An extract from The Inward Investment and International Taxation Review, 11th Edition
Direct taxation of businesses
Key Russian taxes5 and their general rates for businesses are the following:
- profits tax (20 per cent);6
- VAT (20 per cent as of 1 January 2019);7
- social security charges (to the Pension Fund, 22 per cent for remuneration not exceeding 1.292 million roubles and 10 per cent for remuneration in excess of it; to the Medical Insurance Fund, 5.1 per cent; to the Social Security Fund, 2.9 per cent for remuneration not exceeding 912,000 roubles and zero per cent for remuneration in excess of it; and to the Social Security Fund for insurance for work-related injuries and diseases at rates ranging from 0.2 per cent to 8.5 per cent);8
- property tax (2.2 per cent);9
- land tax (may not exceed 0.3 per cent of the cadastral10 value of agricultural and residential land and 1.5 per cent for other types of land);
- mineral extraction tax;
- transportation tax; and
- stamp duty (relatively low in Russia).
Corporates that are Russian tax residents are liable for profits tax on their worldwide profit (calculated as gross income minus deductible expenses).
Non-resident foreign companies with a permanent establishment in Russia pay profits tax on the taxable profits attributable to that permanent establishment. Given that Russian attribution rules are not sufficiently clear, disputes with the Russian tax authorities as regards attribution are not uncommon. Certain other income deemed to derive from Russian source and not attributable to a permanent establishment may be subject to withholding tax.
Profit is calculated as gross income less deductible expenses. Most business expenses are deductible, provided that they are economically justified (i.e., aimed at receiving profit) and properly documented. Restrictions apply to the deductibility of certain expenses, such as certain advertising expenses and interest.
Generally, profits tax is calculated on an accrual basis subject to certain exceptions.
Special accounting rules apply for profits tax purposes.Capital and income
There is no separate capital gains tax in Russia. Capital gains are subject to the regular profits tax. A separate base may be required in respect of listed and unlisted securities.
An exemption is available for capital gains on the sale of participatory interests and specified in the law shares of Russian companies. To qualify for exemption, a taxpayer should have acquired shares or a participatory interest after January 2011 (in relation to preceding periods, special provisions apply) and have held them for more than five years.Losses
Until recently, loss carry-forward was limited to 10 years yet unlimited by amount. Now, loss may be carried forward indefinitely; however, such loss cannot reduce taxable profit in any year by more than 50 per cent.11 Loss included in the general tax profits base may be set off against received capital gain from non-negotiable instruments, but not vice versa.
Starting from 1 January 2020, this rule shall not apply to the legal successor in the reorganisation proceedings of the predecessor if the tax authorities find that the main purpose of the reorganisation was to record losses.Rates
Generally, the profits tax rate is 20 per cent (that is shared between the federal (3 per cent) and regional (17 per cent) budgets). A zero rate applies to medical and educational institutions, regional or municipal museums, theatres and libraries, and to the regional solid waste management operators (provided that the regional authorities introduce a zero rate). In addition, the Tax Code lists certain categories of taxpayers eligible for profits tax incentives (for instance, residents of special economic zones and, recently introduced to the Tax Code, participants of special investment contracts).12 Starting from 2019, regions are only able to reduce the rate in cases directly provided by the Tax Code, and the existing incentives are gradually falling apart. The reduced rates, which were introduced before 3 September 2018, are valid until the end of 2022 at the most. But the region may change its mind and raise them earlier.
Reduced rates also apply to certain types of income. For instance, dividends received by Russian companies from Russian and foreign subsidiaries are subject to a 13 per cent dividend tax. Furthermore, a participation exemption applies if the recipient has held at least a 50 per cent stake in the subsidiary continuously for at least one year. If the subsidiary is a non-Russian legal entity, it must also not be incorporated in a country that appears on the 'blacklist' of offshore jurisdictions published by the Russian government. The look-through approach, which allowed for participation exemption to be applied to dividends paid by Russian companies through offshore vehicles to their Russian ultimate corporate parents, and which was widely utilised, will cease to be available from 2024 save for minor exceptions.
Dividends paid to non-Russian residents having no permanent establishment in Russia are subject to a 15 per cent rate unless a lower tax rate is available under an applicable tax treaty. Interest paid to non-Russian residents is subject to a 20 per cent withholding tax. However, this tax may be reduced (and even eliminated) under an applicable tax treaty. Royalties paid to non-Russian residents are subject to a 20 per cent withholding tax. Again, a reduction or full exemption may be available on the basis of a double tax treaty.Administration
Advance profits tax returns are filed quarterly (or monthly, in some cases); the final return is filed annually.
All taxes, including profits tax, are administered by the Federal Tax Service, including its regional and local departments. Special tax inspectorates exist (e.g., for major taxpayers, for foreign taxpayers, for information technologies).
Tax rulings are available only in limited instances in Russia. However, it is possible to obtain individual guidance from the Ministry of Finance. Action in accordance with such guidance may exempt the taxpayer from fines and late payment interest, but not tax arrears. A taxpayer or tax agent can also request such guidance from the local Tax Service; however, it is unclear if it grants the same benefit. Letters of the Federal Tax Service and letters of the Ministry of Finance addressed to an indefinite number of persons are formally not mandatory, but reflect the general policy of the tax authorities.
Tax assessments may be challenged with the superior tax authority or in court; most decisions are to be challenged with the superior tax authority prior to filing a lawsuit.Tax grouping
Tax grouping is only available to few major corporations in Russia.
