The Simplified Tax System in Russia (6% and 15%)
How much tax should my company pay?
This question becomes even more complicated if you open your business or start working as an entrepreneur in a foreign country. There are a lot of taxes in the Russian Federation: VAT, Corporate Profit Tax, Corporate Property Tax, Water Tax to mention a few. But there is the light at the end of the tunnel if we speak about the Simplified Tax System.
Can my company apply this Tax System?
There are many rules and exceptions concerning the application of this system, but the most important are the following:
- The income must not exceed 150 million rubles (check the sum in euros according to the current FX rate)
- No more than 25% of the shares in the company may belong to another organization
- The company must not have more than 100 employees
- The value of the fixed assets may not be more than 150 million rubles
- Foreign organizations may not apply the simplified system. This means that the branch and representative offices of international organizations are not allowed to do this either.
- Russian companies that have any branch or representative offices are also excluded from applying this Tax System
- Certain professional groups may not apply the simplified system. These are mainly financial service providers.
If your organization meets these criteria, it can apply the Simplified Tax System. Besides, entrepreneurs can use the Simplified Tax System either. Speaking about newly registered companies, in order to apply simplified tax system they need to submit a request not later than 30 days after the registration. Otherwise, they are obliged to apply the General Tax System until the next calendar year. In case your company already exists, you can switch to the Simplified Tax System starting with the next calendar year if you submit the request not later than the 31st of December of the following year.
What are the advantages and disadvantages?
This system applies only one tax instead of such customary taxes as:
- Corporate Profit Tax
- VAT (except for VAT on imports)
- Corporate Property Tax
There are two options for the Simplified Tax System.
Option 1: your revenue. Under this variant, you pay 6% tax on your income. This does not mean that no expenses are taken into account at all when calculating the amount of tax. The following expenses may be deducted from the sum of the tax in order to reduce it:
- Compulsory contributions to the Russian Pension Fund for the employees
- Compulsory contributions to the Social Security Fund of Russia (However, the tax payment may not be reduced more than 50%)
The great advantage here is that you do not have to prove to the tax authorities that your expenses were necessary for the business. After all, expenses are not included in the calculation of the paid tax (except for contributions mentioned above).
Option 2: your revenue minus the costs. Under this variant, you pay 15% tax on the sum you get after deducting the costs from your income.
The following expenses are deductible for the Simplified Tax System:
- Acquisition of Fixed Assets and intangible assets
- Repair of Fixed Assets
- Rental (lease) payments
- Material expenses (as defined for Profit Tax)
- Payroll costs
- Mandatory insurance of employees and property
- VAT paid for supplies and other taxes and dues
- Interest and banking fees paid
- Fire, property protection
- Maintenance of company vehicles and compensation for the use of private cars for business trips within certain limits
- Expenses for business trips
- Notary fees (within limits)
- Auditor’s, accounting and legal services
- Publication of business accounting reports
- Office supplies
- Post, telephone, telegraph, and communication services
- Computer software databases under agreements concluded with the license holder
- Research and Development
- Unrecoverable customs payments
- Remuneration paid under commission and agency contracts
- Court expenses and arbitration fees
But here we meet some disadvantages of option 2.
If the sum of the costs is more than the sum of your revenue, in any case, you must pay 1% tax on all your yearly income even if you make a loss. As well, calculating the tax you can take into account only the costs that are included in the Tax Code. You should also remember that the tax authorities are able to ask you to prove the necessity of the costs anytime.
Still, in many cases, applying this option reduces the amount of taxes you have to pay.
All in all, there are some advantages of the simplified Tax System:
- you pay fewer taxes
- less stringent reporting obligations and so your accounting costs are lower. Under the simplified system, you only need to submit the complete bookkeeping to the tax authorities once per year. Under the general system, this must be done every quarter.
- because of the simplicity of the system, the possibility of having an argument with the tax authorities is lower.
- with Simplified Tax System, you do not pay VAT (except some certain cases, e.g. VAT of the tax agent) and, therefore, you can not reclaim VAT. By the way, VAT refunds are among the most common causes of conflicts with the tax authorities in Russia. These conflicts can be very
long-termand nerve-racking, so this is an important advantage.
The Simplified Tax System in Russia clearly shows that policymakers encourage your activities in most of the spheres. But this system is certainly not suitable for everyone.
And what if…?
Our experts are always ready to help you and determine if the Simplified Tax System is a good choice for you as an entrepreneur or for your company and arrange the transition. If you are thinking about doing business in Russia and want to register a company in Russia, we will help you compare different tax regimes and choose the most efficient, If you have any questions, do not hesitate to contact us.