Controlled foreign company rules
Federal Law No. 376-FZ of November 24, 2014
This law, which entered into force on January 1, 2015, introduces a fundamentally new institution into Russian tax legislation: rules on controlled foreign corporations (CFCs) (primarily the new chapter 3.4 and new article 309.1 of the Russian Federation Tax Code (RF TC)).
Under the CFC rules, the undistributed profits of foreign companies and of foreign structures without the formation of a legal entity, if controlled by individuals or legal entities that are Russian tax residents (controlling persons), will be recognized for Russian tax purposes as income of the controlling persons, taxable depending on the status of the controlling person as corporate tax (at 20%) or personal income tax (at 13%).
A foreign company is considered to be controlled by a Russian tax resident if that resident exerts or has the ability to exert a decisive influence on the company’s decisions regarding the distribution of its after-tax profits (income) by virtue of direct or indirect participation in the company, participation in a management agreement in respect of the company, or other circumstances of the relationship between the resident and the company and/or other persons. On the same grounds, subject to a number of additional conditions, a foreign structure without the formation of a legal entity (trust, fund, etc.) may be deemed to be controlled.
In particular, a foreign company is deemed to be controlled if (i) a Russian tax resident (together with spouse and minor children in the case of individuals) directly or indirectly holds an interest in the company in excess of 25%, or (ii) a Russian tax resident (together with spouse and minor children in the case of individuals) directly or indirectly holds an interest in the company in excess of 10% and the interests held by all Russian tax residents (regardless of their interrelations) exceed 50%. In 2015 a transitional period will be in effect: a foreign company will be deemed to be controlled if a Russian tax resident (together with spouse and minor children) holds more than a 50% interest in the company.
Note that the grounds for recognizing a foreign company under the law as a CFC are not exhaustive. If a Russian tax resident exercises actual control over a foreign company’s decisions regarding the distribution of earned profits, the tax authorities may treat the foreign company as controlled by that resident even if the resident’s share of direct or indirect participation in the company is less than the threshold values or the resident holds no interest at all in the company.
Russian tax residents are required give notice of the foreign companies they control (according to the above criteria), as well as notice of any foreign companies in which their share of participation exceeds 10%. For foreign structures without the status of a legal entity, the tax authority must be notified of the creation of the structure, of actual control over it, of an actual right to the structure’s income, and of an actual right to income/profits distributed from the structure.
The law makes no provision for exempting a CFC’s profits from taxation in Russia according to jurisdiction (a so-called “white list”), with the exception of companies established in member states of the Eurasian Economic Union. However, the law does allow certain exemptions of such profits from taxation in Russia on the basis of (i) special status (in particular banks and insurance companies, as well as non-commercial organizations that do not distribute profits), (ii) nature of activity (in particular, companies earning more than 80% of their profits from so-called “active” income, in contrast to the “passive” forms of income listed in the law), (iii) level of taxation (effective tax rate in the company’s home jurisdiction relative to Russian rates), and (iv) the company’s total profits (a CFC’s profits are not taxed in Russia if its total profits do not exceed 50 million rubles in 2015, 30 million rubles in 2016, or 10 million rubles in 2017 and thereafter). The criteria of “active” income and level of taxation apply only if the company’s home jurisdiction has a double-taxation agreement with Russia and is not on the “black list” of jurisdictions that do not exchange tax information with Russia.
A CFC’s taxable profits are calculated according to chapter 25 RF TC (for purposes of both profit tax and personal income tax), unless the CFC’s financial statements are subject to a mandatory audit under the domestic law applicable to the CFC and the CFC is located in a state with which Russia has a double-taxation agreement. In the latter case the CFC’s profits are calculated on the basis of its foreign audited financial statements.
Profits of a CFC are booked when the tax base of its controlling Russian resident is determined, pro rata to the resident’s interest in the CFC at the date of the decision on profit distribution, or if such decision is not adopted on December 31 of the year in which the financial year ends—i.e., the year covered by the financial statements of the company in accordance with the domestic law applicable to it—at the end of the relevant period.
The profits of a CFC are reduced by the amount of the profits actually distributed to its participants during the period to which the profits correspond (interim dividends) and in the calendar year after the end of that period. When there are multiple Russian residents controlling a CFC, its profits are determined by only one of them.
