SOMETHING ONE CAN
NOT BE IGNORANT OF.
You've probably come across a lot of intimidating information: exorbitant
setup costs, stories of tax raids, and that word "mafia" that
seems to never go away. Organizing and running business at the territory
of the Russian Federation
has long been associated with corruption, red tape and high level of
criminalization. Those entrepreneurs wise enough to ignore these, quite often
farfetched stories, have considerably profited operating on this market. Russia’s
vibrant economy has seen a decade of significant growth in recent years
averaging over 6% per annum. Today’s prospects for it remain bright, according
to the latest economic forecast the growth of consumption will continue at the
rate of 1.7-1.8% annually, mostly thanks to the middle class which is rapidly
growing and will form up to 50-55% of the society by 2011.
Now that you or your company has
decided that the benefits outweigh the risks and it is finally time to
enter the Russian market. You'll probably wake up at least once a week
wondering why you chose Russia,
but if you are willing to apply solid business principles and take a long-term
position, Russia is one of
the best places to be.If you are determined to set up your business in Russia,
next question to be asked where will
it be based? Do you want to open a
representative office in Moscow
, Saint-Petersburg or somewhere else?
Company formation could
take a lot of time and be quite complicated, therefore you shouldn’t do it
without an experienced reliable assistant. First of all, you should select the
legal form, to register company in Russia you choose one of the
following forms: OOO, ZAO, OAO, Branch, and Representative Office. The legal
form that you will choose for the new entity will much influence your business
activity. We will help you to decide which form is appropriate for the company
registration in Russia.
Secondly, you should
appoint/hire the Head of the branch/representative office. So you will need
work permits, visas and legal consultations.
Next step for business
formation is the registration of the new legal entity. It is quite long and
complicated process. Also you will need to open a bank account; we will help
you to choose the most suitable bank for you, the best conditions for
convenient work. Please mind that we also can do accounting for you. Accounting
is one of the internal corporate activities that can easily be outsourced. Our
secure computer software and IT infrastructure insures that bank transactions
are safe, while allowing the client to stay in control of the account.
As soon as your new legal
entity or office in Russia
is registered, even if you have no employees yet, you should decide how to
handle your financial accounting, pay taxes and prepare all necessary financial
and management reports. Without a doubt, Russia represents a unique
opportunity for both local and international businesses. However, it's no
secret that the Russian tax authorities have an aggressive reputation.
We can offer
a complete turn key range of services for formation of companies in Russia (new
company formations). From advising on the most efficient legal structure,
company registration and managing your daily accounting operations, we help you
get it right the first time. Our clients are 100% ensured against fines or
penalties being levied against them by the Russian tax authorities arising from
We bare the risks, so you don’t have to.
Types of Russian legal
Russian corporate law, governing the rights and
obligations of shareholders discussed below, applies as to shareholders of a joint
stock company ("JSC") and as to participants of a limited liability
company ("LLC"). Shareholders always have the power to amend the
company's internal rules and bylaws, change its authorized capital, elect any
members of the board of directors, approve annual reports, decide on
reorganization and liquidation.
Usually a participant's liability is limited to the extent of the capital he/she has invested in the company.
However, in the event of the bankruptcy of a company, a
"parent" may be held liable by a company's creditors if the parent's
actions caused the subsidiary to become insolvent.
A "parent company" is defined quite widely and includes
control not only by reference to ownership, but also contractual or other
relationships that allows a shareholder to
determine the decisions of the company.
Joint stock companies
A joint stock company is one of the most
commonly used Russian legal entity forms for business.
A joint stock company consists of shareholders
and may engage in various forms of commercial activities
envisaged by its charter documents, naturally under the condition that such
activity is not prohibited by Russian corporate law or other legislation,
subject to licensing where applicable. A joint stock company may contract,
undertake legal activities, acquire property, and sue and be sued. A
joint stock company may be either "open" ("OJSC", “OAO”
russian abbreviation), meaning publicly held , or "closed"
russian abbreviation), meaning privately held . Both these forms
may issue common or preferred shares and debentures. Both forms are subject to
statutory reporting requirements and regulatory restrictions, but the
requirements for public disclosure are not so strict for CJSCs.
In the organizing documents no provision can be made to prohibit a JSC shareholder from selling his/her shares.
capital and contributions
For an OJSC, the statutory minimum charter capital is RUB 100,000 (approximately USD 4,2552), and 10,000
RUB (approximately USD 425) for a CJSC.
Different classes of shares are allowed;
dividends and voting rights are equal for each share in a class. Shares in a
joint stock company are considered "securities" under the Russian law
and must be registered with the Federal Service for Financial Markets at the time
Board of directors of
The board of directors of a JSC
is responsible for the overall management
of the company's activities. The responsibilities of the director(s)
normally include all powers not specifically delegated to the realm of the
general meeting of shareholders or other management bodies. Though, these
responsibilities may be specifically limited by the company's charter document
or other applicable laws. Directors have broad fiduciary duties, and may be
held individually or jointly liable for damages to the company resulting from
At all times accounting records are kept in
roubles and according to Russian accounting rules (records may also be kept in
parallel according to any other desired accounting standards, e.g., IFRS).
Dividends may be paid quarterly, semi-annually,
or annually. The decision to pay dividends is made and discussed at the shareholder
meeting, but the amount of dividends can only be stated by the director or
board of directors. Dividends are determined based on the financial statements prepared under Russian
accounting and reporting standards.
LLC is also a
well-spread form of corporate organization. LLCs are often adopted by foreign
companies to conduct wholly-owned businesses in Russia3.
The minimum charter capital for an LLC is
10,000 RUB (around 425 USD).
Liability Company law provides for many similar provisions to those in the Joint Stock Company
A notable distinction between LLCs and JSCs is
the division of the capital of a LLC into "participations" or units, which are
not considered securities under the Russian
law, unlike shares in a JSC which are in fact securities.
Unlike in a JSC, the sale of participation by a shareholder of an LLC
can be restricted in the charter. Als well,
unlike a JSC, a participant may withdraw from an LLC at any time, demanding the
LLC (remaining participants) to provide him/her with a portion of the
net assets of the LLC proportionate to his/her interest in the LLC.
