Work from Russia: restrictions, taxes and nuances — Versus.legal column

Roman Motorin

Over the past few years, in order to stimulate the gaming and IT industries, Russian tax legislation has provided a number of tax benefits that may be attractive to companies from these industries (we talked about some of them earlier). These benefits are aimed at keeping some of the business from these sectors of the economy in Russia and, if possible, attracting business from other countries — for example, China, the Persian Gulf countries and India, including investors.

In this article, we talk about some of the complexities and features of the Russian tax system, primarily for foreign companies that may be interested in the Russian market.

Registration

In order to conduct business in Russia, a foreign company may require a physical presence in the Russian Federation (for example, in order to accept payments from Russian users or foreign partners in the conditions of disconnection of some Russian banks from SWIFT and sanctions, or to pay for the work of partners located in the Russian Federation).

To ensure a physical presence in the Russian Federation, a foreign company has several options:

1. Open a subsidiary in Russia.
2. Open a representative office/branch.
3. Work through a local agent.

Let’s consider each of these options in detail.

1. Open a subsidiary in Russia

A foreign company may open a subsidiary to conduct business in Russia. As a rule, the form of a limited liability company is chosen for these purposes. This is the simplest, most popular and understandable solution of the organizational and legal forms available in Russia.

Such a company has its own property and its own debts, it is responsible for them, it prepares and submits reports and pays taxes. This means that such an organization protects its foreign owner from additional risks associated with its activities in the Russian Federation: in most cases, the foreign owner of the company cannot be held liable for its debts; separate reports are submitted on it, which are not mixed with the reports of other companies.

In addition, an independent LLC in the Russian Federation has more opportunities to use tax benefits. Such a company may exercise the right to use the simplified taxation system. However, in order to use the USN in the authorized capital of the company, at least 75% of the shares must belong to individuals.

If the founders of the company are citizens of the Russian Federation, then it can potentially receive accreditation from the Ministry of Finance and take advantage of a tax benefit in the form of a 0% income tax rate in 2023-2024 and reduced personal income tax and social contributions for employees. In addition, such a company can include its product in the Register of Russian Software and not pay VAT on commercial licenses to Russian users.

Another advantage of this solution is the ability to attract a local partner to the Russian part of your business. Creating a joint venture with a local player who may have more knowledge and experience in their market is a fairly common practice that simplifies work in a new jurisdiction.

Please note that the subsidiary, among other things, must:

• get a legal address in Russia. It will be indicated in the constituent documents and registration data of the company, all its official correspondence will be sent to it;
• open an account in a Russian bank. It is needed to conduct financial transactions on the territory of Russia and pay taxes.

2. Open a representative office/branch

A foreign company can open a representative office or branch in Russia.

Such a solution will allow for more free movement of assets between the representative office and the company itself: such transactions do not need to be executed by contracts or decisions on contributions to the authorized capital, they are not controlled by tax authorities as transactions between affiliated persons.

On the other hand, preferential tax regimes are not available to the representative office/branch. In addition, neither the representative office nor the branch are independent legal entities: a foreign company is responsible for the debts of the representative office /branch with all its property.

The procedures for opening a representative office / branch may vary slightly in each case, but a branch / representative office of a foreign company in any case will have to be accredited, submit tax returns and pay taxes on the activities of the branch / representative office, certify information about the number of foreign employees.

3. Work through a local agent

Some foreign companies prefer to simply transfer part of their tasks in Russia to a local agent. For example, if your tasks in the Russian Federation are reduced to Internet acquiring payments from Russian users, then opening and maintaining a separate LLC, representative office or branch may not be entirely appropriate.

In such cases, you can find a local partner who can collect payments from Russian users or perform other tasks in the Russian Federation. Most often, relationships with such partners are built on an agency or other intermediary model.

This solution allows you not to immerse yourself in the specifics of Russian regulation and taxation, not to spend resources on opening a subsidiary, representative office or branch.