Members of the group can count income and deduct expenses jointly, thus decreasing the tax and administrative burden. Transfer pricing rules are not applicable inside the group.
Currently, companies are prohibited from joining the existing consolidated groups. It is expected that the existing consolidated groups will be terminated by 2023.ii Other relevant taxesVAT
VAT is charged on: (1) goods, works and services 'supplied' in Russia, and also on property rights; and (2) imported goods.
Goods are deemed to be supplied in Russia if they are located in Russia and not transported or if they are located in Russia at the time of dispatch.
In respect of services, the general rule is that they are deemed to be supplied in Russia if the seller of services carries out its activities in Russia. However, specific rules apply to certain types of services. For instance, consulting, legal, accounting, marketing, engineering and information processing services are deemed to be supplied in Russia if the purchaser or recipient of those services carries out its activities in Russia.
The standard VAT rate is 20 per cent. A 10 per cent rate applies to certain food products, goods for children, certain mass media items (e.g., newspapers) and medical goods. The export of goods is zero-rated (exempt with credit). Certain VAT exemptions are available; for example, the sale of land or residential properties and the import of certain technological equipment that has no Russian equivalent.
A company's VAT liability is generally calculated as its output VAT invoiced to customers minus input VAT invoiced to the company by suppliers or paid to customs upon the import of goods. Where the amount of input VAT exceeds the amount of output VAT, the difference is usually recoverable.
Starting from 1 January 2020, the successors of reorganised companies are obliged to reinstate the VAT deducted by their predecessor if they start to use goods (including fixed assets and intangible assets), works, services, property rights in the activity, which is not subject to VAT, or pass to the simplified taxation system, the UTII.Personal income tax
Russian tax residents (generally individuals who, regardless of their citizenship or domicile, are physically present in Russia for at least 183 days in any consecutive 12-month period) are subject to tax on their worldwide income. Non-residents are only subject to tax on income from Russian sources.
In general, employers are required to withhold personal income tax from wages. Personal income tax is withheld at a rate of 13 per cent (since 2021, 15 per cent tax rate will apply to income exceeding 5 million roubles, save for certain types of income which will be subject to 13 per cent irrespective of the amount of such income) from most types of income of Russian residents (special rates may apply) and at a rate of 30 per cent from Russian-sourced income of non-residents (although see below in relation to dividends). Employment-related income of non-resident individuals who are treated as highly qualified specialists is subject to 13 per cent personal income tax regardless of their residency status.Social security charges
An employer is subject to social security charges payable on its employees' and individual contractors' remuneration. Employees are not subject to social security charges.
Employers are required to make contributions to different social security funds in the following amounts (assessed by reference to thresholds that are reconsidered annually):
- to the pension fund, 22 per cent for annual remuneration not exceeding 1.292 million roubles and 10 per cent for remuneration in excess of it;
- to the medical insurance fund. 5.1 per cent; and
- to the social security fund, 2.9 per cent for annual remuneration not exceeding 912,000 roubles and zero per cent for remuneration in excess of it.
Incentives apply for a limited number of industries.
Additionally, employers are required to make contributions to the social security fund for insurance for work-related injuries and diseases at rates ranging from 0.2 to 8.5 per cent, depending on the types of activities carried out by the employer.Property tax
As a general rule, Russian companies are liable to pay property tax on the average annual net book value (cadastre value for trade and business centres and non-residential premises) of the fixed assets on their balance sheet. However, movable fixed assets acquired after 1 January 2013 (other than those acquired from related parties or in the course of liquidation or reorganisation) are exempt from property tax. This narrows the application of this tax to immovable fixed assets and movable fixed assets acquired before 1 January 2013. As of 1 January 2019, the property tax on movable fixed assets is abolished.
The standard property tax rate is 2.2 per cent. However, regional authorities may reduce that rate or even provide a full exemption for all or certain categories of taxpayers.
Owned land is exempt from property tax and is subject to a separate land tax.Land tax
Land tax applies to landowners at the rate determined by the municipal authorities. Land tax is assessed on the cadastral (other statutory values apply in some cases) value of the land, which is usually equal or close to its actual market value. Land tax rates may not exceed 0.3 per cent of the cadastral value of agricultural and residential land. With respect to other land plots, the maximum rate is 1.5 per cent of the cadastral value.
Municipal authorities may establish tax incentives.
Businesses leasing land are not subject to land tax. Instead, they are liable for the land lease payments established by federal, regional or local authorities or other landowners.Mineral extraction tax (MET)
Companies and individual entrepreneurs that extract commercial minerals must pay MET. In particular, this tax is levied on the extraction of coal, peat, crude oil, gas, ferrous and precious metals and precious stones. In certain limited cases, windfall tax is levied on subsoil users.Excise taxes
Certain activities with respect to alcoholic drinks, tobacco, transportation vehicles and oil products are subject to excise taxes payable by companies and individual entrepreneurs.Transportation tax
Transportation tax is payable by persons in whose name a taxable transport vehicle is registered and is payable at the rate established for that type of transport vehicle. Regional governments are permitted to establish tax incentives for certain categories of taxpayers. Generally, transportation tax is not a great burden on businesses.Stamp duty
Relatively small transactional fees apply to, among other things, the notarisation, registration and filing of legal documents and the issue of securities.Other taxes
Other taxes include water tax and levies for the use of fauna and for the use of aquatic biological resources.
Certain specific tax regimes are available to small businesses.