Limitations on the sale of participation
interests or preferential purchase rights or on the approval process for a
transfer of participation may be included in the charter of an LLC.
Dividends and voting rights are determined by the participants in the
Charter, although some restrictions on
voting rights exist in the Limited Liability Company Law.
Tax Code defines a state duty as a fee charged on organizations and individual enterpreneurs for taking certain legal
actions. The table below illustrates some of those legal actions and
corresponding state duties.
Registration of a legal entity
RUB 2,000 (USD 85)
of a subsidiary of a foreign entity
Registration of rights to real estate (FLE/RLE)
Registration of rights to transportation facilities
From RUB 100 (USD 4) to RUB 400 (USD
From RUB 10,000 (USD 425) to RUB
100,000 (USD 4255).
state registration of legal entities is performed by the State Pension Fund,
the State Fund of Social Insurance and the State Fund of Compulsory Medical
Insurance through the Federal Tax Service of the Russian Federation at the local level. The federal Tax Service
is in charge for the coordination of registrations of all sorts. The newly
established legal entity is granted a main state registration number (OGRN) and
the taxpayer's identification number (INN), the
relevant certificates are issued. The documents confirming the registration
with the above-mentioned Funds are sent to the newly established legal entity
by mail. If the company ,for some reason, needs confirmation of its
registration with the Funds right after the registration procedure, it should
apply to the Funds directly. Usually it takes up to 5 days to complete tax and
state registration and 1-2 days to obtain registration documents with the Fund
for an already registered legal entity (if the application was done in person
by one of the founders). The time for mail delivery may slow down the process a
little bit, for up to 4 weeks. Tax authorities nowadays only directly accept
the documents for state registration when filled out personally by one of the
founders of the company. If the documents are filed personally by the founder
it is possible to receive a registration certificate under the power of
attorney, otherwise the registration certificates are sent to the address of
the newly established company by regular mail, and that might take longer.
You will be required to provide the following documents for registration:
- Decision of the founders meeting;
- Charter (2 copies);
- Registration Application, notarized;
- Payment receipt.
If a foreign founder is involved, a
large number of documents needs to be apostilled (or legalized), translated and notarized, which usually means that the
registration process can take a lot longer than the above mentioned period.
"Express" company formation services are advertised everywhere, but
some caution has to be taken in selecting such services.
Sometimes only when a change to the
constituent documents is required and the change is rejected by the tax
authorities due to an earlier failure in the registration process. Resolving such
issues can be more time-consuming and costly than the proper registration of
the company in the first place.
Off-the-shelf companies are widely in
circulation, though it is not quite advisable to found a company in such manner.
There are always inherent risks, including potential liabilities, mostly
regarded to tax issues, involved in acquiring an off-the shelf company that may
have been used for undisclosed purposes.
Furthermore, in some cases the change in ownership of a company, involving more
than 20% of the shares, requires prior approval from the Federal Antimonopoly
Service at all times. In all cases, any alteration in ownership must be
registered, that can take almost as long as the formation of a new company
The tax authorities sometimes implement a number of requirements, and
failure to comply with may even lead to the rejection of the application. In
addition, recently the tax authorities stopped issuing the original of the
Charter (Articles of Association) which is filed for the state registration.
Only a certified copy is issued. As a result, if the company has to file the
copy of the Charter with any other state authorities, another copy of the
Charter has to be requested by the tax authorities every time. The copy is
usually issued within 5 working days and you will be charged around 400 RUR.
Applying for Registration Certificate, Tax Payer Identification Number
Certificate and Bank Signature Card.
For a LLC with the number employees less than 50, generally the General
director and Chief accountant do have a signature right.
You will be requested to provide the
Notarized registration certificate;
Notarized Taxpayer Identification Number (INN) certificate;
Documents confirming authority of the signatories (decision on the founders
on appointment/election of the Director etc.), notarized.
state fee for registration of a RLE (LLC or JSC) is 4,000 RUB (roughly 130 USD) must be transferred to the
account of the State Tax Inspectorate, and add some small extras. It’s highly
advisable to use Sberbank’s branches to carry out this sort of payment since
the tax authorities are familiar with the payment order issued by
the Sberbank and in case of the payment order issued by any other bank the
Inspectorate may request some additional confirmation that the payment was
The professional fee for the process of collecting documents, preparing
all charter documents and presenting them to the Russian registration
authorities typically range from 350,000 up
to 550,000 RUB ( 15,000 up to 25,000
USD), depending on complexity of the case.
How long it takes. Registration
The local tax authorities finalize the submitted charter documents,
their state of tax registration and then
forward them for registration with the
social funds and Federal Service for State Statistics without the confirmation
of the company being already registered. The registration processes take
up to 2 weeks.
a branch or representative office (RO)
stead of participating on the Russian Market as a legal entity, a foreign
company may choose to establish a presence in Russia through a representative
office (RO) or branch . A RO is authorized to conduct certain "preparatory and
auxiliary" activities for its head
office. A Branch, on the other hand, is able to conduct all the activities
which the head office itself could perform, including the execution of sales
contracts. A foreign company may also maintain a RO or Branch and a wholly or
partially-owned subsidiary in Russia.
A RO or Branch of a foreign company, operating in Russia is not regarded as a separate legal entity but as part of the same
legal entity as the head office of the RO or Branch. Therefore, a RO or
Branch is not subject to the same legal requirements
as a Russian legal entity. In addition, the application of tax rules to
non-residents of Russia may
vary from their application to Russian legal entities depending on whether or
not the RO or Branch constitutes a taxable presence in Russia. The currency regulations
apply differently to representative offices and Branches of foreign companies
than they do to Russian legal entities.
Any new RO or Branch of a foreign parent
company must be recognized by the appropriate government authorities through
the process called "accreditation".
A foreign legal entity is obligated to register with the tax and other
authorities depending on the number of days in the calendar year during which
the foreign legal entity has a presence in Russia.
Each RO or Branch of a foreign company must be
individually accredited. In general, each RO or Branch is responsible for its own
tax and other filings.