Reporting

If you have chosen option 1 (opening a subsidiary) or 2 (opening a representative office/branch), you are required to comply with tax obligations and regularly submit tax returns and reports. In particular, you need to:

• submit tax returns. A foreign company must submit tax returns in a timely manner, including an annual report on its activities in Russia and tax returns based on the results of the reporting periods;
• keep accounting records. A foreign company must keep records of its financial activities, including expenses, income and taxes. The report can be executed according to the standards adopted in Russia (Russian Accounting Standards, RAS) or according to International Financial Reporting Standards (IFRS). In addition, branches and representative offices of foreign companies can keep records according to the rules of their main country, if they do not contradict IFRS;
• comply with tax obligations. It is important to comply with all tax obligations and tax payment deadlines in order to avoid fines and problems with tax authorities;
• report to the Social Fund of Russia and the Federal Statistics Service.

In the case of working with an agent, most of these tasks fall on him. Usually, he can act as a tax agent and a responsible person for reporting.

Taxes

There are different types of taxes. Consider them.

• Income tax. The main tax for a foreign company in Russia is the corporate income tax. Its rate is 20%.
• VAT. Value added tax (VAT) is applied to the sale of goods and services in Russia. His rate is also 20%.
• Tax on the USN. This tax is an alternative to paying income tax and VAT (and in some cases, corporate property tax). The tax on the USN greatly simplifies tax reporting and is often much more profitable for taxes: the tax rate varies depending on the region from 1% to 6% when choosing the object of taxation “income” and from 5% to 15% when choosing the object of taxation “income-expenses”.

The transition to the tax on the USN is available only to a legal entity, it will not be possible to transfer a representative office / branch to the USN (see clause 18, clause 3, Article 346.12. of the Tax Code of the Russian Federation). In addition, such a company should be owned by at least 75% of individuals — therefore, it is best to register such a company either for local management or for the final beneficiaries of the entire group.

Also, the company must not exceed certain limits in each tax period: the number of employees (130 people), income (the limit varies from year to year, but the current limit is 188.55 million rubles), the residual value of fixed assets (150 million rubles).

• Property tax. It varies depending on where the property of a foreign company is located and how much it costs in Russia.
• Personal income tax. For foreign citizens working in Russia, income tax is applied. As a general rule: if an employee is a non—resident of the Russian Federation (has lived in Russia for less than 183 days), then his income will need to be taxed at a rate of 30%. If he became a resident, then from 13% to 15%.

At the same time, the State Duma recently adopted new rules: from January 1, 2024, Russian companies will charge personal income tax from their “remote” employees at a base rate of 13-15%, even if they have lost their tax residency in the Russian Federation. It is necessary that one of the conditions is met – the contractor receives remuneration to a Russian bank account or payments are made by Russian companies or separate divisions of foreign organizations in Russia.

• Insurance premiums. An employer in the Russian Federation is also obliged to pay insurance premiums for its employees (the total rate is 30% of employee benefits, but reduced tariffs may also apply).

Consequences of non-payment of taxes

Foreign companies operating in Russia must strictly adhere to the laws in order to avoid serious problems. Non-payment of taxes or late provision of information can lead to fines and even prison terms.

In case of suspicion, the Tax service of Russia may appoint an on-site inspection to find out whether the company has provided the correct reporting and whether it has correctly calculated the taxes due.

Penalties for non-payment of taxes

The amount of fines depends on the nature of the tax offense, the amount of unpaid taxes and other factors. For non-payment of taxes, a fine of up to 40% of the unpaid amount may be imposed in excess of the need to return the amount itself.

Deprivation of liberty

The risks of bringing an official to criminal responsibility in connection with non-payment of taxes by a company in the Russian Federation arise when the amount over 15 million rubles is not paid. At the same time, you can try to avoid these risks if the company pays arrears, fines and penalties.

Total

In order to do business in Russia and not face problems, a foreign company needs to comply with tax legislation.

To do this, you can go several ways: to understand the legislation yourself, hire local tax and accounting specialists, or conduct business through an intermediary company through which all financial flows, taxes and reporting will go (but it is important that the scheme of work with your chosen company is clear and transparent!).

In any case, we strongly recommend consulting with a specialist in the field of tax law and assessing in advance the future tax burden, opportunities for using benefits and options for cooperation with local partners and/or agents.