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KPMG IN RUSSIA AND THE CIS

Doing Business in Russia


Your Roadmap to Successful Investments

2015

kpmg.ru

Tax and Legal


SAINT PETERSBURG
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Doing Business in Russia: Your roadmap to successful investments | 3

Contents

Foreword 5 Business and Personal Taxation 26


Tax system overview 26
Introduction to Russia 6 Tax registration requirements 26
Country facts 6 Business taxation 27
Investment climate 7 Profits tax
Withholding income tax
Encouraging innovation and modernisation
in the economy 7 Value Added Tax
Social security contributions
Living and working in Russia: Useful tips 8
Property tax
Other taxes
Starting a Business in Russia 10
Special tax regimes 33
Legal structures for starting Unified imputed income tax
a business in Russia 10 Simplified tax regime
Direct sales Unified agricultural tax
Distributorship contract
Personal taxation 34
Representative office or branch
Personal Income Tax
Russian subsidiary
Other taxes payable by individuals
Foreign investment law 13
Russian regions, Special Economic Zones 14
Financial Reporting 36
Other business issues 15
Russian Accounting Principles 36
Licensing requirements
Land ownership Statutory reporting requirements 38
Transfer pricing Audit requirements 38
Tax Monitoring
Tax Manoeuvres Appendices 40
Chart of withholding tax rates 40
Company and Labour Law 20 Fines for Tax and Customs Violations 46
Company law 20 KPMG Tax & Legal:
Labour law 22 Cutting Through Complexity 48
Glossary of Terms 49

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4 | Doing Business in Russia: Your roadmap to successful investments

NOVOSIBIRSK
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Doing Business in Russia: Your roadmap to successful investments | 5

Foreword
-
Dear Reader,



This brochure has been prepared
to provide an economic overview of Russia as well as to introduce the

tax and legal issues that are important for those planning to do business in Russia. In particular, there is a
discussion of the benefits
brief-- of investing in the special economic zones, which include Skolkovo, the new
Russian Silicon Valley, which is situated near Moscow.

Russian tax and civil legislation is constantly developing, meaning that sometimes there is no clear answer

to what might be considered a simple question. In such circumstances, court cases and rulings are important

sources for interpreting legislation.


All information is correct as of 1 March 2015. This brochure is not intended to provide tax or legal advice for
any specific person or situation. Readers are strongly advised to seek professional assistance from advisors
with experience of doing business in Russia before undertaking any business ventures themselves.


About KPMG

KPMG is one of the worlds biggest advisory, audit, and tax and legal firms, one of the global Big Four
companies. Comprising a global network of professional firms providing audit, tax and advisory services,
KPMG employs over 162,000 outstanding professionals who work together to deliver value in
155 countries worldwide. KPMG has been working for more than 25 years in Russia and has more than
4,000 professionals working at 18 offices spread across seven CIS countries.
In recent years, KPMG in Russia and the CIS has been one of the fastest growing KPMG practices in the
world. KPMG has been consistently rated the No. 1 audit firm in Russia from 20092013 by Expert RA and
was named Tax Firm of the Year from 20122013 in Russia by the International Tax Review magazine.

St. Peterburg
Lvov
Moscow
Kiev Nizhny Novgorod
Perm
Kazan
Rostov-on-Don Ekaterinburg

Novosibirsk
Tbilisi Atyrau
Krasnoyarsk
Yerevan
Astana
Baku

Almaty
Bishkek

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6 | Doing Business in Russia: Your roadmap to successful investments

Introduction to Russia
Country Facts
COUNTRY SNAPSHOT

Capital: Moscow

Area: 17 mln sq km

Population (2014): > 146 mln (Rosstat)

Cities with over 1 million citizens: 15

Number of regions: 83

President: Vladimir Putin

Prime Minister: Dmitry Medvedev

Currency: Rouble (RUB)

Nominal GDP (2014): RUB70,976 bln (Rosstat)

Real GDP growth (2014): + 0.6 % (Rosstat)

GDP PPP (2013): USD3,460 bln (World Bank)

GDP per capita in PPP (2013): USD24,114 (World Bank)

FDI (2013): USD94.1 billion

Inflation (2014): 11.4% (Rosstat)

Foreign Reserves (06.02.2015): USD374.7 bln (Russian Central Bank)

yy According to UNCTAD (the United Nations Conference on Trade and


Development), FDI into Russia rose 83% in 2013 to $94 billion, putting Russia
in third place globally after the US and China.
yy GDP in 2014 grew by 0.6 percent
yy Russia is the 6th largest country by GDP PPP
yy Industrial output in 2014 was up 1.7 percent year-on-year
yy Unemployment was 5.2 percent at the end of 2014. Russia has the largest
labour force in Europe
yy Russia is the largest country in Europe in terms of internet usage

MOSCOW

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Introduction to Russia | 7

Investment climate The range of measures taken is quite total production output, increase R&D
extensive and includes developing spending, and make Russias innovative
special economic zones, creating products highly globally competitive.
The Russian economy is currently
advanced development territories, and Many are sceptical about Russias
seeking to develop in quite an adverse
improving local tax incentive systems chances of success; nevertheless, the
foreign political and economic
(diversifying the investment amounts goal has been set.
environment. Despite this, Russia
needed to receive incentives, varying
has continued to undertake various The Russian business community is
incentive types, etc).
measures aimed at improving its currently actively discussing Russias
investment attractiveness. In particular, In addition, various measures are innovation strategy, which runs until
as announced at the 2014 Saint currently being taken to improve 2020 and forms the basis on which
Petersburg International Economic infrastructure in Russia. state policy can be consistently made. A
Forum, Russia is seeking to maintain conservative reading of the innovation
Building on trends that started in
economic relations with the West, but strategy finds it covering economic
previous years, there are an extensive
actively develop and grow its economic development, supporting and motivating
combination of measures being
relations with the East. the domestic talent pool, protecting
implemented to improve Russias
intellectual property, and establishing
According to the 2015 Doing Business investment attractiveness, which as of
and supporting the necessary
ratings, which measure how easy it today have led to positive results. The
infrastructure. The strategy also covers
is to conduct business operations in current difficult foreign economic and
improving the legislative framework,
different countries, Russia was ranked political environment has not halted this
reducing administrative (tax/customs)
at number 621(having improved 30 process but rather accelerated it,
barriers, providing tax incentives, and
positions compared with the previous encouraging flexibility and proactive
creating the prerequisites to support
year2). In particular, Russia was quite change, all aimed at achieving the set
demand for innovative products.
highly ranked (34th and 12th position, goals.
respectively) when measuring how Russia has already adopted and
easy it is to start a business or register implemented a number of measures
Encouraging innovation
property. to support the development of an
and modernisation in the innovative economy. A number of
Revision and simplification of
administrative procedures have economy state-controlled institutions now exist
to invest in innovative companies. For
significantly increased the attractiveness Over the past few years, Russia has
example, the Russian Corporation of
of investing in Russia. taken significant strides towards
Nanotechnologies (Rusnano) supports
founding economic development on
It should be noted that continual projects in the field of nanotechnology,
innovation. Both the President and
improvement of the attractiveness of while the Russian Venture Corporation
government have voiced their support
investment in Russia remains one of allocates funds to support venture
and are allocating substantial budget
the governments key strategies. In capital based projects.
funds towards these goals.
particular, on 27 January 2015, the
Russia additionally provides an
Russian Government issued a decree Russia is striving to progressively
extensive list of tax concessions to
on high-priority measures to assure develop in order to compete globally
companies with a high degree of
stable economic development and and overcome the failings experienced
intellectual capital. For example,
social stability in 20153. Among the in the 1990s. At the same time, Russia
IT companies have had their social
key points in the Governments actions is seeking to take advantage of
security contributions reduced from
were moves to increase the possibility international best practice.
30 percent to 14 percent until 2017,
of attracting renewable investment
The Russian President has already while their intangible assets are now
resources of significant value to the
signalled that Russias goal is to amortised over 2 years instead of 10.
most important sectors of the economy.
gradually transition away from A zero-percent profit tax rate has been
As part of increasing the investment an economy based on oil and raw introduced on income from the disposal
attractiveness of the Russian economy, material extraction to an economy of shares in Russian hi-tech companies
Russia has developed a tax incentive focused on technology. To reach this (providing certain conditions are met),
system (both at the federal and regional goal, Russia is seeking to increase the and legislation is being developed
level) aimed at making the investment hi-tech sectors share of GDP, grow to improve the accounting of R&D
process more effective. the proportion of innovative products in expenses for profits tax purposes.