All ROs or Branches of one foreign legal entity in Russia are allowed to file one
consolidated VAT return. Furthermore, if the activities performed by different representative offices or Branches of one foreign
legal entity in Russia
constitute a part of one technological process, Russian profit tax can
be calculated for all ROs and Branches of the company on a consolidated basis.
The state fee for the registration of a branch or RO is 60,000 RUB (
2,553 USD), plus 500-2,000 USD, depending on the period of registration: one,
two, three or five years of your presence
A RO or branch can be accredited for up
to five years, and the state fee for registration depends on the
accreditation duration: 1,000-2,500 USD, plus some small extras. The
professional fees for the entire process of collecting documents, preparing
organizational documents and presenting the documents to the Russian
registration authorities typically range from 350,000 to 500,000 RUB (app.
15,000 up to 22,000 USD)
takes something 3-6 weeks to get a RO or Branch accredited. This process requires
a large volume of documentation to be prepared, authorized and, in many cases,
notarized and certified. As a result the total time required can therefore exceed the registration
period stipulated by the authorities.
A RO or Branch is a legal part of a foreign
company and therefore its oversea head office bears unlimited and full responsibility
for the obligations and actions of the RO or Branch working on the Russian
Representative office or
branch tax status
Any branch or RO constitutes a taxable presence in Russia for the parent foreign
company, naturally depending on the actual
activities carried out by the RO and the availability of protection
offered by an applicable double tax treaty ("DTT").
According to the terminology of russian tax
authorities, a foreign company has a "permanent establishment" if it
conducts certain business activities in Russia through its RO, branch or other
permanent body, based within the territory of the Russian Federation and used for such business activities on a regular basis.
Domestic rules for the determination of a "permanent establishment"
are similar to those outlined in the OECD Model Tax Convention. A Branch or RO,
as a result of the scope of its legal authority
and consequent activities always constitutes a taxable presence.
Opening a Bank account
Both rouble and foreign
currency accounts can be opened right after company’s registration. The
following documents are required for opening a bank account: filled out
application form, notarized copy of the Charter, notarized copy of the
founders’ decision of establishing a LLC (or other) and notarized copy of the
foundation agreement between the shareholders. In order to deposit the required
capital you must open so-called accumulative bank account for the name of the
legal entity that is due to be registered. Terms and conditions can vary,
depends on the bank, mostly opening an
account takes more than just one day because the procedure of the client-bank
acceptance is complicated.
The bank details must be supplied to the
Ministry of Taxation within 10 days from date of opening. Make sure to obtain a letter of confirmation.
Payment of charter
For any LLC, 50% of the charter capital must be
paid up front to the state registration and the balance must be paid within the
period indicated in the foundation agreement (but not longer than one year from
the date of its state registration).
In the case of a JSC, 50% of the charter
capital must be paid within three months after its state registration and the
balance within the period indicated in the foundation agreement (but not longer
than one year from the date of its state registration).
capital contributions can be made in cash or transferred from the bank account.In the first year of
operation the balance must be fully paid.
The least number of
As the matter of fact only one shareholder is
normally required. Under a certain rule, if a sole participant or shareholder
of a Russian company (LLC or CJSC) to be formed is itself a company currently owned
by only one participant or shareholder, it is obligatory that the Russian
company to be formed must have at least two participants or shareholders. A Closed Joint Stock Company founded by more than
50 shareholders must be converted into an Open Joint Stock Company. A Limited
Liability Company with over 50 participants must be converted into an
Open Joint Stock Company or into a manufacturing cooperative.
If the company’s volume of net assets is less than
the minimum charter capital required by the law and it lasts for two consecutive
years, such legal entity is subject to liquidation. If the shareholders do not proceed with a voluntary liquidation
them-selfs, government authorities may
petition the court to liquidate such company and creditors may demand
early termination or compensation for their losses. In practice, forced
liquidation is rare and most of the companies are complying with their payment obligations.
If the volume of company's net assets on its
balance sheet fall below its stated capital, a reduction in stated capital to net
asset value is required.
For any JSC the amount of its net assets on the
balance sheet is determined on a quarterly or annual basis and disclosed in the
quarterly and annual financial statements submitted to the Russian tax authorities.
In the case of LLC, no requirement is stated in
The tax law for reporting the company's net asset position to the authorities.
Taxation of corporate profits
Taxes may be categorized as follows:
- Federal taxes (1): These are applied throughout
the Russian Federation
uniform rates, VAT;
- Federal taxes (2): These are applied throughout
the Russian Federation at tax
determined by the Tax Code but which may be reduced by the regional
government authorities in respect of the portion of such taxes going to the
regional budget, e.g., corporate profits tax;
- Local/regional taxes: These taxes are
determined by the Tax Code and the
local or regional government authorities and are collected entirely locally or
e.g., property tax (a regional tax) and land tax (a local tax).
The above tax structure can result in different tax burdens in different
Tax base calculation
Usually, taxable profit is calculated as income
less deductible expenses based on tax accounting data.
Generally, income is determined
on an accrual basis. The cash basis is only allowed if average sales proceeds
for four consecutive quarters are less than 1,000,000
RUB ( 42,550 USD).
are recognized deductible if they are incurred to generate income and also if
economically justified and duly supported with certain documents. The documentation requirements in Russia are generally regarded as
more onerous and burdensome than in many other countries.
legal entity is not subject to corporate profits tax on its net business income
unless its Russian presence creates a "permanent establishment". If
a "permanent establishment" does exist, profits tax may only be
levied on the part of the profit of the foreign legal entity which
relates to operations of its Branch or RO operating on the Russian Market.
Profits tax is levied at the individual rate;
there is no provision for fiscal unity or group relief.
Any russian source income such as rent, royalties, interest and
dividends as well as international transportation
income received by a foreign legal entity, is subject to withholding tax.
Though there is no withholding tax on the
repatriation of profits from a local Russian office (Branch or RO) to the head
Withholding taxes may be reduced or even
eliminated if the recipient is a tax resident in the country entering in the double
tax treaty with Russia.
There is a list of certain Russian double tax treaties and the withholding tax rates applicable under these
treaties to dividends, interest and royalties.
