The Russian system of taxation is separated into three levels represented by:
- local taxes.
General taxation rules are specified at the federal level by the Russian tax code and other regulations. Regional and local authorities are authorized to regulate certain elements of regional and local taxes, namely to change tax rates within a specific range and deliver tax incentives.
In addition, extra special regimes, such as:
- regional investments projects;
- special economic zones;
- territories of advanced socio-economic development;
- the free port of Vladivostok;
- and special administrative districts.
Establish promising tax conditions for investors that meet detailed requirements, including the removal of or exemption from property and land taxes, the decrease of profit tax rates, and lower social security contributions.
Here is a brief overview of major taxes assessed on businesses and their key elements, such as the type:
- taxable income or property;
- tax base;
- tax rate;
specific regulations concerning intra-group financial operations and transfer of assets.
The legal system in Russia
Russia and its regions function under a civil law legal system. While the power to implement certain laws is in the exclusive domain of the federal government, others are within the area of the regions.
The federal government has the right to control trade and commerce, and to establish the general principles of taxation and fees in Russia. Nevertheless, the procedure for the construction of plants, the establishment of tax rates, and granting of tax motivations are the joint commitment of the federal and regional administrations.
Taxation authorities in Russia
The main tax authority in Russia is the Federal Tax Service.
Its territorial bodies and inspectorates control the accurate calculation and accurate payment of all taxes and social insurance contributions.
The Federal Tax Service carries out tax supervision mainly in the form of in-house (desk) or field tax audits.
An in-house tax audit is conducted based on a tax return filed by a taxpayer. A desk tax audit may be conducted within three months (two months for value-added tax) from the date of filing the tax return. A field tax audit may contain up to three calendar years foregoing the year when the audit is initiated. During a tax audit, a tax authority reviews the computation accuracy and the proper payment of registered taxes within the audited period.
For this purpose, a tax authority may ply its power of compulsory confiscation of documents and other material evidence. During field tax audits, tax authorities are also allowed to request additional documents and to check all taxes (not only those that are reported).
They may also interview employees, conduct counter-inspections, and audit taxpayers’ counterparties.
Besides, there is a separate form of a tax audit that links purely to the control of prices applied by interdependent companies in their dealings (based on transfer pricing regulations).
A special body authorized to conduct such audit checks the accuracy of tax calculations concerning intercompany transactions, though in training local tax authorities are actively engaged in the same checks.
A non-resident may either establish a Russian entity to carry on business in Russia or work directly through a foreign entity (with or without a Russian permanent establishment).
The two types of legal entities most generally used in Russia are the limited liability company (OOO) and the joint-stock company (AO).
In addition to OOOs and AOs, Russian law also identifies other forms of legal entities, including, but not limited to general partnerships, limited partnerships, and manufacturing cooperatives.
It is also possible to use simple and investment partnerships as forms of cooperation without creating a legal body.
However, these partnerships are infrequently encountered in practice due to lack of limited liability and are infrequently used for business purposes.
Limited liability companies in Russia
The OOO is the most favored type of company due to the relative clarity of its formation and the flexible rules on corporate governance and raising capital. The legal form of OOOs has adjusted over time, making it well suitable for both wholly-owned subsidiaries of foreign investors and joint ventures.
Joint-stock company in Russia
An AO is only suggested as a legal form in cases where the shareholders are planning the public placement of shares (which is not permitted for us, and the “non-public” form of an AO).
If no public placement of shares is expected, an AO is generally not advised because it is subject to bulky securities regulations and provides less discretion to shareholders in terms of corporate governance.
Branches and representative offices in Russia
Instead of setting up a local legal entity, foreign investors may prefer to operate in Russia through a branch or representative office of a foreign company, which are not separate legal entities under Russian law and may act only on behalf of the company they are representing.
This is not the preferred option for many companies, as the registration process may be ungainly.
Parent companies bear full liability for the activities of their branches and representative offices.
Branches and representative offices of foreign companies are not subject to company law requirements, but they are subject to special rules recapitulated as tracks:
- They can be funded by the head office by direct transfer from between bank accounts on an “as needed” basis.
- A representative office of a foreign company is not planned to undertake any commercial activity; nevertheless, a branch may undertake such activity.
- The main purposes of a representative office are usually to represent the interests of the company in Russia, carry out market analysis, and promote commercial connections with Russian partners. If a representative office holds out commercial activities, this is not deemed to be a direct violation of law but requires the payment of applicable taxes in Russia.
- Both a branch and a representative office are controlled by their head acting based on a power of attorney issued by the company. The powers of the head depend solely on the provisions of such power of attorney.