The law also amends chapter 16 by adding specific tax offenses relating to violations of CFC rules, including the rules governing notifications regarding CFCs and foreign structures that are not legal entities. In particular, failure to submit a notice of participation in a CFC or submission of incorrect information is punishable by a fine of 100,000 rubles for each foreign company/structure concerning which no information or incorrect information was submitted.
Failure to pay the tax on a CFC’s profits in full is punishable by a fine equal to 20% of the unpaid tax, but no less than 100,000 rubles. However, there is a moratorium on the provisions governing liability for that offense (art. 129.5 RF TC): Russian tax residents will be subject to fines for such nonpayment only in respect of profits relating to 2018 and later tax periods.
Rules on Russian tax residency of legal entities and on beneficial owner
Federal Law No. 376-FZ of November 24, 2014
In addition to the controlled foreign company rules, the law introduces other “de-offshorization” measures, including, first and foremost, rules for determining the Russian tax residency status of legal entities (art. 246.2 RF TC).
According to the new rules, a foreign organization may be recognized as a Russian tax resident if its place of effective management is Russia. An organization’s place of effective management is deemed to be Russia if any of the following is true: (a) the majority of meetings of the organization’s board of directors or other collective governing body (not executive body) are held in Russia; (b) the organization’s executive body regularly performs its activities in Russia (the extent of activities in Russia is equal to or substantially greater than the extent of activities elsewhere); (c) the organization’s key (leading) officials perform their activities associated with decision-making and actions relating to the organization’s day-to-day (current) operations primarily in Russia. If none of the above primary criteria is met or only criterion (a) or (b) is met, secondary criteria are applied; in that case, it is sufficient to satisfy any one of the secondary criteria for Russia to be recognized as the place of effective management. The secondary criteria are: (i) the organization’s accounting or management accounting (disregarding activities relating to the preparation of consolidated financial statements) is performed in Russia; (ii) the organization’s records management is performed in Russia; (iii) operational management of the organization’s personnel is performed in Russia.
The law explicitly states that the performance in Russia of activities of preparation and holding of meetings of a company’s shareholders/participants, preparation for holding meetings of the board of directors, strategic planning, budgeting, preparation and compilation of consolidated accounting statements, internal audit and internal control, and compilation and adoption of internal methodologies, standards, and policies, in the absence of decision-making on the day-to-day management of a foreign organization, does not have the result of making Russia the organization’s place of effective management.
The law also lists circumstances in which a foreign organization is not recognized as a Russian tax resident despite meeting the criteria of having its place of effective management in Russia. In particular, a foreign organization may not be deemed a Russian tax resident if it conducts commercial activities outside the Russian Federation using its own personnel and assets in a state with which Russia has concluded a double-taxation agreement, or if it is recognized as a tax resident of another state in accordance with a double-taxation agreement with that state.
An exception from Russian tax residency rules is also made for passive holding companies—companies in which a Russian controlling person directly or indirectly holds no less than a 50% interest for at least 365 days, more than 50% of whose assets consists of capital in other foreign organizations, whose “passive” income is 20% or less of their total income, and which are located in countries that are not on the Finance Ministry’s “black list” and have a double-taxation agreement with Russia. Furthermore, the holding company must either have no income or at least 95% of its income must be in the form of dividends. If all these criteria are met, the holding company is not recognized as a Russian tax resident, regardless of whether the criterion of place of effective operations is met.
Under certain conditions, a foreign organization may independently declare itself a Russian tax resident.
Beneficial owner rules
Federal Law No. 376-FZ of November 24, 2014
Another de-offshorization measure is the “actual recipient of income” (beneficial owner) rules added by Federal Law No. 376-FZ to arts. 7 and 312 RF TC. The rules are aimed at preventing the abuse of double-taxation agreements through so-called “conduit companies”. These companies, established in a jurisdiction that has a double-taxation agreement with Russia, conduct no activities of their own but receive income from Russian sources under the favorable taxation regime of the double-taxation agreement and transfer it to an offshore jurisdiction.
