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An overview of taxation policies in Russia

Over the past 16 years Russia has been engaged in a significant reform of its tax system, which has been implemented in phases. This reform has improved procedural rules and made them more favourable to taxpayers, has reduced the overall number of taxes and has reduced the overall tax burden in the country.

Types of Tax

The Tax Code sets forth three levels of taxation: federal, regional and local. Currently, federal taxes include VAT, excise taxes, profits tax, individual income tax, mineral extraction tax, State duty, special tax regimes, and several other taxes. Regional taxes include corporate property tax, transportation tax, and gambling tax, while local taxes include land tax, individual property tax, and the trade levy. Social security contributions are payable to the State Pension Fund, Social Security Fund, and Federal Mandatory Medical Insurance Fund.

There are five types of special tax regimes that may be applicable to certain activities and/or categories of taxpayers: single agriculture tax, simplified system of taxation, single tax on imputed income from certain kinds of activity, taxation of production sharing agreements, and the patent system of taxation. These special tax regimes have the status of a federal tax and may provide exemptions from certain federal, regional, and local taxes.

Corporate Profits Tax

The maximum corporate profits tax rate is 20%, which is currently payable at a rate of 2% to the federal budget and 18% to regional budgets. The regional authorities may, at their discretion, reduce their regional profits tax rate to as low as 13.5%. Thus, the overall tax rate can vary from 15.5% to 20%. For taxpayers participating in investment projects in the Russian East Siberia and Far-East regions the corporate profits tax rate may be reduced for a certain stability period (down to 0% in certain cases).

In the course of ongoing reforms significant changes were made to dividend taxation. Effective 1 January 2015, the tax rate on dividends received from Russian and foreign companies by Russian shareholders increased from 9% to 13%. To promote Russian holding companies, starting from 1 January 2008 dividends payable by foreign and Russian entities qualifying as “strategic investments” to Russian companies are exempt from profits tax. The exemption applies provided that on the day the corporate decision to pay the dividends is taken the following three tests are met:

1. The recipient of the dividends has held the shares continuously for not less than 365 days;

2. The recipient of the dividends owns not less than 50% of the shares in the company paying the dividends; and

3. The company paying dividends is not located in a jurisdiction included in a blacklist of off-shore jurisdictions adopted by Order No. 108n of the Russian Ministry of Finance, dated 13 November 2007 (the blacklist includes most off-shore low-tax jurisdictions and territories).

Starting from 1 January 2011 Russian holding companies are no longer required to meet the RUB500 million (approx. USD8.9 million) investment threshold to apply the dividend exemption, which has substantially increased the use of Russian holding companies.

As of 1 January 2015, the following tax rates apply to dividends:

0% withholding tax on dividends payable by Russian and foreign companies qualifying as “strategic investments” (50% or more shareholder with 365 days or longer holding period);

13% withholding tax on dividends payable by Russian and foreign companies to Russian shareholders in all other cases; and

15% withholding tax on dividends payable by Russian companies to foreign legal entities.

Taxable profit is defined as income less deductible expenses. A taxpayer is generally permitted to deduct economically justified and documentarily confirmed business expenses, however, deduction of certain types of expenses is subject to restrictions (e.g., certain advertising costs and representational, including business entertainment, and travel costs). As of 1 January 2009, some of these restrictions were repealed, in particular, taxpayers are now entitled to deduct per diems (previously only within the limits set by the Russian Government) and expenses on the education of employees in Russia and certain voluntary insurance expenses. Expenses on research and development (including those that failed to yield a positive result) falling into the list approved by Resolution of the Russian Government No. 988, dated 24 December 2008, are deductible in the reporting period at a rate of 150% of their actual amount.

Taxation of Foreign Companies

Russian legislation taxes profits derived from a “permanent establishment” in Russia, as well as certain other types of income derived without a permanent establishment in Russia. Importantly, whether a permanent establishment exists under Russian tax law is unrelated to whether a foreign company’s office has been registered in Russia. A permanent establishment may exist even if the office is not registered, and the existence of a registered office may not necessarily give rise to a taxable permanent establishment. Profit derived by foreign legal entities from their permanent establishments in Russia is generally taxed at the same profits tax rates applicable to Russian taxpayers. As of 1 January 2012, a new rule was included in the Tax Code requiring that the income of a permanent establishment be determined taking into account the functions performed in Russia, the assets used and commercial risks assumed, which is generally in line with the OECD approach.

Unless an applicable double taxation treaty provides for a lower rate, dividends payable by Russian companies to foreign shareholders are subject to a 15% withholding tax. Other listed income received by foreign legal entities from Russian sources is subject to either a 20% withholding tax (for most categories of income, including royalties and most types of interest) or a 10% withholding tax (for income from freight and lease of transportation vehicles), subject to any reduction available under an applicable double taxation treaty.