- The main internal document of a branch or representative office is its rule which is approved by the company.
- Taxation of a branch or representative office is determined based on “permanent establishment” rules, applicable provisions of any double taxation treaty, and often requires consideration of transfer pricing rules.
Financing a corporate subsidiary in Russia
A Russian company may be sponsored by equity or debt.
Financing can be provided by:
a parent company;
Equity contributions may be created either in cash or in kind. Debt may be provided in the form of loans or the issuance of bonds.
Equity financing in Russia
The share capital of OOOs is contributed by each party in an OOO, and is no less than the nominal value for its share (participatory interest) and can be increased by making additional donations by the participants (existing or new one). The share capital of AOs can be increased by increasing the nominal value of shares or placing additional shares outside the company.
Certain types of property rights and intellectual property rights can be contributed to equity in a tax-neutral way, but careful analysis and structuring are required to avoid negative tax importance for property rights. For example, a straightforward contribution of debt rights or debt forgiveness may be considered taxable income. A general participation exemption works for property donations made by owners of more than 50% shares in the company (with some other additional criteria).
Equity contributions that do not change share capital are more often used in practice and do not require registration with the appropriate authorities.
Debt financing in Russia
Corporate profit tax implications
Russian companies are permitted to borrow funds from related or unrelated third parties. “Thin capitalization” rules and “safe-harbor” tests should be applied to understand the tax implications.
Thin capitalization rules in Russia
Thin capitalization rules specify the interest deductibility on debt financing obtained from foreign direct or indirect owners of the Russian taxpayer, or companions of the foreign owner or if a debt is guaranteed by the foreign owner.” If the debt to equity ratio of the Russian borrower exceeds 3:1 as of the last day of the taxable (reporting) period, then:
- The excessive stake shall not be deductible for the Russian borrower, which leads to an increase in the tax base for profit tax; and
- The excessive claim is treated, for tax purposes, as dividends payable to a foreign lender.
In practice, financing structuring in Russia deals with several complexes, multi-factor tax issues, including general anti-avoidance rules, possible risks of requalification of debt financing into capital, and limitation of benefits provided under a double taxation treaty. Thus, taxpayers should pay extra attention to this point.
Corporate income tax
Income tax rate
The profit tax rate is 20%.
Many regions have adopted tax incentives for investors, such as a lower profit tax rate. However, as of 2019, a region’s authority to lower the profit tax rate is limited to cases directly specified by the Russian tax code. All other regional profit tax incentives will be canceled starting in 2023.
Computation of taxable income
Taxable base in Russia
The profit tax base is equivalent to the taxable profit computed as sales revenue and other income, less economically justifiable expenses supported by documents. In practice, the conditions for providing documentation in Russia are stricter than -those of other countries.
Loss carry-forward in Russia
As a general rule, a company may carry forward prior-year tax failures in chronological order with the limitation that only 50% of each annual profit tax base may be decreased every year until the end of 2021. This limitation may be prolonged until the end of 2024 if the relevant draft law will be adopted. . Furthermore, there is a direct prohibition in the Tax Code for a non-profitable company to deduct earned losses if the tax authorities prove that the main purpose of the transaction was to minimize taxes.
Income tax reporting in Russia
Taxpayers are needed to file quarterly and annual profit tax returns. Quarterly profit tax returns must be filed within 28 calendar days of the quarter-end. Annual profits tax returns must be filed within three months of the calendar year-end.
Special incentives in Russia
Special incentives are envisaged for taxpayers that are subjects of special economic zones, territories of advanced socio-economic development, the free port of Vladivostok, Innovation center Skolkovo, and for participants of regional investments projects or other special regimes. The profit tax rate may be reduced up to 0%. The number of tax benefits, terms of its application, and other requirements depend on the regime and region.
Dividends in Russia
As a general rule, dividends payable to organizations identified as Russian tax residents are subject to a corporate profit tax rate of 13%. Under certain conditions (i.e., minimum 50% shareholding within not less than 365 days) incomes obtained from subsidiaries (including dividends) may be fully exempt from taxation through “participation exemption”. For foreign subsidiaries, the “participation exemption” works if the country of incorporation is not black-listed by the Ministry of Finance.