1
http://www.doingbusiness.org/rankings
2
http://www.forbes.ru/news/272003-rossiya-podnyalas-v-reitinge-doing-business-na-62-mesto
3
http://www.rg.ru/2015/02/02/plan-doc.html

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8 | Doing Business in Russia: Your roadmap to successful investments

Significant tax and customs This flagship project is currently still should exercise extreme caution as
concessions are also being granted to at the implementation stage and the many drivers sometimes apparently
residents of special economic zones business community is awaiting the randomly and at all times of the day
(set up to promote innovation and initial results. perform illegal and unexpected
technological development). These manoeuvres.
If the Skolkovo project is successfully
concessions include decreases in
combined with other state-supported Qualified medical services are
major taxes (profits tax/social security
measures to encourage innovation, available. While there are many
contributions) through to full tax
Russia is very likely to have the qualified doctors in Russia, expats often
exemptions (property tax, land tax and
opportunity of taking its place among prefer doctors who speak English or
transportation tax).
those countries in the world which their native language. There are several
Some of the measures adopted for have developed, innovation-based western medical clinics in Moscow and
participants in the Russian flagship economies. The key is to make the most St. Petersburg that have many foreign,
Skolkovo project are internationally of this opportunity in a competent and foreign-trained and/or foreign language-
unique. The purpose of Skolkovo is professional manner, so that everyone, speaking doctors.
to create the conditions necessary including Russias citizens and foreign
Good food. There are many quality
for successful innovation at every partners, believe in the concept of
restaurants in Moscow and St.
stage of development, including the innovation economy and actively
Petersburg (and elsewhere).
commercialisation of the end- support implementation of innovation-
results. Skolkovo provides all of the based plans by the government. There can be some ethnic
infrastructure needed to concentrate intolerance. It should be noted
intellectual capital and generate that incidents of racism continue to
innovative solutions in the priority Living and working in Russia: be reported in Russia. People who
industries of nuclear technology, energy Useful tips physically do not look like native
efficiency, aerospace technology, IT and Russians should take special care
pharmaceuticals. Learn Russian. This will not only (avoid being alone) in certain situations,
help you in everyday communication including while using public transport.
Legislation provides VAT, profits
(many street vendors, waiters and
tax and property tax exemptions for If you are coming to stay:
shop assistants do not speak English)
Skolkovo residents, along with a further
but also when doing business. Even if yy An exemption from customs duties
reduction in the rate of social security
you hold meetings in English or use an is available for bringing household
contributions down to 14 percent for
interpreter, it can still be useful to know goods into Russia within certain
a period of up to 10 years. Customs
how things are being translated and limits stated in the agreements of the
duties on imported equipment that
understand what has been missed out. Customs Union.
meets specific requirements can also
be reimbursed, while simplified visa Develop personal relationships. yy Qualified (and English-speaking)
procedures can be adopted to bring in Relationships are quite important in household staff can be found easily
foreign specialists. Russian business. You may not always through other expats.
It was announced that Skolkovos basic be rewarded in cash (there are laws yy There are English, German, French,
infrastructure will soon be completed, against bribery in Russia), but it always Japanese and other foreign language
though companies that expressed pays to be a sociable, reliable individual. schools catering to expat children in
interest in participating in the project Moscow and St. Petersburg (as well
before its completion have been able to Personal safety is not a problem. as in some other cities), although the
be physically located elsewhere while Moscow is as safe as, or safer than (in choice of school and curricula is likely
still enjoying all of the projects benefits, terms of street violence), many other to be less diverse than in your home
including tax and customs concessions. major Western cities. Though like in country.
Current legislation applied these other major Western cities, it is still
privileges up until 2014. unadvisable for people to walk around Routine issues:
the suburbs late at night, and advisable
Many recognised global hi-tech leaders, yy As an expat (except those with highly
to avoid large crowds of football
such as Intel, Cisco, Microsoft, Siemens qualified visa status), you must
supporters.
and Boeing have already signed register and deregister each time you
memorandums of understanding with Beware of traffic. Expats who travel abroad or away from your place
the Skolkovo Foundation (the projects hire a local driver for themselves of residence in Russia.
managing body). Some of them have and their children should choose yy Some bills require that you must
announced significant investments carefully, selecting individuals who physically go to a certain bank and
(billions of US dollars) to be made in the are competent and patient. Expats pay cash. Fortunately, cash machines
Skolkovo project. who drive themselves, or who walk, are readily available.

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Introduction to Russia | 9

yy Registering your car can take 1-2


days of your, or perhaps your drivers,
time. However, your driver can only
register your car on your behalf if
you have spent time and money on
granting the driver power of attorney
over your car. The power of attorney
must be updated 2-3 times annually.
While the above does not cover all
aspects of living in Russia, it is enough
to infer that expats can and do live
safely, successfully and happily in
Russia, and often for long periods of
time.

KRASNOYARSK


2015
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10 | Doing Business in Russia: Your roadmap to successful investments