The corporate profits tax is payable and reported on a quarterly basis based on actual results for the first three months, the first six months, the first nine months and the year or on a monthly basis based on actual results for the previous month. The annual tax return and a report on a foreign legal entity’s activity in Russia must be submitted to the tax authorities by 28 March of the year following the close of the taxable year.

Controlled Foreign Companies Rules

On 24 November 2014 the President of the Russian Federation signed Federal Law No. 376-FZ (the “Deoffshorization Law”) introducing fundamentally new rules on taxation of profits of controlled foreign companies (CFC rules) in Russia. These new rules fundamentally affect most of the wealth management and private holding structures for Russia and mean that immediate review and action may be required. The new rules are effective as of 1 January 2015.

The Deoffshorization Law provides for an obligation of Russian tax residents (individuals and legal entities) to assess, report and pay taxes on undistributed profits of foreign companies and “foreign unincorporated structures” (unincorporated vehicles: funds, partnerships, trusts, and other forms of collective investment vehicles, that may engage in business activities on behalf of their partners/beneficiaries) where they own, directly or indirectly (through other Russian or foreign companies) (1) more than 25% of the shares, or (2) more than 10% of the shares if Russian persons in total own more than 50%, or which they otherwise control, subject to certain exemptions and temporary rules.

Russian CFC rules are very broad and cover not just companies in traditional low tax jurisdictions (e.g. BVI, Panama), but also companies in tax treaty jurisdictions (Cyprus, Luxembourg, Netherlands, USA), whose effective tax rate is less than 3/4 of the weighted average Russian corporate profits tax rate (composed of 20% standard rate and 13% rate for dividends based on the structure of the CFC’s income). The new rules could also cover certain types of trusts and other popular wealth management tools.

Russian taxpayers that are controlling persons are required to report a pro rata share of the CFC’s profits in their tax returns by the end of the year following the year for which the CFC prepared its financial statement (i.e., the first reporting campaign would be for 2016). CFC profits are subject to ordinary tax rates in Russia: 13% for individuals; 20% for legal entities.

Failure to file a notification on owning shares in foreign companies or a notification on participation in CFCs is subject to penalties of RUB50,000 (approx. USD889) and RUB100,000 (approx. USD1,778), respectively, for each company.

New Tax Residency Rules for Foreign Companies Based on Effective Management

Starting from 1 January 2015 foreign companies may be recognized as Russian tax residents (and become fully taxable in Russia on their worldwide income) if they are effectively managed in Russia. The company is deemed effectively managed in Russia if at least one of the following criteria is met: (1) the majority of board of directors’ meetings are in Russia; (2) management of the day-to-day activities takes place in Russia, or (3) executive bodies’ management decisions are made in Russia.

There are also certain secondary criteria which may impose an even higher compliance burden in order to avoid Russian tax residency.

The secondary criteria for foreign companies to be recognized as Russian tax residents include: (1) accounting and management accounting is performed in Russia, (2) document (records) management is performed in Russia, or (3) operational HR management is performed from Russia.

There is an exemption for companies with strong substance, i.e., local qualified staff and assets in a State which has a tax treaty with Russia. This may be helpful to protect bona fide companies registered in tax treaty jurisdictions.

New Beneficial Ownership Rules

The Deoffshorization Law introduces the concept of a beneficial owner into the domestic tax legislation, and it is drafted broadly (and focuses more on anti-conduit company rules) and seems to be more onerous than the latest accepted OECD interpretation. Withholding tax exemptions or reduced tax rates under tax treaties concluded with Russia are only available to beneficial owners of income (exercising functions and risks with respect to such income and determining its “economic fate”) and should not be provided to foreign companies having limited authority to dispose of income and exercising intermediary functions. Russian tax agents are encouraged to obtain additional beneficial owner status confirmations from recipients. The form of such confirmation is currently unclear. This is likely to result in more uncertainty and tax risks for many cross-border payments. Conservatively, the beneficial ownership requirement may apply even if a particular tax treaty does not contain the beneficial ownership clause. The new rules are effective as of 1 January 2015.

A foreign legal entity is deemed to be acting in the interest of non-disclosed third parties with respect to payments, and is subject to the 30% withholding tax (15% withholding tax with regard to dividends from shares in Russian joint stock companies), unless it provides aggregate information on the persons exercising rights to these securities and (or) on the persons represented by trustees/asset managers (except for investors in collective investment vehicles), which includes a number of securities and (or) depository receipts representing Russian securities, jurisdictions where the beneficial owners of income (“fakticheskiye poluchateli dokhoda”) have their tax residency and other relevant information on applicable tax benefits.