In the absence of appropriate documents supporting treaty relief, the
payer of such income must withhold tax. If tax is withheld even though treaty
relief is available, a refund claim may be
filed by the foreign recipient. This is, however, a time-consuming process and
there can be no certainty that the refund will ultimately be payed.
The profits tax rate is generally 24%, that includes 6.5% for the
federal budget and 17.5% for the regional
a tax declaration
All taxpayers are obliged to file their annual
corporate profit tax declarations and pay the tax reflected therein by 28 March
of the year following the reporting year. A taxpayer may file profits tax returns monthly, based
on the tax accounting results for the previous month, or quarterly with monthly
estimated prepayments. In either case, an annual return is required with a
final calculation and any necessary adjustments.
The following table shows deductible expenses
for corporate taxable profits:
expenseAdvertising Up to 1 % Entertainment
Up to 4% of payroll 12% of
Pension and life insurance payroll 3% of payroll
Medical insurance for employees Within statutory limits
Depreciation and amortization
Depreciable or amortizable assets include fixed assets and intellectual
property used to generate income with an
initial value exceeding 20,000 RUB and have a useful life exceeding one
year. The following assets are not subject to depreciation or amortization:
- Property received with special purpose financing;
- Property acquired with state budget financing;
- Property not in service for more than three months;
- Property subject to modernization or
reconstruction for more than 12 months;
- Books and art works;
- Fixed assets provided (received) for use without charge; and
- Land and other objects of nature.
Depreciation and amortization procedures for
corporate profits tax purposes differ from those applicable under Russian statutory
accounting. For profits tax purposes, the
tax basis of a fixed asset is defined as the costs incurred in relation to
such asset in order to place the asset in service for production, including
purchase, transportation, installation and other costs.
The useful life of an asset is determined
within the limits established by the Russian Government.
Two depreciation methods are available for
profits tax purposes: straight-line and declining balance.
withholding on dividends
A Russia-based company should withhold tax at
the following rates from dividends paid and remit the tax to the federal
- 0% - for dividends payable to a Russian company
if this company owns at
least 50% of shares of dividend payer for 365 consecutive days and if this
company's investment in dividend payer exceeds 500,000,000 RUB
( 21,275,000 USD)
- 9% - for dividends payable to a Russian company or to a foreign company
with a permanent presence in the Russian Federation
(as defined in the applicable double tax treaty);
- 15% - for dividends payable to a foreign legal
- 9% - for dividends payable to an individual with Russian tax resident
- 30% - for dividends payable to an individual
with Russian non-resident status.
Value Added Tax (VAT)
Russian Value Added Tax (VAT) is designed to be withheld from taxable bodies and individuals on a basis
similar to the EU model.
VAT taxable activities include:
- sale of goods (work,
services) in the Russian
- transfer of goods (performance of work,
provision of services) in the Russian
Federation for the taxpayer's own use in respect of which
expenses are not
deductible for corporate profits tax purposes;
- construction and
building projects for the taxpayer's own use;
- import of goods through
the customs of the Russian
The taxable base for VAT on imports is the customs value of the goods
plus customs duties, excise and customs
fees. "Technological equipment" imported by a foreign company
to invest in the charter capital of a Russia legal entity may be exempt from import VAT.
VAT tax is imposed on the following dates:
- the date of shipment of goods
- the date of shipment’s payment, full or partial
Advance payments are included in the VAT
taxable base on the date of funds receipt.
Input VAT (VAT on purchases and other expenses) is recoverable if a
number of requirements are met. The
recoverability of input VAT does not depend on if it has been actually
paid to the supplier or importer.
Input VAT is not recoverable if expenses or assets used in the manufacture or sale of products exempted from
VAT, including those expenses or assets incurred for non-production
activities. In certain circumstances input VAT recovery may be denied if the
supplier has not paid over their output VAT.
If a taxpayer has net VAT
due from the budget (input VAT is greater than output VAT), the tax authority
conducts a desk audit of the submitted VAT declaration. Within seven days of the end of the desk audit the tax authority issues
a decision on whether to refund VAT or not. However, the tax authorities often require
a taxpayer to carry forward VAT due from the budget for the offset of this
amount against future VAT payable.
If the supplier of VAT taxable goods and services is not registered with
the russian tax authorities, VAT must be
collected from the payer at the source of
payment. In order to do so, an organization or individual entrepreneur
conducting settlements on the basis of delegation, commission or agency
contracts is considered a tax agent for goods sold by a non-registered foreign entity.
With some exceptions, VAT withheld
at the source qualifies as input VAT.
The Russian Tax Code provides for goods and
services place of supply rules which determine whether Russian VAT applies to certain
and payment VAT
All taxpayers must file their VAT declarations
on a monthly or quarterly basis. The final settlement of tax is made on the same date
as it is filed.
submission of declarations and payment of VAT by a foreign legal entity with
several branches in the Russian
Federation can be performed on a
by one division chosen by the board of directors.
The general VAT rate is 18%. The reduced VAT rate of 10% applicable for
medical goods, books, periodicals,
foodstuffs and children's clothes. The export of goods is subject to “O”
VAT . Certain lines of business, including banking and securities transactions,
are exempt from VAT altogether.
Individuals are subject to Russian personal
income tax, both residents or non-residents. A tax resident is subject to personal
income tax on worldwide income, whereas a non-resident is subject to personal
income tax only on Russian-source income.
Russian source income will include any income from any payment source for
performed services or sold goods in Russia.
is considered a Russian tax resident if physically present in the Russian Federation for
183 days or more during 12 consecutive months.
Personal income tax rate
personal Income tax rate of 13 % applies to all types of Income with the
- 9 percent tax rate on
dividend Income from Russian and foreign companies;
- 30 percent tax rate on Russian-source Income of
non-residents, except for
15 percent tax rate on dividend Income from Russian companies
- 35 percent tax rate on specific types of
Income, Including: Interest from bank
deposits In excess of specified rates; material benefit from loans provided by
or Individual entrepreneurs at a rate of Interest less than the
The Russian tax resident can benefit from
standard, social, property and professional deductions in computing the taxable base.