Starting a Business in Russia


Legal structures for starting a non-tariff regulations is being developed yy State subsidies to the agricultural
in both the Customs Union and Russia. sector will be USD9 billion per year in
business in Russia 2012. Subsequently, state subsidies
Investors often face the problem of Customs clearance fees depend on
will decrease yearly.
deciding which legal structure they the cost of the services rendered by the
should choose for their business in customs authorities, but cannot exceed
Distributorship contract
Russia. Below you can find guidance on RUB30,000 (USD490).
A FLE has the right to conclude a
establishing the following options: A disposal charge is also payable distributorship contract with a Russian
yy Conducting direct sales on imported vehicles. The rates of company, allowing the Russian
this charge can vary depending on company to sell the FLEs goods in
yy Distributorship contracts the engine power, vehicle weight and Russia. If one of these agreements is
yy Representative offices or branches seating capacity. signed, then the foreign legal entity shall
yy Russian subsidiaries Since 2012, Belarus, Kazakhstan, and not be taxed in Russia. The Russian
Russia have formed a single economic distributor shall be responsible for
Direct sales clearing the imported goods through
zone. These countries economies
A foreign legal entity (FLE) that sells are now more tightly integrated than customs and paying customs duties and
goods directly from abroad to customers they were under the Customs Union, import VAT. Distributorship contracts
located in the Customs Union (in and freedom of movement for goods, are seen as vertical agreements from
particular, in Russia) would not be services, capital and labour is ensured, an antitrust law perspective and must
subject to Russian taxes and would not along with guaranteed equal treatment comply with antitrust regulations.
be required to establish a presence in for legal entities.
Russia via any corporate structures. Representative office or branch
The Russian customers are responsible In 2012, Russia ratified the protocol on
joining the World Trade Organisation A FLE can choose to establish
for clearing the imported goods through
(WTO) and became a full member. As a presence in Russia through a
customs and for paying customs duties
part of joining the WTO, Russia now representative office (RO) or branch.
and taxes (import VAT, excise), as well
has certain commitments related to A RO or branch is not a Russian legal
as customs processing fees.
various sectors of the economy and entity, but is part of the FLE, and,
Import duty rates are set in the international trade: therefore, the head office bears full
Unified Customs Tariff (UCT) of the responsibility for the obligations and
Customs Union of Russia, Belarus and yy Import duties on certain products actions of the RO or branch. A RO is
Kazakhstan. Generally, these import have been lowered, while import only authorised to conduct certain
duty rates vary from 5 percent to 20 duties on computers, components preparatory and auxiliary activities for
percent and apply to goods imported for manufacturing computers and the head office. A branch, on the other
from countries that enjoy most favoured hardware components must be hand, is able to conduct all activities that
nation status with Russia. If goods are removed within three years; the head office can perform, including
imported from developing countries with yy Foreign insurance companies will be the signing of sales contracts. However,
most favoured nation status, then the permitted to open branches in Russia the Russian customs authorities often
customs rates can be reduced. Import after the transition period; try to identify the final Russian buyers
VAT is payable on the customs value of of the goods being imported, and can
the imported goods, and is increased by yy Technical regulations will be
question the right an FLEs branch has
the import customs duty. simplified and developed based on
to declare goods for customs clearance.
international standards;
Technological equipment that is As a result, it can be difficult for a
not manufactured in Russia can be yy A transition period is provided that will Russian branch to clear goods through
exempted from import VAT upon import allow investors in the Kaliningrad and customs.
into Russia. Technological equipment Magadan special economic zones to
continue to receive tax breaks; ROs and branches are registered via
imported into the Customs Union is accreditation from the Federal Tax
also likely to be exempted from import yy There will be a transition period Service of Russia, which has been
customs duties, provided certain lasting until 1 July 2018, during acting as the accreditation agency
requirements are met. which current industrial assembly since 1 January 2015. The Federal Tax
Some goods imported into the regulations will be in force; Service accredits ROs and the branches
Customs Union are subject to non-tariff yy Russia will guarantee a certain level of all foreign companies, except for
regulations (e.g. certification, licensing, of transparency concerning foreign- foreign banks and foreign civil aviation
quotas, etc.). Currently, legislation on trade legislation; companies (for these entities, their

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Starting a Business in Russia | 11

ROs are respectively accredited by the Russian subsidiary Recent changes to Russian corporate
Central Bank of Russia and the Federal An FLE can choose to establish a law allow shareholder agreements in
Aviation Service). presence in Russia via establishment which participants can, among other
of a Russian subsidiary. The most things, determine voting obligations
Any FLE intending to open an RO or
common business structures in Russia at general shareholder meetings,
branch in Russia must pay a state fee
are Limited Liability Companies (LLC) coordinate voting options with other
of RUB120,000 (USD1,959). Once
and Joint Stock Companies (JSC). In shareholders, determine the price
accredited, the ROs or branchs term
an LLC (Russian abbreviation, ), at which shares can be sold, and
is unlimited. The Federal Tax Service
the participation units attributable to coordinate other actions related to
reviews the application for accreditation
shareholders (participants) are not the JSCs management, activities,
within 25 business days, and once
considered as securities under Russian reorganisation and liquidation.
certified (via the issuing of a certificate
on accreditation by the Federal Tax securities legislation. Shares in a JSC, The governing bodies of a JSC are
Service), the FLE should file an on the other hand, are considered to be the general shareholders meeting, the
application for tax registration with the securities and are subject to registration board of directors and the executive
local tax authorities, and register its with the Bank of Russias department body (a sole individual or a group).
RO or branch with the Federal State governing admittance to financial
markets. A JSC can be either public The executive body manages the
Statistics Service and social security
(its shares are publicly traded) or non- JSCs day-to-day affairs and reports to
funds.
public. the board of directors and the general
Bank accounts can be opened after shareholders meeting.
the RO or branch has been accredited Foreign companies often use LLCs to
conduct their wholly-owned business in The shareholders meeting, upon a
with the accreditation authority and
Russia. LLC law has many provisions proposal from the board of directors
registered with the tax authorities and
similar to those in JSC Law; however, or at its own discretion, can delegate
the Federal State Statistics Service.
there are certain distinctions. the powers of the executive body to an
In total it takes approximately 6-9 weeks external commercial company or to an
to set up an RO or branch after all Generally, only one participant individual manager.
the necessary documents have been (individual or legal entity) has the right
submitted to the registration authorities. to establish an LLC or JSC. However,
Limited Liability Company
As the setting up process requires the a solely-owned legal entity cannot
preparation, approval, and, in many establish another LLC or JSC as a The provisions in LLC law are similar to
cases, notarisation and apostillation subsidiary (i.e. one that would be those in JSC law.
(legalisation) of a large number of 100-percent owned by the legal entity).
An LLCs participants are not liable for
documents, the total time required is the LLCs obligations, and any losses
likely to exceed the period mentioned Joint Stock Companies the participants may experience are
above. A JSC is a legal entity that issues shares limited to the value of their respective
to generate capital for its activities. A participation units.
An RO is authorised to conduct shareholder is not generally liable for the
certain preparatory and auxiliary LLC charters are likely to restrict
JSCs obligations and a shareholders
activities for its head office. A branch, participants in an LLC from transferring
losses are limited to the value of their
on the other hand, is able to conduct participation units to third parties. If
shares.
all of the activities that the head office this is indeed the case, a participant
itself performs, including the signing Different classes of shares are has the right to withdraw from an LLC
of sales contracts. Depending on the permitted. For each share in one at any time and require that the LLC
exact scope and nature of activities, particular class, the dividends and (or the remaining participants) give the
both ROs and branches can be voting rights are equal. withdrawing participant a portion of the
used to create a taxable presence in LLCs net assets commensurate with
Both forms of joint stock company
Russia for their company. the proportion of participation units the
public and non-public have the right
participant owned.
to issue common or preferred shares
and bonds. Both forms are subject LLC charters can limit the transfer of
to statutory reporting requirements participation units or require that the
and regulatory restrictions, but the other participants or the LLCs approval
requirements for public disclosure are is gained first before transferring the
less rigorous for non-public companies. units.

