What are the specifics of foreign companies’ taxation in Russia?
Understanding the importance of attracting foreign investors, Russia provides them with a national legal regime with the same rights that Russian companies have.
What rules and rates can be applied to foreign companies, and what legal status is most profitable to work with?
Foreign organizations in the Russian Federation conduct business through their representative offices or Russian organizations. Depending on this, the taxation of foreign organizations in the Russian Federation differs. More information on legal presence in Russia you can read here.
Features of the profit tax calculation for foreign organizations in Russia are regulated by articles 306–309 of the Tax Code.
To operate in the Russian Federation, a foreign company must register its representative office, division, or branch. A special feature of foreign legal entities' tax status is that the rights of the Russian Federation to impose taxes are provided by international agreements on the avoidance of double taxation.
The taxation of foreign companies in the Russian Federation can be divided into 2 types:
- Taxation of companies that have representative offices in the Russian Federation.
- Taxation of organizations that do not have representative offices in the Russian Federation but receive income in a different way.
Taxation of companies that have representative offices in the Russian Federation
If a foreign company has a permanent representative office in the Russian Federation, it is a tax agent for profit tax when paying certain types of income to foreign companies that do not have permanent representative offices in the Russian Federation.
The tax base is calculated in this way: the amount of income received minus the costs (for example, for machine maintenance, repair work, etc.). Such expenses must be economically justified, documented, and made to implement activities aimed at generating income.
Not all foreign companies pay taxes equally. There are also representative offices that are exclusively engaged in providing support and preparatory services.
They provide these services on a permanent basis and free of charge. However, regardless of this, they are also under taxation. But the tax is calculated not from the difference in income and expenses but from the costs of carrying out its activities. So, the less a company spends on its functions, the less it will pay.
Currently, the tax rate is set at 20%.
Foreign organizations that are registered and operate in the Russian Federation are required to maintain accounting records. Branches and representative offices of the company independently perform the functions of a legal entity and reflect the results of their activities. At the same time, they must form an accounting policy for the purposes of accounting.
Foreign companies that are taxpayers in accordance with the tax legislation of the Russian Federation must report at the place of registration and submit reports to the Federal Tax Service. In addition to tax reporting, foreign companies also submit financial statements to the tax authority, regardless of their key performance indicators and their tax status.
As to other taxes, foreign companies that sell goods (services) through their representative offices in the Russian Federation are the same VAT payers as Russian organizations. In other words, they pay VAT to the budget on a General basis and submit a tax report to the Federal Tax Service. The tax rates applied to them are stipulated in article 164 of the Tax Code, according to which they are 0%, 10%, and 18%, depending on the type of product or service.
Also, if a foreign representative office in Russia owns the movable or immovable property, land plots, they must pay Property Tax and Land Tax.
For the Property Tax, the average annual property value or cadastral value (for real estate) is taken as the tax base. The tax rate is set by each region separately, but it cannot exceed 2.2%. The article also sets other limits for certain categories of property.
Land Tax is calculated in the same way as for Russian companies. In accordance with article 394 of the Tax Code, specific tax rates are set by municipalities' laws. However, the law sets limits that such rates may not exceed:
- 0.3% of the cadastral value in relation to land for housing construction, agriculture, personal or subsidiary farming;
- 1.5% for all other lands.
If the company’s work is organized through a branch or other form of representation and it employs employees, it obviously has an obligation to pay insurance contributions for such employees or other individuals to whom it pays remuneration.
At the same time, the foreign registration of such a company does not matter at all: the amount of insurance premiums is determined in accordance with article 426 of the Tax Code, according to which they are:
- pension insurance — 22%;
- social insurance — 2.9%;
- medical insurance — 5,1%.
The calculation is based on remuneration paid to individuals, including the salary of employees of the representative office.
Taxation of organizations that do not have representative offices in the Russian Federation but receive income in a different way.
Taxable income received by foreign companies without representative offices in the Russian Federation is given in article 309 of the Russian Federation’s Tax Code. This list includes:
- dividends paid to a member of a Russian company;
- income received from the distribution of profit/property of a Russian company (including distributions during liquidation);
- interest on any debt, including debt obligations on state and municipal equity securities;
- income received as a result of the use of intellectual property rights;
- income received as a result of the sale of shares or interests of Russian companies whose assets consist of more than 50% of real estate located in the Russian Federation;
- income received from the sale of Russian real estate;
- income received from leasing or subleasing property that is used in the Russian Federation;
- revenue generated from international transportation;
- fines and penalties received for breach of obligations;
- other income.
If a foreign company does not have representative offices in the Russian Federation, but it receives income from any Russian sources, the tax is paid for it by the tax agent.
For companies that do not have permanent representative offices in the Russian Federation, the taxation object can also be the property located in the Russian Federation.
Foreign companies that pay Property Tax are required to submit a tax report to the tax authority at the place of registration.
Land Tax is paid by foreign organizations that own a land plot in the Russian Federation. The object of taxation, in this case, is a land plot. The company calculates the tax itself and pays it to the region’s local budget, where the land plot is located. The tax report is submitted to the tax authority in accordance with the location of the tax area.