Social deductions include educational expenditures, per taxpayer and
each of his/her children and medical
expenditures, per family, anything up to
50,000 RUB ( 2,127 USD ) each.
Property deductions include expenditures
relating to the purchase and sale of real estate and personal property.
Professional deductions include expenditures
for the creation of intellectual property rights.
An individual who has taxable income that is not subject to withholding,
for example any kind of awards coming from
abroad, is personally responsible for filing and paying the appropriate income
A foreign citizen may be entitled to some
benefits under a double tax treaty. In this case certain information must be
provided to the Russian tax authorities to claim such benefits.
types of taxation
The general rate of tax withholding is 20% (on
interest, royalties, income from leasing and rental operations, etc). Tax
withholding on freight income paid to a non-resident with no permanent
establishment in Russia
Capital gains from the sale of real estate
located in Russia
are subject to Russian tax at the following rates:
- 24% - on the net gain (sales proceeds less
expenses) if the expenses for the
of such property can be supported by appropriate documents;
- 20% - on gross income (sales proceeds) where documents to support
expenses on the above sales are not
presented by the recipient of income;
Capital gains by a foreign shareholder from the sale of a RLE are also
exempt from withholding tax except where
more than 50% of the assets of the RLE being sold consist of real
Companies,legal entities and individual entrepreneurs, which are
manufacturers and traders of excisable
products,such as tobacco, alcohol, oil products, cars etc are considered
Excise tax, as any other tax, is
levied on the value of a taxable product.
A taxpayer can use registration certificates
which permit a taxpayer to offset the tax due by deducting the amount of excise taxes
Excise tax is not imposed on
Property tax is assessed on all ROs and
branches of foreign legal entitles owning property at the territory of the Russian Federation.
Such taxable property Includes personal
property and buildings treated as fixed assets in compliance with the
russian accounting standards. For foreign legal entitles without a permanent presence in Russia, only its buildings are
subject to property tax. The taxation rate is set by regional
legislation but may not exceed 2.2%. In Moscow, Moscow region and St.
Petersburg the rate is currently set at 2.2%.
land, water and other natural resourcs :
The land tax is imposed on the landlords’
ownership rights, rights of permanent use or lifelong heritable possession.
The land tax is payable to the regional
budgets. The Tax Code sets the tax base and reporting requirements, while the local
authorities set the tax rate and filing period.
This tax is imposed on taxpayers that use water resources to manufacture
or produce hydroelectricity. Its rate
depends on the source which the water is taken from and the economic
region where it is located.
Another tax is imposed on taxpayers
exploiting fauna and water biological resources.
Finally, a tax is imposed on taxpayers
recognized as sub-soil users based on the value of extracted mineral
Every Russia-based employer, including a
Russian legal entity and a RO or Branch of a FLE registered in Russia,
must pay social security contributions - Unified Social Tax - to the
Russian Pension Fund and medical contributions for injury and any occupational
Social Tax ("UST")
UST is assessed on the gross payroll of each employee and is payable by
his/her employer to the Federal Budget, Social Insurance and Medical Insurance
Funds. The Tax Code provides a regressive scale of annual UST rates as
Tax base (RUB) UST rate %
First 280,000 (USD 11,915) 26
(USD 13,615) 10
Over 600,000 (USD 25,530) 2
The Tax Code renders special tax regimes under which a taxpayer is
pay one specified tax instead of a number of taxes. Such a regime may be applied if certain requirements are met. Special
tax regimes include the simplified tax, unified agricultural tax, tax on
imputed income and production sharing.
Simplified tax system
Such taxation system can be adopted by a
company if certain criteria are met, including but not limited to:
- The company's annual turnover does not exceed
( 850,966 USD);
- The net book value of fixed assets and
intangible assets does not exceed
RUB ( 4,254,830 USD);
than 100 people are employed.
The simplified tax replaces the profits tax, VAT (except VAT paid on
imports), property tax, and a portion of UST. Use of the simplified tax system
does not exempt employers or individual entrepreneurs from making mandatory
pension insurance contributions or
withholding income tax from employees' compensation.
The following organizations are not eligible for simplified tax system
- A Russian company with local branches;
- A FLE, RO or Branch of a FLE;
- An organization engaged in specified lines of
business (e.g., banks, insurance
pension funds, investment funds, participants in [production
sharing agreements], etc.); or
- A company where more than 25% of its capital is
owned by other
- The simplified tax rates are:
- 6% - if a taxpayer
selects "revenues" as the tax base; and
- 15% - if a taxpayer selects "revenues less
deductible expenses" as the tax
A company involved in agricultural production,
processing and selling agricultural products may also use a simplified tax system,
under condition that the share of income from the sale of agricultural products
accounts for at least 70% of its overall sales income.
The unified agricultural tax replaces the profits tax VAT,except VAT
paid on imports, property tax and the
portion of UST payable to the medical and social funds. The imposed tax
at 6% of revenues is less than certain deductible expenses.
on imputed income
Regional authorities may impose a "tax on imputed income" on
individual entrepreneurs and small
companies. This tax rate is set by the local tax authorities for specific types
of activities: public catering or retail trade. A company paying this
tax is set apart from most other taxes. The imputed income tax does not exempt an employer or individual entrepreneur
from mandatory pension insurance contributions. The tax on imputed
income is imposed at the rate of 15% on the "imputed"
revenue per month and is adjusted by special coefficients based on the type
of utilized land, range of goods, seasonal factors, level of income, etc.
Transportation tax is a regional tax payable on
all registered transportation vehicles: cars, motor bicycles, ships,
aircraft, etc. by the entities (or individuals) registered as the owners of these vehicles.
The tax base
is usually based on the size of the engine. The tax rate varies for different
means of transportation and may vary according with the regional legislation.
the principal law applicable to employment arrangements is the Russian
The interests of the employer and employees are
regulated and protected by the system of social partnership in the following
- Negotiation of collective agreements;
- Mutual consultation on employment issues;
- Participation of employees in the management of the organization;
- Participation of third parties in pre-court
settlements between an employer and its employees.