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12 | Doing Business in Russia: Your roadmap to successful investments

PERM

Economic partnership by a notary. The share capital of the be met by one participant acting
economic partnership is divided into independently, a group of participants,
A recently passed law introduces a new
shares. Contributions to the share or all of them together.
legal form for commercial legal entities
capital can be made in the form of The law that gives effect to economic
economic partnerships4. This legal form
money, securities, property rights or partnerships was passed on 1 July
is designed for companies involved
other rights with a monetary value. 2012. Since then, only a few economic
in innovative activities (including
the provision of venture capital). A The partners have the right to participate partnerships have been established
partnership can be created by two or in managing the partnership and also (registered) in Russia. Therefore, some
more persons (both individuals and legal to allocate profits and expenses. The of the practical aspects of conducting
entities can participate in a partnership). allocation of profits and expenses can commercial activities and managing
The maximum number of participants be disproportionate to the number of economic partnerships remain unclear.
in an economic partnership is 50. If the shares owned. It is thus advisable to establish a
number of participants in an economic All shareholders, by unanimous Russian subsidiary in one of the more
partnership exceeds 50, it must be re- decision, elect the governing bodies common legal forms as either an LLC
organised as a JSC within a year. of the economic partnership. The or JSC.

The constitutive document of an partnership must maintain a register of


participants and indicate the size of their The most common corporate
economic partnership is the Articles structures in Russia are Limited
of Association. In addition, when stakes in the partnership capital, as well
as list equity stakes belonging to the Liability Companies (LLC) and Joint
establishing an economic partnership, Stock Companies (JSC). Foreign
its participants should conclude a special partnership itself.
companies often use LLCs for their
partnership management agreement If the economic partnership is technically wholly-owned businesses in Russia.
to govern the rights and obligations insolvent and the intellectual property it
of the participants, management of owns is seized and sold, the participants
the partnership, its activities, etc. in the partnership are liable for the
This agreement is certified and kept partnerships obligations. These can

4
Federal Law N 380-FZ On economic partnerships of 3 December 2011, effective 1 July 2012

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Starting a Business in Russia | 13

Foreign investment law The law also offers foreign investors yy Certain activities related to the use
protection from unfavourable changes of encrypting facilities and bugging
Foreign investors are guaranteed in Russian legislation if the foreign equipment;
certain property rights on their investor holds more than 25 percent yy Military-technology activities.
investments in the Russian Federation of a Russian companys share capital,
and this protection also covers priority Thus foreign state companies (non-
and to the profits they earn in Russia.
investment projects, regardless of the Russian state companies) are forbidden
Foreign investments are regulated foreign investors stake in the projects from engaging in transactions that would
both on a Federal and regional level. share capital. Foreign investors are allow them to control Russian strategic
According to Federal law on foreign protected against: companies (e.g. from purchasing more
investments, the rights of foreign than 50 percent of the voting shares
investors to conduct business activities yy Newly adopted laws altering customs (participation units) in a strategic
in Russia, and their rights to take duties, Federal tax rates and company, or from participating in the
the profits gained in Russia must be contributions to state non-budgetary regulatory body of a strategic company,
the same as those of native Russian funds (subject to certain restrictions); etc.).
investors. Certain limitations can be yy Amendments to current laws resulting Non-Russian state companies can
placed on foreign investors, but only if in an increase in the investors tax engage in some transactions, though
these limitations are required to protect burden; only after obtaining approval from
constitutional guarantees such as those
yy Any introduced bans and limitations Russian state authorities (i.e. they can
protecting the health, rights and lawful
on foreign investments in Russia. purchase more than 5 percent of the
interests of citizens, or state defence
Foreign investors have this protection voting shares (participation units) in a
and security measures.
during the first seven years of an strategic company (different thresholds
Foreign investors are generally subject investment projects pay-back period, are set for different types of strategic
to the same treatment as Russian starting from the date that the foreign companies)).
investors. Licensing, notification and investor began funding the project. Other non-Russian investors (non-
permission requirements that may
Russian legislation limits the activities Russian private companies; non-Russian
restrict business activities apply to both
of non-Russian investors participating individuals; or Russian companies
Russian and foreign legal entities.
in companies that are of strategic value controlled by non-Russian companies
Foreign investors are guaranteed the to Russia (strategic companies) and or individual(s)) are allowed to carry
full and unconditional protection of their in companies that carry out some other out transactions that would result in
rights and interests. A foreign investor activities, such as: them obtaining control over a strategic
is entitled to recover losses caused by company. However, these transactions
an unlawful action or omission by the yy Exploring subsoils and extracting must be approved by Russias state
Federal or regional state authorities mineral resources on land plots of authorities.
in accordance with Russian civil Federal significance;
legislation. yy Aerospace activities; Russian legislation limits the
ability of non-Russian investors to
The property of a foreign investor or of yy Certain services provided by natural
participate in companies that are of
a company with foreign participation monopolies or companies with a
strategic value to Russia.
cannot be seized in order to be dominant position on the Russian
requisitioned or nationalised, unless market;
stipulated by Russian Federal or yy Harvesting live aquatic resources;
international laws.
yy Activities controlling hydro-
If requisition occurs, the value of the meteorological and geothermal
seized property must be reimbursed to processes and events;
the foreign investor or company with
yy Certain activities related to the use
foreign participation. If nationalisation
of nuclear and radiation-emitting
takes place, the value of the nationalised
materials;
property and incurred losses must be
reimbursed.

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14 | Doing Business in Russia: Your roadmap to successful investments

Russian regions and Special yy A technological implementation SEZ; yy The candidate is prohibited
from registering branches or
Economic Zones yy An industrial and innovation SEZ;
representative offices outside of
Most Russian regions have adopted yy A tourism and recreation SEZ; the SEZ, unless the SEZ is in the
laws that allow tax concessions to yy A Ports and Logistics SEZ. Kaliningrad or Magadan regions.
be given to investors. Currently, the However, even in these regions, the
SEZs are established with intended
majority of investment tax concessions candidates main activities must be
lifespans of 49 years.
relate to profits tax and property performed on the territory of the SEZ.
tax. Investment tax concessions are According to law No. 116-FZ, residents
Current legislation does not contain
normally granted only for the investment within a SEZ only have the right to
restrictions regarding the business
projects payback period, and the engage in the activities specifically
reputation or credit history of the
amount of the tax saving gained cannot prescribed for that respective SEZ type.
applicants, or limitations on sources
exceed the amount initially invested Law No. 116-FZ contains an exhaustive
of capital (i.e. companies with both
in the project. Regional authorities list of the types of activities that can be
Russian and foreign capital may
can establish additional conditions for carried out in each type of SEZ.
become SEZ residents).
granting concessions (i.e. employing
Apart from the abovementioned SEZs,
individuals residing in the region, Residents of all SEZs established in
there are some combined SEZs in the
assisting in the development of the Russian Federation enjoy customs
Kaliningrad region (effective until 1 April
infrastructure, etc). incentives deriving from customs
2031) and the Magadan region (effective
rules that designate SEZs as free
A Special Economic Zone (SEZ) is a until 31 December 2025). The residents
customs zones. This is regulated
clearly defined and limited piece of of these SEZs have been allowed by
by an agreement that requires all
territory within a particular region of special laws to conduct various types of
activities to be performed within the
Russia, in which business is carried activities.
SEZ and guarantees that the goods
out under special circumstances
There are currently 17 SEZs operating imported into the SEZ are exempt from
granting certain tax, customs and other
in the Russian Federation. import customs duties and import VAT,
concessions to the residents of the SEZ.
providing that certain requirements are
The residents in a SEZ can be legal To become a resident of a SEZ,
met.
entities or individual entrepreneurs, applicants should comply with the
though they must conclude an requirements laid down by their desired
agreement to carry out their activities SEZ.
and operate within the territory of the
The main requirements for candidates to
SEZ, and be registered with the SEZs
obtain SEZ status are the following:
authorities.
yy The candidate should be registered ROSTOV-ON-DON
The establishment and operation of
on the specified territory of the SEZ.
SEZs in the Russian Federation is
regulated by an agreement between the yy The business plan and the investment
governments of Russia, Belarus and project should provide for a certain
Kazakhstan5, by Federal Law No. 116-FZ6 volume of investment to be made
and by specific Federal laws that within a specified period (the
regulate particular SEZs (if any). actual investment amounts are not
necessary on the date an application
Issues related to the establishment, is submitted).
operation and abolishment of free
economic zones are referred to in
national legislation, i.e. law No. 116-FZ,
which provides for four types of SEZ:

5
On issues related to free (special) economic zones on the customs territory of the Customs Union and the customs procedure on
the free customs zone of 18 June 2010
6
Federal Law No. 116-FZ On special economic zones in the Russian Federation of 22 July 2005

2015 JSC KPMG. All rights reserved.


Starting a Business in Russia | 15

SEZ residents also enjoy the following Other business issues To obtain a licence, an application must
tax concessions: be submitted to the licensing authorities.
Licensing requirements
yy Profits tax rate reductions and The licensing requirements depend on
Certain types of business activities can
favourable treatment of certain the type of licensed activity.
only be carried out in Russia with a
expenses for profits tax purposes;
special licence issued by an authorised The decision to grant or deny a licence
yy Property tax and land tax exemptions licensing body. The following activities is generally made within the forty-five
during the concession period. (among others) are subject to licensing: days after the authorities receive the
Law No. 116-FZ contains a grandfather application and all of its accompanying
yy Surveying;
clause under which the state documents. Regulations on the
guarantees that, should tax legislation yy Pharmaceutical activities and the licensing of some other activities can
be amended so that it has a negative production of medicines; allow for shorter processing periods.
effect on the taxpayers positions, yy The development, production, repair, Generally, licences are issued for
the amendments will not be applied sale and trade of weapons and indefinite terms.
to the residents of SEZs who took military equipment;
up residence in accordance with law Licences are issued separately for each
yy Overseas and inland waterway
No. 116-FZ. In general this guarantee type of activity. The transfer of a licence
passenger and freight transportation;
applies for the period that an agreement to another legal entity or individual
to carry out activities within a SEZ is in yy The use of highly explosive and is prohibited, except for in cases
force. hazardous objects for production; specifically provided for by law. A licence
yy The production, storage, usage and becomes invalid when an organisation
Most Russian regions have adopted distribution of explosive materials for is liquidated or terminates activities as
laws that provide tax concessions for an industrial assignment; a result of its reorganisation (unless it
certain investment activities. is reorganised via legal transformation
yy Activities related to the exchange of
into another form of company) or when
narcotic and psychoactive drugs;
a sole proprietors state registration
yy Educational activities. certificate expires.
Licensing is carried out at both the
Federal and regional level.

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16 | Doing Business in Russia: Your roadmap to successful investments

In accordance with the procedure Certain other restrictions also apply to yy Transactions between related parties,
established by the Administrative Code owning land, e.g. foreign individuals or where:
of the Russian Federation, authorised legal entities do not have the right to Cross-border transactions occur
licensing bodies are entitled to suspend own land adjacent to the state border of (with no limit on the annual
a licence if the licensee violates the the Russian Federation. aggregate turnover from all
licensing requirements and conditions. transactions between the parties);
Special laws regulate transactions
Performing a regulated activity without involving farmland. According to these The amount of income and
the appropriate licence is likely to laws, foreign individuals, legal entities expenses under the transaction for
lead to the imposition of significant and stateless persons, as well as one calendar year exceeds RUB1
penalties, with other consequences that Russian legal entities (in which more billion (approximately USD16.4
could include a court order requiring than 50 percent of the share capital million at the rate of 61 roubles:
enforced liquidation. The penalties and is owned by foreign individuals, legal 1 dollar), unless this transaction is
consequences depend on the specific entities or stateless persons) can only performed between:
circumstances. lease not own farm land. (1) The participants in a
For some business activities, instead consolidated group of taxpayers, or
of receiving a licence, a company is When acquiring land in Russia, both (2) Companies registered in
required to become a member of a Federal and local regulations should the same region of the Russian
professional self-regulated organisation be considered. Federation, provided that these
that sets its own membership criteria companies (a) do not pay corporate
(this for example applies to engineering, income tax (CIT) in another region
Transfer pricing
construction and valuation services). of the Russian Federation, (b) do
A transfer price should be viewed as a not have tax losses, and (c) do not
Some business activities can be price subject to monitoring by the tax have separate divisions in other
conducted only on the basis of authorities. The tax authorities monitor Russian regions or outside the
a special licence issued by an prices to ensure that they reflect market Russian Federation, or
authorised licensing agency. realities and have not been fixed to
(3) Companies conducting
reduce the tax burden.
activities within the same
Since 2012 the following changes have hydrocarbon mine, engaging
Land ownership
been made to Russias transfer pricing in transactions related to the
Pursuant to the Constitution of the rules: extraction of hydrocarbon raw
Russian Federation, land can be owned materials, or
yy The list of legal entities that are
privately. Land can also be owned by (4) Taxpayers engaged in making
considered related parties has been
state or municipal authorities or held interbank loans (deposits) which
considerably extended;
under other ownership conditions. are limited in term to 7 calendar
yy Prices will no longer be permitted to
The Russian Land Code regulates days, or
deviate up to 20 percent from market
the purchase of land via regional-level prices. It thus has become more (5) Taxpayers engaged in
legislation. In practice, it is still quite difficult to set prices with a view to transactions in the sphere of
difficult to acquire land in Russia from planning the tax amounts to be paid. military and technical cooperation
state or municipal authorities. However, Instead, the concept of an arms between the Russian Federation
according to Federal Law, the owners length range has been introduced; and other foreign countries (as
of buildings have the exclusive right regulated by the respective federal
to purchase or rent the land plots yy Transactions subject to transfer
laws);
underlying and surrounding their pricing control (controlled
transactions) have been defined and One of the parties to the transaction
buildings.
specified more clearly. is a taxpayer using the unified tax
Typically, land-lease contracts on an imputed income system, or
Russian transfer pricing legislation is
(sometimes with a right to purchase) run the unified agricultural tax system,
now more detailed and developed.
for a maximum term of 49 years. Renting while the other party does not use
As a result, the tax authorities could
or acquiring state property (apart from this tax regime; provided that the
potentially be more successful in
when executing the aforementioned amount of income and expenses
challenging transfer prices in court
exclusive right) is likely to require under the transaction exceeds
following a transfer pricing audit.
winning a tender/auction. If property is RUB100 million (approximately
rented or obtained without conducting Thus, in accordance with the law, the USD1.6 million at the rate of 61
the obligatory tendering procedures, following transactions should be subject roubles:1 dollar) for one calendar
then the transaction can be invalidated. to transfer pricing regulation: year;

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Doing Business in Russia: Your roadmap
Starting
to successful
a Business
investments
in Russia | 17