Double Taxation Treaties

Russia has signed 87 double taxation treaties (although seven tax treaties have not yet entered into force), which can provide for the reduction of the withholding tax rate on dividend income to as low as 5% and generally provide for a 0% withholding rate on other income (e.g. interest, royalties, and capital gains). For example, the 1998 Russia-Cyprus Double Taxation Treaty provides for a 0% withholding tax rate on interest, royalties, capital gains, and other income not related to a permanent establishment; a 5% withholding tax rate on dividends payable to Cypriot shareholders who have contributed over EUR100,000 to the charter capital of a Russian subsidiary responsible for paying out these dividends; and a 10% withholding tax rate on dividends payable to all other Cypriot shareholders. Many other tax treaties provide for similar withholding tax rates, although some have higher rates.

Value Added Tax (“VAT”)

VAT is imposed on all goods imported into Russia and is also applied to the sale of goods, work and services. According to recent amendments to the Tax Code the same VAT regime applies to goods and services that are sold in or imported into territories under Russian jurisdiction e.g., artificial islands and drilling platforms on the continental shelf. Under the new rules, certain types of works (services) provided for the purposes of  geological study, exploration and development of hydrocarbons on subsoil plots located on the continental shelf, exclusive economic zone of the Russian Federation and (or) the Russian sector of the Caspian Sea bed are subject to Russian VAT.

The tax period for VAT for all taxpayers and tax withholding agents is a calendar quarter. Starting from 1 January 2015, as a general rule taxpayers must pay VAT in equal instalments not later than the 25th day of each month following the reporting quarter. Current legislation imposes a VAT rate of 18% on the sale of most goods, work and services. A lower 10% rate is applied to limited types of goods, such as pharmaceuticals, medical equipment, and certain food products and periodicals. The export of goods is subject to 0% VAT. In addition, certain types of goods, work, and services are exempt from VAT including, but not limited to, the following:

Land plots, dwelling houses and apartments, lease of office space to accredited representative offices and branches of foreign legal entities from jurisdictions which apply reciprocal benefits;

Certain medical goods and services;

The sale of shares, derivatives and repo transactions;

Certain operations provided by financial services businesses (registrars, depositaries, dealers, brokers,  securities management businesses, investment, mutual and private pension fund management companies, clearing organizations, trade organizers);

The assignment of exclusive IP rights (e.g., patents, know-how), with the exception of trademarks, and rights to use the results of these IP rights (e.g., a software use license) based on licenses (including nonexclusive licenses).

An import VAT exemption applies to technological equipment that is not produced in Russia according to a list adopted by Resolution of the Russian Government No. 372, dated 30 April 2009 (as amended).

Generally, VAT paid on the acquisition of goods, work and services may be offset against VAT collected from customers. Russian buyers are not required to postpone offsetting input VAT on advance payments until the goods, work and services are delivered and can take an offset on special advance VAT invoices. Russian VAT legislation allows recognition of retroactive discounts in the current tax period through issuing corrective VAT invoices (however, if a discount does not change the price set in a contract, the taxpayer does not need to issue a corrective VAT invoice). The form of a corrective VAT invoice and the standards for its completion became effective as of 1st January 2012. Starting from 23rd May 2012 new e-Invoicing regulations came into force. e-Invoicing requires a digital signature and data transfer via authorized operators and is subject to agreement of the counterparties.

A Russian customer of a foreign company that is not registered with the tax authorities and is active (making sales or providing services) in Russia must withhold either 9.09% or 15.25% reverse charge VAT (depending on the applicable underlying VAT rate of 10% or 18%, respectively) from the amounts transferred to the foreign company and must itself remit such reverse charge VAT directly to the State budget.

As of 1 January 2014 VAT tax returns may be filed with the tax authorities only in electronic form.

Corporate Property Tax

As of 1 January 2004, Chapter 30 of the Tax Code (covering corporate property tax) came into effect, replacing the former 1991 Corporate Property Tax Law. Property tax is a regional tax, i.e. it is regulated by the legislation of the relevant region, with a maximum rate of 2.2%. The tax base includes movable and/or immovable fixed assets owned by the taxpayer in Russia, and is calculated based on the depreciated book value of those assets determined according to accounting rules (and not tax accounting rules). Starting from 1 January 2014 the tax base of certain types of real property, such as business and shopping centres, offices, trading premises, catering and consumer services premises as well as property owned by foreign entities with no permanent establishment in Russia or properties that are not used for the activities of such permanent establishments, shall be calculated based on their cadastral value, which is determined by a State cadastral assessment. The maximum tax rate for 2015 calculated under the new rules should not exceed 1.7% for property located in the Moscow region and 1.5% for objects located in all other regions of the Russian Federation.