Under the beneficial owner rules, a foreign company cannot avail itself of the benefits of a double-taxation agreement between Russia and the company’s home jurisdiction in respect of income from Russian sources if the foreign company has limited powers to dispose of the income and performs intermediary functions in respect of that income in the interests of another person, without performing any other functions and without itself assuming any risks, paying such income directly or indirectly (in whole or in part) to such other person, which person would not be entitled, if the income had been received from the sources in Russia directly, to enjoy such benefits (i.e., is located in a different jurisdiction). The beneficial owner is the person who through direct and/or indirect participation in the organization, control over the organization, or by virtue of other circumstances has the right to use and/or dispose of such income independently, or the person in whose interests the other person is authorized to dispose of such income (art. 7 RF TC).
If the beneficial owner is an individual or legal entity with tax residency in a state other than the state where the direct recipient of the income is resident, but that other state also has a double-taxation agreement with Russia, the income is taxed according to the provisions of the double-taxation agreement with that other state.
If the beneficial owner is a Russian tax resident, it is taxed under Russian tax laws. If such Russian tax resident is an organization, an income source that is a Russian organization (provided that the tax authority where the organization is registered is informed of this fact) is not required to perform the duties of a tax agent, and the income recipient pays tax independently (art. 7(4) RF TC). In the case of income in the form of dividends, if the beneficial owner is a Russian organization, that organization may, subject to compliance with article 284(3)(1) RF TC and a number of additional conditions set out in article 312(1.1) RF TC (the clause added by the law), apply to those dividends the zero-rate tax applicable to “direct” payments.
Higher rates of profit tax and personal income tax on dividends
Federal Law No. 366-FZ of November 24, 2014
Starting from the 2015 tax period, the tax rate on dividends paid to individuals and legal entities that are Russian residents is 13% (formerly 9%), according to the new version of article 284(3)(2) RF TC. Article 224(4) RF TC is repealed.
As before, the tax base for dividend income is calculated separately, which does not allow such income to be reduced for tax purposes by an organization’s expenses relating to its principal activities (deductions are for individuals) (arts. 210(2) and 274(2) RF TC).
RF Investigative Committee regains powers to initiate criminal cases for tax offenses
Federal Law No. 308-FZ of October 22, 2014
The law establishes new procedures for the initiation of criminal cases in tax-related offenses (arts. 198–199.2 of the RF Criminal Code).
According to these amendments, upon receiving a report that a tax offense has been committed, the investigator forwards the report together with relevant materials and a calculation of the unpaid amount to the superior tax authority of the tax authority with which the taxpayer/tax agent is registered.
The superior tax authority has 15 days to send a reply to the investigator concerning the information it has on tax offenses—namely, whether a tax audit of the taxpayer/tax agent has been or is being performed at the time the query is received from the investigator. If an audit has been performed and the tax authority has issued a final decision recording the tax offense mentioned in the report received by the investigator, the tax authority sends the finding on the tax violations to the investigator.
Within 30 days of receiving the report of the offense, the investor must decide whether a criminal case should be initiated. However, the tax authority’s reply is not binding on the investigator. A criminal case may be initiated even if a tax audit of the taxpayer/tax agent has not been performed or is not being performed at the time the information is exchanged.
Accordingly, article 140(1.1) of the RF Criminal Procedure Code, which provided that only materials received from a tax authority following a tax audit could serve as the basis for initiation a tax-related criminal case, has been repealed.
RF Investigative Committee investigators have thus regained the power to independently initiate criminal cases for tax offenses, irrespective of tax audits. In the process of initiation of criminal cases, tax authorities have been given the role of an advisory body, whose opinion or even lack of opinion is not binding on the investigator.
New VAT return form
RF Federal Tax Service Order No. MMB-7-3/558@ of October 29, 2014
January 1, 2015, marks the entry into force of amendments to article 174 of the RF Tax Code: a restated version of clause 5 and new rules in clauses 5.1 and 5.2 (Federal Laws No. 134-FZ of June 28, 2013, and No. 238-FZ of July 21, 2014).
We recall that these innovations to the Tax Code require VAT returns to be submitted solely in electronic format, with the inclusion of information from the taxpayer’s purchase and sales ledgers.
Intermediaries acting on behalf of another person (agents, commission agents), if they have VAT taxpayer status and are not exempt from the relevant obligations, must also include in the VAT return information from their registers of VAT invoices received and issued in performance of their intermediary activities. If such intermediaries are not VAT taxpayers or are exempt from the obligations of a VAT taxpayer, they must submit the actual registers of issued and received VAT invoices to the tax authorities in electronic form.