One of the parties to the transaction USD0.98 million at the rate of 61 of companies in which the taxpayer
is a resident of the Skolkovo roubles:1 dollar) for one calendar participates, information about the
Innovation Center and applies year. controlled transaction and functional
a 0 percent CIT rate, or is free yy Transactions, where one of the analysis, selection of the transfer pricing
of taxpayer obligations, or is a parties is a tax resident in a country method applied for tax purposes and
resident of an SEZ in Russia, or included on the Russian Federation the sources of information used, and
is a participant in a free economic Ministry of Finances blacklist, and if calculation of the arms length range.
zone; while the other party is proceeds from the transactions with The tax authorities may request the
not utilising any such benefits, this counterparty exceed RUB60 transfer pricing documentation on
provided that the amount of million (approximately USD0.98 controlled transactions starting from
income and expenses under the million at the rate of 61 roubles:1 1 June of the year following the year
transaction exceeds RUB60 million dollar) in one calendar year. in which the transactions took place.
(approximately USD0.98 million at
Taxpayers are obliged to notify the tax Accordingly, the taxpayer should provide
the rate of 61 roubles:1 dollar) for
authorities of any controlled transactions the transfer pricing documentation 30
one calendar year;
carried out within the calendar year working days after receiving the request.
One of the parties is subject before 20 May of the year following
to the mineral extraction tax For taxpayers who qualify for major
the year in which the transactions taxpayer status (in accordance with
(with a rate stipulated as a took place. Notification of controlled
percentage), provided that the the criteria stipulated by the tax code),
transactions should be given in a strictly the new law introduces the possibility
transaction concerns extracted prescribed format. This discloses
minerals and that the amount of concluding advance pricing
information about each operation agreements with the tax authorities (i.e.
of income and expenses in the performed within the controlled
transaction exceeds RUB60 million the taxpayers and the tax authorities
transaction (for instance, the operations agree in advance to apply a specific
(approximately USD0.98 million at performed within a buy-sell transaction
the rate of 61 roubles:1 dollar) for methodology to calculate the arms
would cover each delivery of each length price range).
one calendar year; particular item of goods).
One of the parties to the transaction Taxpayers could be subject to a penalty Tax Monitoring
is a taxpayer holding a licence to of RUB5000 if notification is provided
extract hydrocarbon raw materials after the deadline or errors/mistakes Federal law 348-FZ dated 4
from a mine, while the second are detected in the notification by the November 2014 introduced into
company is the operator of the tax authorities. Although the taxpayer the Russian Tax ode a new type
mine, provided that the amount may regard the penalty amount as of tax control called tax monitoring
of income and expenses in the insignificant, the presence of the penalty (amendments made in Part I of the
transaction exceeds RUB60 million on the taxpayers records will act as Russian Federations Tax Code,
(approximately USD0.98 million at a sign that the tax authorities should including inter alia a new Section V_2
the rate of 61 roubles:1 dollar) for include the company on their lists for Tax control via tax monitoring, were
one calendar year; further transfer pricing audits. adopted). Below we have provided the
One of the parties is a participant key information covering the underlying
In addition, in order to comply with principles in these new forms of
in a regional investment project
Russian transfer pricing regulations, cooperation between taxpayers and the
that can apply preferential tax
taxpayers as per the request of the tax authorities as part of tax monitoring.
rates, if the amount of income
tax authorities should justify the
and expenses in the transaction yy Taxpayers voluntarily participate in
prices applied in controlled transactions
exceeds RUB60 million tax monitoring and can independently
by preparing supporting transfer
(approximately USD0.98 million at assess the practical value and
pricing documentation. The taxpayer
the rate of 61 roubles:1 dollar) for usefulness of this form of tax control.
should submit the documentation with
one calendar year.
respect to the controlled transaction The participation criteria are as follows:
yy Cross-border transactions involving (or for a group of similar transactions)
1) The total amount of federal taxes paid
oil and oil products, ferrous and non- specified in the request from the
in the calendar year prior to the year an
ferrous metals, mineral fertilisers, Russian tax authorities. Transfer
application is submitted by the potential
precious metals and precious stones pricing documentation should
participant exceeds RUB300 million;
(i.e. goods traded on international contain the following information: a
commodity exchanges), if the description of the main characteristics 2) The total income generated by
proceeds from these transactions of the taxpayers business, analysis the potential participant exceeded RUB3
with the same counterparty exceed of related parties or a description of billion during the period prior to the year
RUB60 million (approximately the main characteristics of the group the application was submitted;

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18 | Doing Business in Russia: Your roadmap to successful investments

3) According to accounting (financial) yy Tax monitoring covers all of the taxes If the taxpayer disagrees with the
data, the total value of the applicants and duties calculated for the period motivated opinion, it can file an
assets exceeded RUB3 billion as at 31 from 1 January to 31 December of the appeal with a higher tax authority
December in the calendar year prior to chosen calendar year. within one month in order to initiate
the year the application was submitted. yy In contrast to traditional forms of tax the mutual agreement procedure.
The Law provides the members of a control, in-house and field tax audits, During consideration of the appeal,
Consolidated Group of Taxpayers with tax monitoring provides extended one of two possible decisions may be
the opportunity to participate in tax cooperation in which the taxpayer issued: (1) a decision to change the
monitoring, but only from 1 January 2016. should notify the tax authorities in motivated opinion, or (2) upholding
advance about any uncertainties or of the original motivated opinion.
yy If a decision on participation is Disagreement with an upheld
positive, a taxpayer must submit risks related to its tax position and
payments to the federal budget. motivated opinion may lead to the
its application before 1 July of the conducting of a field tax audit, the
year preceding the calendar year The tax authority in turn should
address uncertainties concerning results of which may be appealed to a
to be subject to tax monitoring. higher tax authority and in court.
The application should also the taxpayers tax position following
include regulations on information a request by the taxpayer as well as yy Positive cooperation via tax
cooperation (basic supervision on its own initiative, resulting in the monitoring gives the taxpayer
agreements); information on direct/ provision of a motivated opinion by certainty and allows it to be in control
indirect participants with participation the tax authority. of its tax position. It also allows for
interests of over 25%; and the yy If the Company agrees with the a better relationship with the tax
tax policy that took effect. The tax motivated opinion, it should send administration, for less administrative
authority will make a decision on tax a notification to the tax authority burden, and for the taxpayers
monitoring by 1 November of the stating that it agrees and stating the exemption from in-house and field tax
year in which the application was amendments it is making to comply audits within the tax monitoring period
submitted. with the motivated opinion (if any). (with some exceptions).

