When is a foreign company obliged to register a subsidiary in Russia?
Foreign organizations are foreign legal entities, companies, and other corporate entities whose legal status is determined according to the legislation of the country in which they are established. The most common form of presence of foreign organizations in the Russian Federation is a representative office. The primary documents defining the legal and economic status of the representative office of the foreign organization in Russia are:
- Civil Code of the Russian Federation,
- Tax Code of the Russian Federation,
- Intergovernmental conventions and agreements between the governments of the Russian Federation and foreign countries.
When do we need to register?
According to the Russian Federation legislation, a foreign company must register a subsidiary if it conducts business on Russia’s territory. The main question here is what we mean, saying «business». Fortunately, the Civil Code of Russia gives us the definition: business is defined as an activity aimed at systematic income generation. The term «systematic» should be used in the meaning used in the Tax Code of the Russian Federation «twice or more during a calendar year» So here we have an answer to the question: If the company does some activities and they lead to the income more than once a year, the company needs to register the subsidiary. Of course, there are some nuances, and they are usually regulated by an international agreement between the Russian Federation and a specific country. But the general rule that we have already discussed is still the same.
But we have got only one employee. Do we need to register the subsidiary?
If you have an employee — the citizen of Russia and he works under the employment contract in the office, your company is obliged to open the permanent representative office. An exception is an employment contract with a remote employee, a civil agreement with an individual to perform work (provide services), as well as the implementation of preparatory and auxiliary activities by a foreign company in Russia if there are no signs of permanent representation.
Preparatory and support activities, in particular, include:
- use of facilities only for the purpose of storage, display and (or) delivery of goods belonging to this foreign organization prior to the start of such delivery;
- maintaining a stock of goods belonging to this foreign organization only for the purpose of their storage, display and (or) delivery prior to the start of such delivery;
- maintenance of a permanent place of business only for the purpose of purchasing goods by this foreign organization;
- maintenance of a permanent place of business only for the purpose of collecting, processing and (or) distributing information, accounting, marketing, advertising or market research of goods (works, services) sold by a foreign organization if such activity is not the regular activity of this organization;
- maintenance of a permanent place of business only for the purpose of simply signing contracts on behalf of this organization, if the contracts are approved in accordance with detailed written instructions of a foreign organization.
Permanent representation of a foreign company: what is it?
Foreign organizations can carry out business activities in Russia either through their permanent representative offices or without their establishment. In the first case, the foreign organization pays income tax, generally, in the same manner as Russian taxpayers.
In the second case, income tax is withheld from the source of income payment. However, certain types of income may not be taxed at all in Russia due to the Tax Code (chapter 25) or intergovernmental agreements.
Branches, representative offices, bureaus, offices, agencies, or any other separate divisions or other places of business through which the foreign company regularly conducts business activities on the territory of the Russian Federation can be the permanent representative.
The activities of a permanent representative office may be related to:
- the use of mineral resources and other natural resources in Russia;
- the construction, installation, assembling, commissioning, maintenance and operation of equipment;
- the sale of goods from warehouses in Russia;
- other works and services, except for preparatory and auxiliary activities (we have already written above).
The Civil Code and the Tax Code of the Russian Federation have different meanings of representatives
There are two main differences between a representative office, defined by the Civil Code of the Russian Federation, and a permanent representative office under Chapter 25 of the Tax Code of the Russian Federation.
In the Civil Code, the representative office only represents and protects the interests of the organization. In the Tax Code, a representative office (permanent establishment) performs more important tasks. It must conduct independent business in another country (choosing contractors, determining prices, other essential terms of transactions, and so on).
Secondly, in the Civil Code, a representative office is a division within a legal entity. The Tax Code says that a permanent establishment can be either a separate division of a foreign company or any «other place of business." For example, a Russian intermediary (legal entity or individual) through which a foreign company conducts its business in Russia.
As we have already written, if the activities of a foreign company in Russia are auxiliary or preparatory, this usually does not lead to the formation of a permanent representative office. But let’s look at the example to understand this issue completely.
A foreign company’s representative office provides advertising in Russia, stores and demonstrates samples of goods, and accepts orders from the customers in Russia. It passes these orders to the head office, concluding contracts with Russian customers and supplying them with goods from abroad.
The activity of the representative office, in this case, is only auxiliary. Therefore, there is no permanent establishment for tax purposes. Although a representative office in the meaning of the Civil Code may exist for years, it can be accredited by the State Registration Chamber or the Chamber of Commerce and Industry, and so on.
The same representative office independently imports goods to Russia and concludes contracts with buyers based on the General power of attorney of the head office.
Such activities can no longer be considered auxiliary. This is an independent business on the territory of the Russian Federation.
Tax registration of a representative office
Any foreign organization that plans to operate in Russia for more than 30 days a year is required to register with the Tax Authorities. You need to register not later than 30 days from the start date of your business. If a foreign organization does not plan to operate in Russia but opens an account with a Russian Bank, it is registered at the Bank’s location.
In addition, foreign companies that operate in Russia for less than 30 days a year must send notifications of income from activities in the Russian Federation using the specified form. The notification is sent before the start of the activity to the Tax Authorities and the Ministry of Internal Affairs of Russia.
If foreign companies do not have the representative office in Russia but receive income from Russia’s sources, they are required to inform the Tax Authorities about this income. To do this, they must send notifications of income received to the Tax Authorities at the location of the source of income payment and to the Ministry of internal Affairs of Russia. Such notification must be sent within one month from the day when the right to receive income arises separately for each source of payment.
Of course, there are a lot of nuances in this question. If you need our experts' consultation, please, contact us.