On April 11 2011 the Supreme Arbitrazh Court ruled on two issues that are likely to affect companies in Russia with foreign employees. A panel of judges ruled on social security contributions to the state pension fund and whether such payments should be made in respect of foreign employees who do not plan to reside in Russia permanently. The court also ruled on the need for professional translators in dealings between the tax authorities and foreign taxpayers.

One of the issues in the claim was whether the taxpayer could legally deduct compulsory pension contributions from its gross profit. The court concluded that contributions must be paid for foreign employees working in Russia only if they have a permanent or temporary residence permit, whereas such contributions are not payable in respect of a foreign employee who is in Russia for a temporary stay. If the authorities have mistakenly registered a foreign individual as being an employee for whom contributions must be made, the taxpayer is not at fault and is not liable for a penatly. However, such expenses cannot be deducted and must be recalculated.

The other significant finding was procedural and related to the use of professional translation. The company in question was subject to a tax audit in Russia. Its managing director and financial director were foreign citizens, but no professional translator was made available for the audit - the role of translator fell to the company's deputy director. The court concluded that it was impossible for the foreign employees to provide cogent explanations or raise objections because the lack of an independent translator put them at a disadvantage. This was recognised as absolute grounds for revoking the tax authorities' decision.

The court's findings are likely to have a significant practical impact on companies with foreign employees in Russia. The current social insurance rate is 34% and the ability to deduct such expenses for corporate income tax purposes can be significant. Therefore, the court's distinction between obligatory and non-obligatory payments is helpful. The ruling on a company's procedure rights is also valuable - in such cases the authorities' decisions may be deemed invalid if a professional translator is not involved.

For further information on this topic please contact Andrey Tereschenko or Ivan Zelenin at Pepeliaev Group by telephone (+7 495 967 0007), fax (+7 495 967 0008) or email ([email protected] or [email protected]).