SAINT PETERSBURG

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Doing Business in Russia: Your roadmap
Starting
to successful
a Business
investments
in Russia | 19

Tax manoeuvres in the Russian To resolve this issue, the tax Despite a decrease in export duties
Oil & Gas industry manoeuvre was introduced to gradually for light oil products, oil refineries are
reduce export duties on oil 1.7 times expected to face a serious drop in their
Late in 2014, the Russian President and on petroleum products from 1.7 profit margins due to their growing
signed Federal law # 366-FZ of to 5 times over 20152017, while production costs, caused by higher
24.11.2014 that introduced a new tax simultaneously raising the minerals domestic prices for crude oil, which were
system, called tax manoeuvres, that extraction tax (MET) on oil 1.7 times traditionally calculated as an export
significantly affects Russian Oil & Gas and on gas condensate 6.5 times over netback (i.e. the oil price in international
majors and refineries. this period. The manoeuvre should in markets minus export-related costs,
The key reason behind the shift to theory balance budgetary losses from such as transportation fees and export
this new tax system was the intention export duties with new gains from the MET. duty).
to reduce the shortfall in government Another aim of these tax reforms is to To avoid this negative fallout for
receipts as a result of oil supplies from modernise the oil refinery industry and refineries, changes to excise taxation
Russia to Belarus and Kazakhstan to improve the refining quality, which were introduced which represent a
taking place within the conditions of a is currently very low in comparison decline in the excise tax rates for oil
common economic space, the Eurasian with Europe. In this vein, export duty products and in the excise extra refund
Economic Union (EEU). In accordance for fuel oil will be gradually increased procedure (the so called negative
with a recent decision by the EEU, to 100% by 2017. The initial plan had excise system). This means that
Russia needed to lower its export duties export duties rising to this level in 2015, refineries meeting specific conditions
to the levels adopted by Kazakhstan causing some experts to suggest are allowed to receive refunds on the
in order for a single oil market to be that this could cause the immediate excise they pay, multiplied by a refund
completed by 2018. If not aligned with closure of many old refineries in coefficient that varies between 1.37 and
Kazakhstan, the differences would likely Russia. To prevent this, the initial plan 2.88 in 2015, 1.6 and 2.84 in 2016, and
incentivise Russian oil companies to was amended to provide more time 1.94 and 3.4 from 2017, depending on
export crude oil through Kazakhstan for refineries to complete full-scale the type of oil product.
and Belarus, causing losses to the oil- modernisation.
dependent Russian federal budget.
The tax manoeuvres key fiscal figures
are presented in the table below:

Tax rates / coefficients to change via implementation


of the tax manoeuvre (from 2015 onwards), compared
to the previous system
2014 2015 2016 2017 and
subsequent years
MET per tonne, RUB 493 766 857 919
Marginal export duty coefficient 59 42 36 30
for crude oil,%
Export duty rates on petrochemicals, % of oil export duty:
Light and medium distillates 66 48 40 30
Gasoline 90 78 61 30
Naphtha 90 85 71 55
Fuel oil, bitumen etc. 66 76 82 100

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20 | Doing Business in Russia: Your roadmap to successful investments

Company and Labour Law


Company law authorities discovery of earlier violations for a non-public JSC, the statutory
in the registration process. Resolving minimum is RUB10,000 (approximately
Liabilities these issues at a later date can be more USD163.00).
(i) Parent liabilities time consuming and costly than simply
The statutory minimum charter capital
undertaking the standard company
In general, a shareholders liability is for an LLC is RUB10,000 (approximately
registration route.
limited to the amount of capital that the USD163.00).
shareholder invested in the company, Off the shelf companies are also
including as-yet unpaid amounts. available, although it is not advisable to Payment of capital
However, in the event of bankruptcy, purchase one. There are inherent risks,
For an LLC, 100 percent of the charter
a companys creditors have the right including potential liabilities (e.g. tax
capital should be paid within 4 months
to hold the parent liable for the debts liabilities) involved in acquiring a company
from the date of its registration with the
of its bankrupt subsidiary if the actions that could have been used for undisclosed
state. Alternatively, at the discretion
of the parent caused the subsidiary purposes. Furthermore, in some cases,
of the founder, the charter capital can
companys insolvency. to successfully change the ownership
be paid in full or partially before the
of a company (involving more than 25
The parent company is also liable for LLC is state registered. If this option is
percent of voting shares in a JSC and
any deals by its subsidiary that were chosen, a temporary account should be
more than 1/3 of participation interests in
concluded on instructions issued by the opened by the founder(s) in a Russian
an LLC), prior approval from the Federal
parent company or with its approval. bank. Upon registration of the LLC, this
Antimonopoly Service is required.
(ii) Liabilities of controllers account should be closed and the funds
In all cases, any change in ownership transferred to current accounts that
The term controller is broadly defined, must be registered, and this can take as have been opened.
and its definition includes control long as forming a new company.
not only via ownership, but also via For a JSC, 50 percent of the charter
contractual or other relationships that Number of shareholders or capital must be paid within three
allow a person / entity, including a parent participants months of state registration, and the
company, to take decisions on behalf balance must be paid in full within
It only takes one participant (individual the year following completion of state
of a company, or otherwise influence a
or legal entity) to establish an LLC and/ registration.
companys activities.
or a JSC. However, LLCs and JSCs
Registration cannot be established by another solely Charter capital contributions can be
owned legal entity. made in monetary form or in-kind.
Registration of a legal entity by the
appropriate authorities takes five The maximum number of participants in an Monetary contributions should be
business days from the moment that LLC is limited to 50 people. If the number made in amounts not less than the
documents are submitted. of participants in an LLC exceeds 50, then statutory minimum charter capital.
Registration of a JSC requires up to the LLC should be reorganised into a In-kind contributions require
an additional six weeks to register the JSC or a production cooperative within independent appraisal (irrespective
issued shares with the Securities Market one year. The number of shareholders of their value).
and Commodity Market Department at in a JSC is not limited by law.
the Bank of Russia. Bank accounts
Managing directors
Foreign investors are required to have Rouble and foreign currency accounts
certain documents legalised, translated The company may appoint more than can be opened after registration, though
or notarised, which can significantly one managing director (i.e. CEO) they must meet certain government and
lengthen the registration period. capable of acting on behalf of the bank requirements.
company jointly or individually. If this
It is possible to find adverts for Express
option is chosen, it must be stipulated in Establishment costs (LLC, JSC)
company creation services, but caution
the charter of the company and all of the
is advised when using such services. A shareholder (participant) in an LLC or
individuals selected must be registered
Companies are often registered not in JSC must pay a state registration fee of
in the state register of legal entities.
accordance with official procedures, RUB4,000 (approximately USD65.00),
with many steps in the process being which is payable at the moment the
Minimum capital and
missed out. These missing steps often registration documents are filed. In
become apparent only when a change contributions addition, if a JSC wants its share issue
to the companys constituent documents For a public JSC, the statutory to be registered, there is a registration
is required, and the change is rejected minimum charter capital is RUB100,000 fee of up to RUB200,000 (approximately
by the tax authorities due to the (approximately USD1,630); and USD3,260).
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Doing Business in Russia: Your roadmapCompany
to successful
and investments
Labour Law | 21