Controlled foreign corporations or short CFC
As a general rule, a Russian tax resident is believed to control a foreign company, if such person/ legal entity (a) owns more than a 25% interest in the company or (b) 10% interest in the company provided that more than 50% interest is owned by Russian tax residents and (c) by other means determines or may determine corporate decisions for this company concerning the distribution of income among its equity holders. A controlling individual should pay a tax at a rate of 13%/20% on income earned by a CFC in balance to that person or legal entity’s share in the company. The income is taxed if the CFC does not pay out the full amount of its net income as dividends to its equity holders by the end of a calendar year following the calendar year in which a reporting time comes to an end. CFC rules are also applied to trusts and other similar structures.
CFC rules excused from taxation active business companies, as well as companies with an effective tax rate exceeding 3/4 of the effective Russian tax rate.
Cross-border payments in Russia
Transfer pricing in Russia
Certain sorts of transactions, understood as “controlled transactions,” should be run at arm’s length under the threat of a pricing adjustment for taxation purposes. These include:
- Transactions with foreign-related companies exceeding an annual threshold of RUB 60 million
- Transactions between two Russian affiliated companies with total revenues reported under these transactions by both parties exceeding RUB 1 billion, if the parties to the transactions apply different profit tax rates, or if one of the parties is a minerals extraction taxpayer and the subject of the transaction is mined minerals, or if some other specific condition is met.
- Other transactions above a RUB 60 million threshold, with formally irrelevant parties, may also be considered controlled transactions:
- Transactions with conduit companies – mediators with related companies;
- Transactions with companies from the Ministry of Finance’s black list of jurisdictions;
- Foreign trade transactions for goods traded at the stock exchange.
Certain immunities and additions to the above-mentioned rules are revised periodically, so we recommend carefully checking required compliance actions.
The Russian transfer pricing model is primarily based on the Organisation for Economic Co-operation and Development (OECD) guidelines and contains country-by-country reporting requirements. At the same time, local practices and rules should be carefully considered. Generally, a master file prepared at the group level is not enough to cover Russian transfer pricing issues.
Withholding tax on passive income in Russia
Interest, royalties, and dividends payable by Russian businesses to foreign companies are subject to withholding tax unless the respective double taxation treaty provides otherwise.
The withholding tax rate is 20% for interest and royalties, and up to 15% for dividends. The 30% rate may be applied to income from securities (save for dividend income) in some cases with nominal holders of securities, where a beneficial owner is deemed to be unknown.
Freight and similar income are taxed at a 10% rate. Most other types of foreign company incomes taxable at the 20% rate include income from the sale or rental of real estate located in Russia, income from the use of intellectual property rights in Russia, and income from the sale of shares of entities if more than 50% of their assets comprise real estate located in Russia.
As foreign companies are not registered with Russian tax authorities, the above tax should be calculated, withheld, and paid by a tax agent.
Lower rates under a double taxation treaty are permitted. At the same time, anti-abuse rules require the taxpayer to obtain not only a certificate of residency of the recipient but also to get evidence of economic beneficiary of income., Russia has recently amended its tax treaties with several countries including Cyprus, Malta, Luxembourg, and introduced a 15% rate on dividends and interest starting in 2022. Russia’s tax treaty with the Netherlands will be terminated as of 2022. Russia’s tax treaties with Switzerland, Singapore, and Hong Kong are expected to be amended soon.
Withholding tax on active income in Russia
There is no withholding tax on active revenue. It is generally taxable in Russia through a “permanent establishment” setup. The concept of a permanent establishment is generally similar to the OECD standard.
Multilateral Instrument in Russia
Russia ratified the MLI on May 1, 2019, and it entered into force on January 1, 2021, for 68 tax treaties.
Some notable exclusions are tax treaties with the:
United States (which has not adopted the MLI);
At the same time, Russia has amended its tax treaties with some countries included in the MLI list like Cyprus, Malta, and Luxembourg and introduced an increased withholding tax on dividends. Thus, the MLI will apply to include a 15% withholding tax rate on dividends paid to residents of these countries.
Russia has implemented two mechanisms of benefits limitation: the principal purpose test, supplemented by the simplified limitation on benefits test.
As most countries have chosen the main purpose test, the simplified limitation on the benefits test will not apply to those tax treaties.
Russia has not adopted Articles 18-26 (arbitration) and thus, all disputes between Russian and foreign tax authorities will be resolved only by a mutual agreement procedure.
Payroll taxes in Russia
Personal income tax or short PIT
Russian companies are required to compute and withhold personal income tax from salaries and other income paid to workers and other individuals. Starting in 2021, a progressive PIT was introduced: a 13% rate applies to a tax base up to RUB 5 million and a 15% rate applies to any excess. A 13%/15% rate applies to many types of income received by Russian tax residents (regardless of the source of such income). A 30% rate applies to income received by non-residents from Russian sources, except highly qualified foreign specialists, who under certain conditions are eligible for the 13%/15% rate.