A collective agreement may be concluded between the employer and the
employees. The labour law does not require a collective agreement, unless on of
the parties insists to issue it. The
trade unions protect employees’ rights when such contract gets broken. The employer is represented by the General Director or
his authorized representative.
The law allows the parties to define the content of a collective
agreement independently; however, they may
not be less favorable than those in the Labor Code. The collective
agreement is subject to registration with the appropriate State Labor Office.
As it is written in the Labor Code, when an employer makes decisions,
the employer should consider the opinion of the trade union(s) if such exists.
So far the russian trade unions are more
typically formed at company level rather than on an industry-wide level
as in western countries. In the event If a disagreement occurs between them and
cannot be settled by common consent, then the employee can file his/her
complaint and submit it to the civil court.
Accordingly to the Labor Code an employment
contract should contain "essential" conditions, such as place of
work, commencement of work, position, rights and obligations of the employer and the
employee, salary and benefits, also additional conditions: probation, trial
An employment contracts may be signed for:
- an indefinite term; or
- a fixed term of not more than five years.
The contracts with a fixed term are only allowed when employment
relationships cannot be established for an
indefinite term and specific conditions are met.
Particularly, fixed term contracts are recomended for the following
categories of employees:
- Directors, deputy directors, chief accountants;
- Employees working in companies created for a specific project;
- Part-time workers (having more than one job);
- If the work is temporary in nature.
welcome to sign an individual written employment contract with each employee.
After its signing, a respective order for the employee's admission to work should
be issued by the General Director.
In the case of a fixed term contract, the term
and the reason for defining the duration or cancelation of the contract must be
Trial periods, maximum up to three months, are permitted to assess the
suitability of employees for the position. At the same time certain categories
of employees are not subject to a trial period:pregnant women, minors,
transferees. The trial period may be established for six months for directors,
deputy directors, chief accountants, deputy
chief accountants and directors of branches, representative offices or other
If the payment of salary has been overdue for more than 15 days, the
employee has the right to notify the
employer and to stop attending his/her working station. In such cases, the
employer may be obliged by court to pay the employee for each idle day by two-thirds
of the average salary, calculations based on actual salary accrued and the
actual working time for the past 12 months.
The employer must pay interest for each day of
delay in payment of salary in the amount of no less than 1/300 of the refinancing rate
of the Bank of Russia.
Even criminal sanctions may be imposed on the
employer if the payment of salary is delayed
for more than two months - up to 125,000 RUB or imprisonment for up to
The Russian employment legislation requires that a work labour book to
be kept for each employee working for more than five days for one enterprise. This is the basic document concerning
the activities of the employee, work performed by the employee, reasons for
dismissal, etc. Firms are generally required to sign, stamp and hold
such work record cards for their employees.
Amendments should be made to the labor book if
there are any changes to material conditions of employment.
Though nowadays looks like these so-called
“work labour books” soon will be
completely withdrawn from the circulation, instead letters of references will
be in favour.
of employment agreement
The reasons for terminating an employment
contract according to the Russian employment legislation include a number of
situations, such as:
- Agreement of the
of the term of the employment contract;
- Cancellation of the employment contract at the
initiative of management or employee;
- Refusal of the employee to continue working due
to a change in owner or
of the employer, or its reorganization;
of the employee to continue work owing to relocation of the employer.
employee may terminate a contract by giving two week's advance written notice to the company, unless an earlier
termination is mutually agreed. A fixed term employment contract may be
terminated by an employee if he/ she is injured
or disabled and not in position anymore to perform the required type and volume
of work, management violation of the employment legislation, the collective
agreement or employment contract, or if the employee has other good
grounds for doing so.
The Russian employment legislation secures
certain guarantees for all legal employees:
- Wages for time spent away from work, for the performance of the functions
a trade union officer, appearing in court,
going to vote, and fulfilling other state
or social responsibilities;
- Severance pay in certain
- Certain social benefits:
maternity leave, paid holidays and vacation time;
- Limited overtime is permitted for certain
workers, subject to certain conditions.
payable at the following coefficients: 1.5 times normal salary per
hour for the first two hours, 2 times for subsequent hours. Employees may
demand additional days-off as compensation for overtime;
- In general, employees are entitled to twelve
days of paid Russian national
and annual leave of not less than 28 calendar days;
- Employees are generally entitled to sick leave benefits, paid by the
Insurance Fund. The monthly amount of such statutory benefits may not
exceed 17,250 USD ( 734 USD), though the
first two days of
sick leave must be covered by the employer;
- Women are entitled to get paid for maternity
leave, 70 days before and after childbirth as well as unpaid leave until the child's
In compliance with the Labor Code severance pay must be equal to at
least two week's average earnings where an
employment contract is terminated in certain circumstances, for example:
- Drafting or enlisting of
an employee into military service;
- Refusal of an employee to be transferred to
work in another locality together
enterprise, institution or organization upon its relocation;
- Reinstatement of an
employee who previously performed the work.
In the event of the dissolution of an enterprise, institution, or
organization, or staffing cuts, a one-off payment of monthly average earnings
is required with additional payments if the
dismissed employee is unable to find work, but no more than two months.
To eliminate a position by redundancy, at least 60 days notice must be given to
the employee and severance pay must be made in the amount equal to two months'
salary. If the employee is unable to find alternative employment, then up to
two additional months' salary may be claimed from the former employer.
An employer may void a contract with employee in the
- An employee submitted
false documents when he/she was hired;
- An employee fails to discharge work duties on a regular basis for no
- Is absent for no good cause.
- Is inebriated at work
- Discloses commercial information or internal confidential information of
the employer to the third party
- Steals from the employer.
- Fails to comply with labor protection requirements, that can cause a significant damage to the equipment or
The Russian labour law stipulates that
employment contracts cannot be terminated on the initiative of the employer with the
- Pregnant women or women
with children under the age of three;
- Single women with
children under 14 or disabled children under 16.
If the employee’s age is under 18, an
employment contract may be terminated by the State
Labor Inspectorate and Commission on Minors.