According to the restated version of clause 5 and the new provisions of clauses 5.1 and 5.2 of article 174 RF TC (Federal Laws No. 134-FZ of June 28, 2013, and No. 238-FZ of July 21, 2014), the RF Federal Tax Service has approved a new VAT return form, the procedure for its completion, and the format for its submission in electronic form. The new form is to be used from the first quarter of 2015.
According to the new form and the procedure for its completion, the date and number of each VAT invoice received or issued by a taxpayer, and likewise corrections to an adjusted VAT invoice issued to adjust information in an original VAT invoice, are to be reflected on a separate page of the return. The return must also indicate the date on which the purchased goods, work, or services were booked and the date and number of the document confirming payment of tax to the counterparty (according to received VAT invoices). If there are several such documents relating to a transaction that is reflected in a single received VAT invoice, a separate page of the return must be completed for each such document. The return must also state all other information recorded in the purchase and sales ledgers (customs declaration number, INN/KPP of the intermediary, etc.) and the register of issued and received VAT invoices (for intermediary transactions).
Reforms of property taxes for individuals and legal entities
Federal Law No. 284-FZ of October 4, 2014
Reforms to the system of taxation of immovable property continued in 2014.
For example, Federal Law No. 284-FZ codified legislative provisions governing the tax on the property of individuals (previously Russian Federation Law No. 2003-1 of December 9, 1991, now the new chapter 32 of the RF Tax Code). The provisions of chapter 32 RF TC enter into force on January 1, 2015.
The main difference from the previous regulations is that the tax base is no longer the total inventory value but instead the cadastral value of the immovable property. At the same time, the law establishes a 4-year transitional period (until January 1, 2020), during which the legislative bodies of RF regions must approve a single date on which the procedure for determining the tax base according to cadastral value will begin to be applied in that region. In RF regions where such a decision has not been made, the tax base will continue to be determined according to inventory value. An exception has been made for the federal cities of Moscow, St. Petersburg, and Sevastopol, for which no transitional period is provided: taxation based on cadastral value begins in 2015 (for properties whose cadastral value has been approved). Furthermore, the cadastral value will always be used to tax properties included by the competent authorities of RF regions (in accordance with art. 378.2 RF TC) in the list of properties for which the tax base for the corporate property tax is defined as the cadastral value (i.e., primarily commercial real estate).
For some properties that are taxed at their cadastral value, a system of deductions has been established: in particular, in residential premises the taxable area is automatically reduced (by 20 square meters in apartments, by 10 square meters in rooms, and by 50 square meters in residential buildings). RF regions have discretion to increase the amount of these deductions (art. 403 RF TC).
The limits within which RF regions can set tax rates ranges from 0.1% to 2% depending on the category of the immovable property (art. 406 RF TC). For residential premises, for example, the maximum allowable rate is 0.3%; for commercial real estate and other immovable property whose cadastral value exceeds 300 million rubles (the so-called “luxury tax”), the maximum rate is 2%.
Furthermore, article 408 RF TC grants a general 4-year “grace period” during which taxes calculated at the rates approved by RF regions within the range set by article 406 RF TC will be reduced by a fixed reduction factor. The system of these reduction factors is designed such that the tax amount increases in each successive year during the grace period.
For certain categories of individuals (including pensioners), the Law provides tax benefits in the form of an exemption of taxes primarily for residential premises (art. 407 RF TC). Each taxpayer may claim the exemption for only one property.
A number of amendments have been made to article 378.2 RF TC, which deals with the corporate property tax applicable to properties whose tax base is defined as their cadastral value. In particular, the list of properties taxable at their cadastral value (art. 378.2(1)(4) RF TC) includes residential buildings and residential premises not accounted on the balance sheet as fixed assets.
Also noteworthy is the addition of article 378.2(15) RF TC, which provides that if the cadastral value is changed by a decision of the commission for consideration of cadastral value assessment disputes or by a court decision, information on the cadastral value established by such decision of the commission or court will be taken into account when determining the tax base as of the tax period in which the request for revision of cadastral value was filed, but not earlier than the date on which the disputed cadastral value was entered into the cadaster. The same rule is introduced for the tax on the property of individuals (art. 403(2) RF TC).