Social insurance contributions or short SIC
The SIC is 30% of the annual income of an employee within established thresholds, with a subsequent reduction to 15.1% on remuneration above the thresholds. Lower preferential rates apply to some companies, such as IT companies relenting with certain requirements.
Indirect taxes in Russia
Value-added tax or short VAT
Taxable operations are supplies of goods (works, services), property rights and construction works for a taxpayer’s own needs. Financial and similar operations (insurance, loans, circulation of securities, etc.) are generally exempt from VAT. There are some other notable immunities, such as the transfer of intellectual property rights for patents, software and trade secrets.
The VAT rate in Russia
As of January 1, 2019, the standard VAT tax rate is 20%. Reduced 10% and 0% VAT rates apply to certain goods, works, and services. VAT for the export of goods is 0%.
Foreign providers of “electronic” services to Russian clients (both B2B and B2C) need to register for VAT purposes in Russia. The list of such electronic services includes (among others):
- Granting access to use computer programs and databases via the Internet
- Advertising services via
- the Internet
- Assigning domain names
- Web-hosting services
- Granting access to use e-books and other content via the Internet.
VAT agents in Russia
If a foreign company without a presence in Russia (i.e., not registered with the Russian tax authorities) makes VAT-eligible sales, the tax agents will be required to calculate, withhold and pay VAT on behalf of this company. In general, VAT tax agents could be goods or services purchasers registered in Russia or payment intermediaries registered in Russia.
VAT recovering in Russia
A purchaser of taxable interests works or services has the right to recover input VAT in the full amount provided that necessary supporting documents are in place and the acquired goods, works, or services are intended for operations subject to VAT (irrespective of the actual output VAT accrued). Starting July 1, 2019, companies are allowed to recover input VAT even if they provide services outside of Russia (not VATable in Russia). If acquired goods, works, or services are used for both taxable and non-taxable operations, input VAT is recoverable pro-rata. Internal controls for bona fide suppliers are a key element to support VAT deductibility. A three-year eligibility limitation should be taken into account in claiming expenses of past periods.
Interests subject to excise duties are mainly alcohol, tobacco, cars, motorcycles, and fuel.
The base is either a quantity or a value of goods produced (reworked or refined) depending on the type of goods. The rate of excise tax varies depending on the kind of taxable goods being referenced.
Other notable taxes
Property tax in Russia
Property tax is payable by Russian companies and foreign companies that conduct activities through a permanent establishment in Russia for immovable property reflected in their accounts as fixed assets, and (b) foreign companies that do not have a permanent establishment in Russia for their immovable property. Land plots and some other properties are not subject to property taxation. Different and complicated approaches to define movables and immovable often create uncertain tax positions.
Generally, the tax base is determined as the net book value of taxable assets based on the taxpayer’s statutory accounting records. However, for some commercial buildings such as office buildings, hotels, or shopping malls listed by the regional authorities, the tax base is defined as the cadastral value of the object of immovable property as approved by the respective regional authorities where the property is located.
The tax rate may not exceed 2.2%. The exact rates are set within this limit by regional authorities. Buildings taxed at the cadastral value are subject to a slightly lower property tax rate (up to 2%). The property tax rate may be reduced to 0% on the new property, which is a part of an investment project, implemented under special regimes mentioned in Section 6.4 above, or by other decisions made by regional authorities.
Land tax in Russia
Land tax is a local tax. A land plot that is owned by a taxpayer is recognized as an object of taxation. The tax base is the cadastral value of the land plot. The annual rates vary with a maximum of 1.5% depending on the type of permitted use of a particular land plot. The rates are set by local authorities.
Transport tax in Russia
Transport tax is levied on motor vehicles (cars) and other technical standards of transport, such as boats, bikes, and planes owned by a taxpayer. The rates are determined by regional authorities and rely on the technical features of each particular transport vehicle (i.e., engine capacity).
Customs duties in Russia
Customs duty is a mandatory fee levied by the customs authorities when a taxpayer is moving goods across the customs border of the state. Customs duty rates are determined by the Russian government and change depending on the type of imported or exported taxable goods.
Minerals extraction tax in Russia
A minerals extraction tax is owed by companies involved in mining activities. The tax is established as the value of extracted minerals or as a multiple of the number of removed minerals and a certain fixed tax rate subject to a coefficient. The value of extracted minerals may be defined based on costs or revenues, and the majority of functional issues in the tax deal with the correctness of the specific methodology chosen.