It may prove difficult to terminate an
employment contract on the grounds that the employee is not suitable for the
position unless there are clear job requirements with demonstrable failings by
the employee. Generally courts rule in
favour of an employee when considering cases of alleged wrongful dismissal. In
practice, companies seek where possible to secure the employee's voluntary
A subcontractor may be engaged pursuant to
provisions of the Russian Civil Code relating to civil work contracts. Under a
civil work contract, the contractor
performs certain type work at his/her own risk for the hiring company. The
“sub” is required to use its own materials, unless otherwise stipulated by the contract.
However, if the nature of the contract
is effectively an employment
agreement, a court is likely to uphold the applicability of labor law should
a dispute arise.
a non-national employee in Russia
permits for foreign employees
All non-nationals employed in the Russian Federation must obtain work
permits. An employer willing to hire a
foreign national must apply for authorization to hire foreign citizens
and check the quotas for that with the Federal Immigration Service. On the
basis of the authorization and within the limits of the quota, the Immigration
Service can grant the named foreign national such permitting document.
The process of proper
hiring a foreign employee in Russia
requires the following steps:
of the company with local employment centre
The procedure of legalizing
relations with foreign employee shall be started from registration of the
company with a local Employment centre. This registration shall be made once.
After such a registration the company will have a right:
- to submit an application for work permit
- to publish through the Employment centre
an advertisement of the appropriate vacancies for those positions where
the requirement to get a quota is temporarily waived
Submission of quota applications
to employ foreigners
The Russian migration
authorities require that companies shall in advance annually apply to the
employment centers for the rights to employ foreigners. According to the
current regulations, the companies shall reserve quotas for its foreign
employees by filing applications for their work permit quota for the next year
by the May 1st of the current year.
If a company needs to
obtain work permits for its foreign employees in the current year without
having filed quota applications in the previous one, extra quota applications
should be submitted.
Herewith, each year the government approves a list of positions where the
requirement to get a quota is temporarily waived (usually, a general director
of the company, head of rep office). However, such list is valid until the end
of the year and the government can at any time decide to retract this law.
the permit for the company to engage foreign staff
In order to have right to
employ expats (nationals of non-CIS countries) the company shall apply to the
Federal Migration Service (FMS) for a permit to engage foreign labour. The FMS
considers the application within 30 days after submission of the documents.
Herewith, according to the
current regulations, before applying to the FMS the company shall publish
through the Employment centre an advertisement of the appropriate vacancies
(i.e. of the jobs that the foreign employees are hired for) for a month period
and wait for possible Russian candidates. It's a formal part of the process but
the company will be automatically refused by the FMS if advertisement term is
work permits for foreign workers
The company must apply to the
Federal Migration Service (FMS) for a work permit for each foreign employee.
The FMS considers the documents within 30 days.
the company with the FMS in order to get invitations
In order to apply for the
invitations for its foreign employees the company shall be registered with
Federal Migration Service (FMS). Such registration is valid for 1 year and
shall be prolonged annually. As well the registration shall be amended if the
company’s details are changed.
invitations for a foreign employee
In order to enable the
employee to get a working visa the company shall apply to migration service for
issuing an invitation.
of the incoming foreign employees with the local department of FMS at the place
of stay in the Russian
According to the current
regulations, the company shall register its foreign employees with the local
department FMS at place of stay within 3 working days after their entry into
the Russian Federation.
Notification of the local tax
authorities and the local employment centre concerning the newly employed
According to the current
regulations, the company shall notify the local tax authorities concerning each
employed expat within 10 calendar days after his/her entry into the Russian
Federation, the local employment centre and regional state labour inspection -
within a month after conclusion of the labour contract with the foreign employee.
Some of business activities are subject to
licensing by the appropriate government authorities, including, for
example, banking, construction, and the sale of Pharmaceuticals.
that licensing process in Russia
can be very demanding with regard to documentary support, and for foreigners,
with poor language knowledge mostly it turns out to be a very time-consuming and
stressful red tape.
those cases where a company undertakes a regulated activity without the appropriate license, a government agency (such as
a tax inspectorate) may apply to the court demanding fines for such company and
even its termination,in some cases with confiscation of all income from
the unlicensed activity.
will lead you through the process of obtaining licenses hustle free. We have a
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The purchase of land is presently regulated by
the Federal Land Code, which must be implemented through enabling legislation by each
regional government authority. It is still generally complicated to deal with
land ownership in Russia.
Mostly, land is available under lease (sometimes with a right of first
refusal to purchase) for a maximum duration
of 50 years.
Liquidation, bankruptcy, reorganization
Here is a list of circumstances under which company’s existance may be
- According to the decision of shareholders general meeting;
- In compliance with the court decision if the company has become
insolvent or bankrupt;
- A court decision in some cases of gross violation of the law;
- By achievement of the goal which the company
The liquidation procedures first of all include
settlement of the issue with the tax authorities and payment of the liquidation
fee. The tax closure can cause significant delays in completing its procedures
as a tax audit is often performed long after the tax closure is initiated.
Once a liquidation commission has been
appointed, all rights to manage the company are transferred to the commission.
Primarily bankruptcy law provides protection
for enterprise's creditors and outlines the procedures to be followed in
the event of bankruptcy. If the company has been recognized insolvent it is
understood that it is unable to satisfy all pecuniary claims made by creditors
or to meet and execute pecuniary
obligations as it is stated by the court. Then the legal entity is officially considered
insolvent and consequently can be declared bankrupt if it fails to meet pecuniary obligations for more than
three months after the date such obligations were presented.
In the event of bankruptcy legal actions can be
initiated if the debt is over 100,000 RUB ( around 4,255 USD) for a legal entity and
10,000 RUB (around 425 USD) for an
of legal entity
All mergers, consolidations, split-ups and
spin-offs, as well as transformations are permitted under the Civil Code, Joint Stock
Company Law and Limited Liability Company Law.
Such reorganization implicates series of steps to be undertaken which, under individual
circumstances, can demand considerable
efforts and time.