RF SAC Plenum guidance on value-added tax
RF SAC Plenum Ruling No. 33 of May 30, 2014
Among the rulings that the RF Supreme Arbitration Court (“RF SAC”) managed to adopt in plenary session before its elimination (on August 6, 2014) was a ruling dealing with controversial questions from practice in the application of chapter 21 RF TC, governing the charging of VAT.
The ruling contains clarifications on virtually all elements of VAT taxation, including determination of the tax base and tax deductions.
Among the clarifications, the following can be singled out as most likely to affect the size of the tax burden and the development of court practice:
- in situations where, by virtue of article 173(5)(2) RF TC, a taxpayer has issued to a buyer a VAT invoice separating out the VAT amount and is under an obligation to pay that tax amount to the budget, that taxpayer may apply tax deductions for goods, works, services, and property rights acquired for the purpose of such transactions (s. 6 of the Ruling);
- a disposal of property as a result of events beyond a taxpayer’s control (loss of property due to spoilage, breakage, theft, natural disaster, or similar events) does not constitute a taxable event. However, a taxpayer is required to record the disposal and the fact that the property was disposed of for the stated reasons, and was not transferred to third parties (art. 54(1) RF TC). In that connection, when a dispute arises concerning the truthfulness of the reasons cited by a taxpayer for a property disposal, including during assessment of the accuracy and completeness of documents submitted by the taxpayer to corroborate the fact and circumstances of the disposal, courts should consider the nature of the taxpayer’s activities and the conditions of the taxpayer’s economic management, take into account whether the volumes and frequency of the property disposal correspond to the usual level for such activities and other similar circumstances, and also evaluate the tax authority’s objections as to the likelihood of the property disposal for the reasons stated by the taxpayer, in particular arguments as to excessive losses (s. 10 of the Ruling);
- a transfer of goods/works/services from a taxpayer to a counterparty in addition to the main goods (e.g., souvenirs, gifts, and bonuses) without extra charge is taxable under article 146(1)(1) RF TC as a transfer of goods (performance of works, provision of services) on a gratuitous basis unless the taxpayer proves that the price of the main goods includes the value of the additionally transferred goods/works/services and the tax charged on the main transaction also reflects the transfer of the additional goods/works/services. In the case of a transfer of goods/works/services for advertising purposes, such transactions are taxable under article 149(3)(25) RF TC if the expenses to purchase or create one unit of the goods/works/services exceed 100 rubles.
However, when advertising materials are distributed as part of a taxpayer’s activities to promote in the market, with the aim of increasing sales, the goods/works/services it produces or sells, such distribution cannot be regarded as a separately taxable item unless the advertising materials qualify as goods, i.e., property intended for sale in its own right (s. 12 of the Ruling);
- if a contract does not expressly state that the price set in it does not include the tax, and the circumstances preceding the conclusion of the contract or other terms of the contract do not indicate otherwise, the tax chargeable to the buyer by the seller is separated out by the seller from the price stated in the agreement (i.e., the price is deemed to include the tax), for which the computation method is used (art. 164(4) RF TC) (s. 17 of the Ruling);
- on the basis of article 171(6) RF TC, a taxpaying investor’s right to a tax deduction depends neither on the settlement procedure for contract works nor, accordingly, on who claims payment of the relevant amounts: the contractor itself or the developer/technical client. For purposes of implementing the provisions of chapter 21 RF TC in relations with an investor, a developer/technical client should, if it is not acting simultaneously as a contractor, be classified as an intermediary and be subject to the provisions of article 156(1) RF TC (s. 22 of the Ruling).
Right to expense severance benefits paid to employees upon termination of an employment contract
Federal Law No. 382-FZ of November 29, 2014
This federal law restates article 255(9) RF TC.
As of 2015, an organization is entitled to classify as labor costs the contributions paid to dismissed employees, including those made in connection with reorganization, liquidation, or staff reductions of the taxpayer. Such contributions include, in particular, the severance payments made by the employer upon the termination of an employment contract as provided for by employment contracts and/or separate agreements of the parties to an employment contract, including employment termination agreements, or by collective bargains, agreements, or corporate bylaws containing labor law provisions.
Thus, legislators have allowed organizations to expense for tax purposes the compensation paid to dismissed employees pursuant to, in particular, employment termination agreements.
