International Tax Legislation

One of the constitutional principles is the rule that internat.agreements concluded by Russia take precedence over its national legislation. This rule is equally applicable to conventions for avoidance of double taxation and prevention of fiscal evasion with respect to taxes (“double tax treaties”) and other internat.tax agreements of the Russian Federation.

A company can be called a rep. office if there is constant and regular activity at a particular place. As long as a representative office carries out non-commercial activity (marketing research, and other preparatory activity), it is not a subject to income tax. When commercial activity stars to take place, a representative office becomes a taxable entity.

2.permanent establishment = any separate unit or place of business of a foreign organization in Russia (the branch office, office, factory, construction site, etc.) through which it regularly carries out enterpreneural activity. Such units profits are generally taxed at the basic rate, as if it were an ordinary Russian company.

a) Even if such a unit is formally absent, but the foreign company keeps a "dependent agent" within Russia, for tax purposes, it is considered as a permanent establishment. dependent agent = representative of foreign organization which has authority to represent its interests on a regular basis and uses them to sign contracts on behalf of the foreign organization or for the coordination of their conditions reglamentations. term "dependent agent" was first legislated it is the Tax Code, although the principle was implicitly (неявно) applied in the past.

If Co receives income from sources within Russia, this income is taxed from this source. It means that tax shall be paid not by foreign Co but the Russian source (of income) (this may be a Rus.organization or a rep. office of a foreign Co in Russia), which in this case is the fiscal (Налоговый) agent.

Tax rate on dividend income is 15%; in the form of interest on state and municipal securities =15% or in some cases 0%. These rates do not depend on the presence or absence of representations.

As for other types of income, there are two rates of tax at source of income. For income from use or rental (charter) of vehicles in international transport rate is 10%. For other types of income, it is 20%.

Assets Tax in Russia

most important among the regional taxes. If a Representative Office/ foreign organization, or its branch, /subdivision has the assets on the territory of Russia, it should pay assets tax.
From January, 1, 2004 a new chapter to Tax Code that governs assets tax came into force. following main provisions of this chapter should be mentioned: 1. Max. size of assets tax rate will not exceed 2.2% 2. Rep. Offices that don’t conduct commercial activity, i.e. dont create “permanent establishment” on the territory of Russia, will only pay assets tax on property = real estate that it owns. (very lucrative for them as tax on property very low and price for property higher and higher)

Unified Social Tax

Unified Social Tax (UST) represents a social tax package that every employer has to pay to state funds. UST consists of contributions to Pension Fund, Social Security Fund and Obligatory Medical Insurance Fund. The total rate of UST is 35.6%. Rate can be considerably reduced.
Russia’s Tax Code provides for the so called regression scale, enabling a reduction of the 35.6% rate depending on employee's total earnings. The "the-higher-the-wage - the-less-is-the-rate" rule is applied.
Until January, 1, 2003 remuneration and benefits paid to foreign citizens did not generate a UST liability, provided that the foreigner concerned was unable to benefit from the funds either by law or contract. Starting from January 1, 2003 employers of foreign citizens are subject to UST on all remunerations and benefits paid to such foreign citizens. These changes have risen the issues of double taxation with respect to UST. Double taxation is generally avoided by the conclusion of social security agreements (so called “totalization agreements”). However, Russia doesn't have any of such agreements signed. The only consolation at this time is that the rate of UST in Russia is insignificant in comparison with the rates applicable in many other countries.

b) Income from sources in the Russian Federation without forming a permanent representation

If a foreign Co operates in Russia through independent agent, it does not lead to permanent establishment need. just a person who performs orders of a foreign organization in the course of his normal business activity e.g. as a broker or salesman.

Tax Code specifically provides some imp situations that do not create a permanent establishment:

• The department's activities, which bears a preparatory or auxiliary character.

• Import or export of goods by foreign trade contracts.

• Provision of staff for the Russian Federation.

• Ownership of shares in the capital stocks of Russian organizations.

If Co receives income from sources within Russia, this income is taxed from this source. It means that tax shall be paid not by foreign Co but the Russian source (of income) (this may be a Rus.organization or a rep. office of a foreign Co in Russia), which in this case is the fiscal (Налоговый) agent.

A foreign legal entity is required to register with the Russian tax authorities in each location in which it carries out activity through a subdivision (regardless of whether the activity is taxable or not) for a period exceeding 30 days without interruption or added up within a calendar year.

Special registration requirements apply for foreign legal entities which:

1.Own immovable property in Russia, 2. Own transport vehicles in Russia 3. Have movable property subject to taxation in Russia 4. Have opened bank accounts with Russian banks.

In accordance with the general provisions of the Tax Code, income received by a foreign legal entity and not attributed to a permanent establishment (PE) in Russia is subject to withholding income tax in Russia (to be withheld at source). Withholding income tax rates are as follows:

15% on dividends and income from participation in Russian enterprises with foreign investments; 10% on freight income; 20% on some other income from Russian sources, including royalty and interest, 20% of revenue on capital gain (from the sale of immovable property located in Russia or shares in Russian subsidiaries where the immovable property located in Russia represents more than 50% of assets).

Tax should be withheld by the tax agent and paid to budget within 3 days of the date when the income was paid out. Income tax withholding rates may be reduced under a relevant double taxation treaty, whose provisions may be applied based on confirmation of tax residence, to be provided by a foreign company to the Russian tax agent prior to the date of payment (no advance permission from the Russian tax authorities is required).

3) Previously, only residents of countries with suitable tax treaty with Russia, could carry out trade of shares in Russia on a tax-free basis. In particular, it was widely practiced to use Cypriot companies as the agreement with Cyprus is one of the most favorable tax treaties with Russia. Now, such selectivity is not longer needed:any foreign company may carry out transactions with shares, not falling under the withholding tax on income from their sale. Plus, the recent default in Cyprus proves this to be unwise.