Let’s consider taxes that foreign companies may be subject to and that a foreign company doing business in Russia is most likely to pay. These are value-added tax (VAT) and corporate profit tax.
VAT
Business development and expansion sooner or later confronts an entrepreneur with the need to move into foreign markets. However, a company operating on the territory of a foreign state inevitably runs into problems, one of the first problems being tax liability.
Under Russia’s current legislation Part 1, Article 19 of the Russian Federation Tax Code, taxpayers and levy payers in Russia are organizations and individuals who are obligated under the Russian Tax Code to pay taxes and levies. In addition, Part 3, Article 19 of the Tax Code also establishes that a foreign entrepreneur can be deemed to be a taxpayer without the creation of a legal entity.
The list of Russian taxes includes 14 taxes and levies.
Let’s consider taxes that foreign companies may be subject to and that a foreign company doing business in Russia is most likely to pay. These are value-added tax (VAT) and corporate profit tax.
With regard to VAT, it is essential to pay attention to two situations. The first is related to the conveyance of goods across the customs border of the Customs Union and persons deemed to be taxpayers in this connection. The second is related to amendments to tax law, specifically, amendments to the Tax Code that will come into force on January 1, 2017 and that envision changes in VAT for online service sales.
In accordance with Article 143 of the Tax Code and Article 79 of the Customs Union Customs Code, taxpayers for VAT purposes are legal entities deemed as such under customs legislation of the Customs Union and the Russian Federation. The following operations are liable for VAT: importation of goods into the customs territory of Russia and sales of goods in the territory of Russia. VAT is paid by the importer of goods. In other words, a foreign company may become a taxpayer only if it has a representative office on the territory of Russia. The export of goods from Russia is not subject to VAT. In addition, in case of re-export VAT, refunds are envisaged.
Regarding the amendments to VAT for online services, it should be noted that as of January 1, 2017 a foreign company is subject to VAT if it provides online services in Russia. Services are deemed to be provided in Russia if the purchaser of the services carries out activities in Russia.
However, foreign companies need to know the peculiarities of Russian tax law only if they sell their online products directly to consumers. Otherwise intermediaries in online service sales actually become foreign company tax agents, as they are obligated to calculate and pay the tax.
Corporate profit tax
Under Article 246 of the Tax Code, taxpayers, for profit tax purposes, are foreign companies that carry out activities in Russia through permanent establishment and/or receive income from sources in Russia.
Taxable profit is determined according to the general rule as for Russian companies as gross income earned by a PE less tax-deductible expenses incurred. However, there is a special tax calculation procedure if a PE carries out activities of an auxiliary or preparatory nature without remuneration. In this case the tax base is 20% of expenses incurred.
If there is no PE, taxable profit is determined according to the rules under Article 309 of the Tax Code. Taxable profit:
– Income received from the distribution of profits or property of organizations, other entities or associations thereof, including their liquidation, in favor of foreign organizations;
– Interest income from all types of debt obligations;
– Income from the use of intellectual property rights in Russia;
– Rental and lease payments related to assets used in Russia;
– Income from international transport if at least one transit point is located in Russia;
– Fines and penalties for the violation of contractual obligations in Russia.
However, the list is not closed. Other analogous income is also subject to taxation. If a foreign organization does not have a PE, the tax is calculated and paid by a tax agent. Thus, in the case of interest income on securities, a depository is deemed to be a tax agent.
Violation of the procedure for the payment of taxes and levies under Russian law incurs liability under current tax law. One example is a violation under Article 122 of the Tax Code, “Nonpayment or incomplete payment of tax (levy).” This violation carries a fine of 20 or 40 percent of the amount of the unpaid tax, above the sum of the tax due to be paid. Thus, in its ruling (dated February 17, 2014, No. 09AP-1074/2014) in Case A40-118792/13, the Ninth Arbitration Court of Appeals upheld the decision to impose liability on an organization that was a foreign company’s tax agent in the payment of profit tax in the form of dividends on corporate rights. The incorrect payment of the tax and consequently the imposition of liability resulted from the fact that the company, organized by a foreign investor, misinterpreted the provisions of the law on dividends and failed to take into account the positions of the Russian supreme courts on this issue, which, naturally, could have been avoided with effective legal assistance from Russian law firms.
The examples related to corporate profit tax and VAT show that Russia, like any other tax jurisdiction, has a number of specifics regarding the taxation of foreign companies. Prior to entering the Russian market, it is advisable to consult with experts on tax law. This will allow a company to protect itself from the negative consequences related to liability for the violation of current law and will help reduce preparation time for starting entrepreneurial activities in Russia.