In 2014 and previously, it should be noted, the court practice that had developed on this issue was virtually uniformly negative for taxpayers (see, for example, Moscow Okrug FAC Rulings of April 7, 2014, in case No. A40-56610/13; of March 26, 2014, in case No. A40-171364/12; and of December 23, 2014, in case No. A40-77167/14 and the Volgo-Vyatka District Arbitration Court Decision of October 27, 2014, in case No. A29-9206/2013). The courts, as a rule, with reference to RF SAC Presidium Ruling No. 13018/10 of March 1, 2011, reached the conclusion that there was no “business need” for such payments and that they were therefore not economically justified (art. 252 RF TC).
Changes to the tax regime for real estate transactions of individuals
Federal Law No. 382-FZ of November 29, 2014
As of January 1, 2016, a new tax regime enters into force for real estate transactions of individuals. The new regime is meant to prevent the artificial understatement of prices in such transactions for the purpose of minimizing personal income tax (where the parties specify a price in the contract that is less than the actual price of the property, and part of the amount is then paid without mentioning the obligation to pay it in the contract).
Article 217.1 has been added to chapter 23 RF TC. This article increases, from three years to five, the length of time that individuals must own an immovable property for the sale of that property to be tax-exempt. By way of exception, the three-year period remains in effect for income from the sale of immovable property (a) inherited by the taxpayer or received under a deed of gift from a family member and/or close relative according to the RF Family Code, (b) through privatization, or (c) by a taxpayer paying rent as a result of the transfer of the property under a life estate agreement.
The new article 217.1 also contains the rule that if a taxpayer’s income from the sale of an immovable property is less than 0.7 multiplied by the property’s cadastral value as at January 1 of the year in which the state registration of the transfer of title to the property was performed, then that calculated value is taken to be the taxpayer’s taxable income from the sale. In other words, the taxable income from the sale of an immovable property cannot be less than 70% of its cadastral value.
At the same time, RF regions have been granted powers to ease these rather strict rules. They may, for all or some categories of taxpayers, decrease (even to zero) the reduction factor and/or the ownership period required to be eligible for the exemption.
Trade levy introduced in Moscow as of July 1, 2015
Federal Law No. 382-FZ of November 29, 2014
As of the January 1, 2015, the list of local taxes has been expanded to include a trade levy (chapter 33 RF TC “The Trade Levy”). This is a compulsory charge payable quarterly by organizations and individual entrepreneurs on the facilities they use for trading activities. Individual entrepreneurs who have purchased a patent (license) are exempt from the levy.
The rates for the trade levy are set by laws enacted by the federal cities, but cannot exceed the maximums established by the RF TC. There are two kinds of rates: fixed rates per quarter in rubles, and rates per square meter of sales floor area. In any event, however, the levy cannot exceed the computed tax amount payable under the patent system of taxation on the basis of a 3-month patent.
For purposes of calculating the trade levy, sales floor area is determined as in the patent-based taxation system.
Payment of the trade levy is not expected to increase the tax burden on taxpayers, given that it is deductible from their tax liabilities (profit tax, unified tax, or the personal income tax payable by taxpayers in connection with their business). A greater tax burden may result only for “mala fide” taxpayers who minimize the tax base of the profit tax or unified tax, or for loss-making organizations.
A crucial point is prompt notification of the tax authorities that trading activities are being conducted for purposes of payment of the trade levy: under chapter 33 RF TC, failure to file such a notice will be equated with conducting business without registration and be subject to the corresponding penalties.
Notably, for now the trade levy will be introduced only in the federal cities: Moscow, St. Petersburg, and Sevastopol, and not before July 1, 2015.
A Moscow law on the trade levy has already been adopted by the Moscow City Duma (Moscow Law No. 62 of December 17, 2014) and envisages the introduction of a trade levy in Moscow as of July 1, 2015. The rates set by that law will be in effect in 2015–2016.
In Moscow the rates will be differentiated according to city district and okrug. Exemptions from the levy are granted for, among other things, weekend markets and sales from vending machines.
Federal Law No. 348-FZ of November 4, 2014
The law introduces into the RF Tax Code an alternative form of interaction with tax authorities, which will be available to large companies: so-called tax monitoring. Companies are eligible for tax monitoring if they simultaneously meet all three of the following criteria: (1) total amount of profit tax, VAT, excises, and mineral extraction tax paid in the preceding year is at least 300 million rubles; (2) total income according to annual accounting statements in the preceding year is at least 3 billion rubles; (3) total value of assets according to annual accounting statements at the end of the preceding year is at least 3 billion rubles.