Taxable assets do not include inventory, any costs or intangible assets recorded on the taxpayer’s balance sheet, land and bodies of water. Starting from 1 January 2013, movable property recorded as fixed assets from 1 January 2013 is not taxed.

Managing companies of mutual funds investing in real estate are subject to property tax on the property held in the fund. The corporate property tax is paid by the managing company from the property of the fund and effectively applies to property held for both corporate and individual investors. Effective as of 1 January 2013, the property of natural monopolies is taxed. The maximum tax rate is set for public railroads, pipelines, power lines and items considered an integral technical component of these facilities, and cannot exceed 1% in 2015.

Corporate property tax is payable on an annual basis, with advances due every quarter. However, regional governments in the Russian Federation may exempt certain categories of payers, including both Russian and foreign organizations, from the obligation to assess and make such advance payments, and sometimes provide property tax exemptions or investment incentives.

The Deoffshorization Law referred to in Section 8.6.1 above introduced a new requirement for foreign companies (and “foreign unincorporated structures”) holding real property in Russia to disclose direct and indirect owners (full ownership chain including individual beneficiaries) along with filing property tax returns.

Social Security Contributions

Effective as of 1 January 2010, the Unified Social Tax, which previously combined payments to the various Russian social funds, was replaced by separate contributions to the State Pension Fund, the Social Security Fund, the Federal Mandatory Medical Insurance Fund and the Territorial Mandatory Medical Insurance Funds (the latter were excluded from the list of recipients as of 1 January 2012).

As of 1 January 2015, the social security contributions apply at an aggregate rate of 30% (the same rate as for 2014) of an employee’s annual salary of up to the following thresholds (“social contributions thresholds”):

For contributions to the State Pension Fund — RUB711,000 (approx. USD12,640, RUB624,000 in 2014);

For contributions to the Social Security Fund — RUB670,000 (approx. USD11,910);

For contributions to the Federal Mandatory Medical Insurance Fund — no threshold.

The social security contributions are payable as follows: (i) to the State Pension Fund at a rate of 22% of the amount not exceeding the threshold and 10% of the excess, (ii) to the Social Security Fund at a rate of 2.9% of the amount not exceeding the threshold and 0% of the excess, (iii) to the Federal Mandatory Medical Insurance Fund at a rate of 5.1% of the amount with no limit.

The social security contributions apply to all payments to individuals (including individuals applying the simplified system of taxation) even if made from net income. The social security contributions period is a year, and the social security contributions are paid on a monthly basis.

Individual Income Tax

Individuals who are defined as “Russian tax residents,” i.e. those who have been in the country for 183 days or more during any 12 consecutive months, are subject to individual income tax on all their income, both that earned in Russia and that earned elsewhere. Individuals who do not meet this criterion are subject to tax on any income received from Russian sources. From 1 January 2001, Russia has enacted various income tax rates, including: a 13% flat rate applicable to most types of income received by Russian tax residents, including dividend income; a 35% rate applicable to income from gambling, lottery prizes, deemed income from low-interest or interest-free loans (except loans directed at new construction or acquisition (of a residence) and excessive bank interest; a 30% rate applicable to Russian-source income received by non-residents; and to income from certain types of securities held on foreign nominal holder and similar accounts (and not on an owners account) if the relevant foreign nominee receiving such income fails to provide appropriate aggregate information to the Russian depository in a timely fashion. As of 2011, foreign nationals who have not yet obtained Russian tax resident status but are recognized as highly qualified foreign specialists for the purposes of Russian employment legislation (i.e., receiving a salary of at least RUB2 million per year (approx. USD35,560)) enjoy 13% Russian individual income tax on their Russian salary.

As part of the legislative initiative to create an international financial centre in Russia, from 1 January 2010 new rules have applied to individuals recording financial results on transactions with different categories of securities and derivatives for tax purposes. Also, individual investors were granted the right to carry forward losses on tradable securities and tradable derivatives for ten years. Detailed provisions regarding the determination of the tax base on repo transactions for individuals were included into the tax code effective.

Regional and Local Taxes

Regional and local legislative bodies may, at their discretion, introduce various tax incentives and credits with regard to regional and local taxes. Regional taxes currently include corporate property tax, transportation tax, and gambling tax. Local taxes currently include property tax on individuals, land tax and the trade levy. Although these taxes are set regionally and locally the federal legislature has enacted limits on their overall rates. The trade levy may be enacted no earlier than 1 July 2015 only in Cities of Federal Significance (Moscow, St. Petersburg and Sevastopol). All other municipalities located in other Russian regions may introduce the trade levy only upon adoption of the relevant federal law.

 

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