Annually any OJSC undergoes a Russian statutory
audit. A CJSC is expected to undergo an annual audit if it meets certain legal
criteria. In particular, an audit is mandatory for the following companies:
- All credit and insurance
- Any companies with annual revenue of over
50,000,000 RUB (over 2,127,415 USD) or with total assets over 20,000,000 RUB ( over 850,966 USD).
all JSCs are subject to audit by the initiative of the company's internal audit committee, by the
internal auditor, or by the decision of the shareholders general meeting, or by
the board of directors, yet by demand of a shareholder or group of shareholders
holding 10% or more of the voting stock.
audit procedures must be performed by an auditor or audit firm with a valid
Russian audit license.
and Social Insurance Funds
The amount of
contributions due to the Russian Pension Fund is evaluated on the gross payroll
in respect of each employee and are paid on a regressive scale, depending on
the employee's annual income. Deductions are capped at 56,800 RUB per annum per
employee and are not payable on an individual's annual income above 600,000
to the Russian Pension Fund are deductible from UST, thus an employer reduces its
current UST payment by contributions to the Russian Pension Fund. As a result, they do not actually represent an additional
to the Social Insurance Fund are payable in addition to the taxes mentioned above.
The rate of contributions depends on the risk category which the employer is
referred to by the fund. The current
minimum contribution is 0.2% of payroll and the maximum of 8.5 % annually.
Capitalization rules are applicable when:
company has an outstanding debt (a "controlled debt"):
- to a foreign company that owns (directly or
indirectly) more than 20% of
company's share capital, or
- to a Russian company that is an affiliate of
the aforementioned foreign
- in respect of which an affiliated person or the
foreign company itself acts
as a guarantor, surety or otherwise guarantees repayment of the debt by
debtor company, and
The amount of such company's
unpaid loans (unsettled debts) exceeds the
net assets of the Russian company more than three times (12.5 times for
banks and leasing companies).
The excess interest, the amount of interest on the controlled debt exceeding
the 3:1 or 12:5:1 ratio, is considered a
dividend, which is non-deductible for profits tax purposes and generally is
subject to withholding tax of 15% or lower rate under an applicable DTT.
Possible income and
Receipt of money transfers from a parent
company, a subsidiary, or an individual does not result in taxable income
- The ownership of the recipient or transferor in
the charter capital of the other
party to the transaction is more than 50%;
- The individual's
ownership in the company-recipient is above 50%;
- The property received (except for money) is not
disposed of within one year
from the date of receipt.
The Tax Code requires taxpayers, including
branches and RO of foreign companies, to maintain separate accounts for profits
The methodology applied for corporate profits tax purposes should be
clearly explained in the taxpayer's tax
accounting policy. Once chosen, the tax accounting policy may not be
changed during the financial year.
Specifically, a taxpayer must independently
develop its tax accounting policy and apply it for at least two tax periods with
respect to expenses treated as direct expenses and the method for valuing
If expenses cannot be allocated directly to a
manufacturing process, such expenses are to be allocated on an any other
economically justified basis.
Profits generated by russian branch or RO can be repatriated through several
procedures: transfer pricing mechanisms,
service charges, royalties and interest payments. These are, however, coming
under increasing official scrutiny and often raise other tax issues:
- Transfer prices impact
the amount of customs duty;
- Management services can create a taxable
presence in Russia
for the service provider;
- Consulting services can be challenged with respect to deducibility and
subject to VAT;
- Royalties charged must
be economically justifiable;
- Interest is deductible up to a certain rate,
but subject to the thin capitalization
discussion in the Profits tax section above).
The Russian tax authorities are entitled to
change the prices of the following transactions and impose additional taxes, late payment
interest and penalties if the sales price deviates from the market level by
more than 20%:
- transactions between related companies where one party to the
directly or indirectly owns 20% or more of
the share capital of the other party;
- barter transactions;
- foreign trade transactions;
- transactions where the price deviates by more
These are one-sided adjustments in that a
Russian seller with additional tax costs from a transfer pricing challenge
will not lead to a reduced tax cost for a Russian buyer.
Customs duties levied on imported goods are assessed at various rates,
according to the goods classification, applied to the customs value of the
imported goods. We have to admit that the
applicable rates for the most frequently imported commodities are significantly
higher than those in most Western states. Customs rates usually vary
from 5% to 20% and apply to goods from countries which enjoy most favored
nation status with Russia.
If goods come from developing countries with most favored nation status, the
customs duties may be reduced. If goods come from a country that is not on the list of loyal countries, the customs
duties are imposed at twice the normal rates.
Assets imported into Russia as contributions from a
shareholder of foreign LLC as the charter capital of a Russian branch or RO may
be exempt from import customs duties if certain conditions are met.
Currently, this customs duty exemption is broader than the import VAT exemption for
Customs clearance is intended to be much simpler and faster due to new
procedures, so-called "Green Corridor", developed by the Russian
Federal Customs Service.
Export duties are assessed on exports of
certain raw materials, such as timber, oil, metals, coal
Naturally,export customs duties are depending
on the goods exported. The export duty on oil and oil products is reviewed
every two months by the Russian Government based
on the market price of oil.
The Foreign Exchange Control Law (the
"Currency Law") regulates currency transactions In Russia. All
currency transactions are conducted without limitation.
Russian entities perform rouble
transactions nation-wide without any restriction. The foreign currency transactions between residents which can
be performed without any restriction include:
- receipt and repayment of loans and interest;
- deposit and withdrawal of cash from bank accounts;
- certain transactions with bills of exchange issued by authorized banks;
- purchase and sale of foreign currency by individuals;
- payment of commissions to authorized banks.
Generally, foreign currency transactions
between residents and non-residents can be performed without limitation.
All russian legal entities with foreign participation are considered
residents for the purposes of currency
regulations, and may compensate their employees, doesn’t matter if they are
foreign or not, in roubles or in kind (in-kind compensation may not exceed 20%
of total salary). Branches or ROs of foreign companies may draw the
payroll either in roubles or in a foreign
Russian employees may receive
- By money transfer from outside Russia or from a local bank account
foreign legal entity to a bank account of
the individual in a Russian authorized
- While working overseas for a foreign employer
bringing the foreign currency back into Russia on return.
The Russian citizens may legally open foreign currency accounts with
authorized banks in Russia. Foreign
currency deposits may be made in such accounts and the Russian citizens
may withdraw cash from such deposits freely.