Tax monitoring means the tax authority’s ongoing oversight of the monitored organization’s compliance with tax laws instead of desk and field tax audits of that organization. To enable such control, the monitored organization is required to provide the tax authority with necessary documents upon request on an ongoing basis.
If in the process of tax monitoring the tax authority finds that taxes and levies have not been correctly calculated and withheld or have not been paid in full in a timely manner by the by the organization in the specific business situation, a reasoned opinion is issued by the tax authority on its own initiative. The taxpayer itself may request a reasoned opinion from the tax authority, if the taxpayer has doubts or is unclear about the grounds for application of the provisions of tax legislation and/or the procedures for calculating or paying taxes and levies.
If the taxpayer agrees with a reasoned opinion, it complies with the opinion by filing or adjusting the relevant tax reports. If the taxpayer disagrees with a reasoned opinion, it initiates a mutual agreement procedure involving the central office of the RF Federal Tax Service. Based on the outcome of the mutual agreement procedure, the tax authority’s reasoned opinion may be revised or left unchanged.
Changes to the levying of insurance contributions to state extra-budgetary funds
Federal Laws No. 406-FZ and 407-FZ of December 1, 2014
The legislative provisions regulating the amount of insurance contributions to the RF Social Insurance Fund, RF Pension Fund, and RF Federal Mandatory Medical Insurance Fund and the procedure for paying such contributions have undergone a number of changes.
Primarily, these changes relate to payments to foreign employees.
Starting in 2015, foreign citizens and stateless persons temporarily staying in Russia (with the exception of workers deemed to be highly qualified specialists in accordance with Federal Law No. 115-FZ on the Legal Status of Foreign Citizens in the Russian Federation of July 25, 2002), among others, must be covered by social insurance for temporary disability and maternity. Employers are required to pay insurance contributions to the Social Insurance Fund at a rate of 1.8% on payments to this category of employees. A condition of their eligibility for temporary-disability benefits (issuance of medical certificates) is that contributions must be paid for them for at least 6 months prior to the month in which the insured event occurs.
In addition, the rules on maximum payments in favor of an employee have been revised; when the maximums are reached, the insurance contribution rate on such payments is reduced or set to zero. For contributions to the Federal Mandatory Medical Insurance Fund, the maximum has been abolished altogether: the rate is now 5.1% regardless of the amount of the payments.
The maximum has been set at 711,000 rubles for contributions to the Pension Fund, and 670,000 rubles for contributions to the Social Insurance Fund.
First court case on the “joint promotion” agreement
MO FAC Ruling No. A40-82571/13 of July 16, 2014
The effective of advertising campaigns carried out by product manufacturers and distributors vitally depends on their close cooperation with retail stores to jointly promote the products and increase sales. Both the manufacture and the retailer have an interest in improving the effectiveness of marketing and advertising and in steady sales growth, and their cooperation in this area is standard market practice. The problem is that Russian legislation lacks a specific “contractual structure” to formalize such relations between a producer/distributor and a retailer, in which the parties do not reciprocally provide services to each other but there is a common goal and concerted actions to achieve it.
A “product co-promotion agreement”, whose use we have recommended in these situations for many years, is not provided for in the RF Civil Code and is little known to the tax authorities; for that reason, business representatives have been anticipating claims from the tax authorities about this “contractual structure” and attempts to recharacterize it as a more “customary” agreement, with the aim of assessing the parties with additional taxes. It was not until 2014 that such an agreement became the subject of a judicial dispute: in the “Job.ru” case (MO FAC Ruling No. A40-82571/13 of July 16, 2014) the court considered a tax authority’s claims against a taxpayer that had concluded a mutual cooperation agreement with its partner. The tax authority made claims against the taxpayer for providing services free of charge to the partner.
The court supported the taxpayer’s arguments and held the inspectorate’s decision to be unlawful, stating that the parties could enter into any contract regardless of whether it was contemplated by the Civil Code. Mutual cooperation does not have as its purpose the provision of services by the parties to each other; rather, it involves contributions by each party to a common activity, and such contributions cannot be regarded as a sale that is subject to VAT.