There are additional fees for translating Debt-to-equity conversion If the liquidated company does not
and notarising documents. Professional According to Russian corporate law, have sufficient assets to discharge its
fees for document collection, the converting debt into equity is an option liabilities, insolvency procedures are
preparation of an organisations available to both LLCs and JSCs, applied.
documents, and document submission excluding credit organisations (banks).
range from USD7,000 to USD10,000 Insolvency
for an LLC and from USD13,000 to An LLCs debt can be converted into Bankruptcy law provides protection
USD16,000 for a JSC (to establish the equity in two cases. In the first, an to the creditors of legal entities and
entity in Moscow). LLC owes debt to a participant. The outlines the procedures to be followed
participant exchanges the debt for in the event of bankruptcy. Bankruptcy
Net assets position additional charter capital. In the second, is understood as the inability to satisfy
If an LLCs or JSCs net assets on its the LLC is indebted to a third party. all pecuniary claims made by creditors
balance sheet fall below its charter The third party can exchange the debt or the inability to meet and execute
capital as of the end of the financial for a participatory interest equal to the pecuniary obligations as recognised
year (with the exception of the first two amount owed. by a court. A legal entity is considered
financial years), the company must Shareholders are permitted to set- insolvent and consequently can be
undertake one of the following actions: off their monetary claims against a declared bankrupt by a court if it fails to
(1) Increase its net assets; or company by purchasing additional meet its pecuniary obligations for three
shares in a JSC only if the shares are consecutive months after the date on
(2) Reduce its charter capital to an issued via a closed subscription. which the obligations were due.
amount not exceeding its net
assets (but not lower than the Bankruptcy legal proceedings can be
Liquidation initiated if the debt owed is not less than
statutory minimum amount of
charter capital). A company can be liquidated by: RUB300,000 (approximately USD4,900)
to a legal entity or RUB10,000
If, for the same period as indicated yy A decision made at a general
(USD163.00) to an individual.
above, an LLC or a JSC has net assets shareholders / participants meeting;
worth less than the minimum charter yy A court decision if the company has A Russian legal entity is considered
capital required by law, the company is become insolvent or bankrupt; insolvent and can consequently be
subject to liquidation. In the event that declared bankrupt by a court if it
yy A court decision if the company has fails to meet its financial obligations
voluntary liquidation is not undertaken
grossly violated certain laws; (of approximately USD5,000; or
by the shareholders or participants,
then the government authorities are yy A court decision if the goals, which the RUB10,000 (USD163.00) to an
likely to petition a court for liquidation, company was established to achieve, individual) for three consecutive
and creditors are likely to demand cannot be realised; months following the date on which
early termination or the fulfillment of yy Expiration of the term or achievement the obligations were due.
obligations and compensation for of the goal for which the company
losses. In practice, forced liquidation is was established (if provided for by the Reorganisation
rare if a company meets its obligations charter).
(including taxes). Mergers, consolidations, split-ups, spin-
The liquidation procedures include offs and transformations are permitted
If, for two consecutive years, an LLC forming a liquidation commission, under the Civil Code, under JSC law
or a JSC has net assets less than the notifying creditors via issuing and under LLC law. It is possible to
minimum charter capital required announcements on liquidation in mass reorganise an entity via a simultaneous
by law, the company is subject to media outlets, settling creditors claims, combination of the above different forms
liquidation. Practically speaking, a distributing the remaining assets among of reorganisation.
low/negative net asset position can the shareholders / participants, and Reorganisation entails a number of
be rectified through capital injection deregistering the company with the state steps, e.g. a tax audit of the company
in the form of gratuitous financing authorities that the company originally by the Russian tax authorities; written
or contributed assets (available only registered with. Tax deregistration can notification to creditors, who are
for an LLC). In practice, an increase cause significant delays in completing entitled to request that the companys
in charter capital can also recover the procedures, as a tax audit is performed obligations be prematurely terminated
a low/negative net assets situation before tax deregistration is permitted. or accelerated; etc. This can mean that
if it is done with an additional Once a liquidation commission has been completion of a reorganisation can
premium (including a debt-to-equity appointed, all rights to manage the require considerable time and effort for
conversion). company are transferred to the commission. an individual entity.
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22 | Doing Business in Russia: Your roadmap to successful investments

Labour law and its employees. The law does has the right to transfer the employee
not require a collective agreement if to a position in a different line of work
Labour regulations neither party requests it. If a collective for a period not exceeding one month.
Relations between employers and agreement is signed, then a trade union An employee can be assigned to a
employees are primarily regulated usually represents the employees. job requiring lower qualifications only
by the Labour Code of the Russian The employer is represented by the subject to the employees written
Federation (the Labour Code). general director or his/her authorised consent. If the employer needs
representative(s). additional work performing by the
Employment relations in the Russian
The law allows the parties to define the employee, then the employee needs
Federation are regulated by the
content of any collective agreement to provide his or her written consent
Labour Code; other legal acts that
independently; however, the contents and the relevant paperwork needs to
contain regulations relating to labour
must not make any conditions worse be completed.
(including internal policies, decrees
and acts adopted by the employer); the than the minimum standards provided yy Employees are entitled to 14 paid
employers agreements with its staff for by the Labour Code. The collective non-working days of public holidays
(if any agreements exist); and direct agreement is subject to registration with and annual leave of at least 28
employment contracts with actual the appropriate State Labour Office. calendar days. For some categories
employees. of employee, the minimum annual
Role of trade unions paid leave established by legislation
Employees enjoy the rights and benefits
can exceed 28 calendar days.
provided for under Russian labour According to the Labour Code, an
legislation. This same legislation also employer is obliged to consider the yy An employee is entitled to a sick leave
governs the types of employment opinion of a trade union(s) (if such a allowance, paid by his/her employer
contracts that can exist and the terms union exists) on certain matters. In and the Social Insurance Fund, based
under which they can be concluded, Russia, trade unions are more typically on the employees salary, which is
amended and terminated. formed at company level rather than at between 60 percent and 100 percent
industry level. of salary, depending on length of
Importantly, the Labour Code provides
service. However, in 2015, this
that no employment contract may
cannot be more than RUB1,633 per
stipulate conditions that are worse than Employment conditions day. Employers can pay temporary
the minimum provisions provided for
Employee guarantees disability benefits at a higher rate from
under Russian labour legislation.
their own accounts.
Russian labour legislation provides
Social partnerships certain guarantees for employees, in yy Legislation also provides wages
particular: covering time spent travelling on
The Labour Code establishes a set
behalf of work, for performance of the
of principles providing for social yy Standard working hours are not to functions of a trade union officer, for
partnership in labour relationships. exceed 40 hours per week. appearing in court, for going to vote,
Social partnership is defined as the
yy Overtime is permitted for some and for fulfilling other state or social
system of relations between employees,
employee categories in specific duties.
employers, the state and the local
circumstances, but generally yy In certain situations, legislation
authorities, aimed at regulating and
should not exceed four hours in two provides severance pay.
balancing the interests of the employees
successive days or 120 hours per
and employers in their labour relations. yy Overtime is permitted for some
year. Overtime is payable at the
The following areas of interest, among workers, subject to certain conditions
following rates: no less than 1.5 times
others, are regulated: being fulfilled.
the normal salary rate per hour for
yy Negotiation of collective agreements; the first two hours, and no less than yy Women are entitled to maternity
yy Mutual consultation on employment twice the normal rate for subsequent leave for 70 calendar days (84 days
issues; hours and for work on weekends if this is not the first child) prior to
and non-working days. Employees childbirth and 70 calendar days (86
yy Participation of employees in the
additionally have the right to demand days if there were complications
management of the company;
additional days off as compensation with the birth, and 110 for the birth
yy Involvement of all parties in for overtime. of twins, triplets, etc) after childbirth.
negotiations / disputes before things Maternity leave is granted along with
yy An employer does not have the right
go to court. social insurance benefits, which are
to require that an employee performs
functions beyond those set out in his/ paid in amounts defined by statutory
Collective agreements legislation. Regardless of her period
her employment contract, unless
A collective agreement can be business circumstances require of employment with a specific
concluded between an employer otherwise, in which case the employer company, a woman is also entitled to

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Company and Labour Law | 23

annual paid vacation, which can be yy Part-time workers (having more than yy An employee fails to fulfill their work
taken either before or immediately one job); duties on a regular basis without any
after maternity leave, as well as leave yy Individuals in full-time education. good reason for why they cannot; is
until the childs third birthday. During absent without any good explanation;
her maternity leave and until the child Employers are required to sign is inebriated at work; discloses state,
reaches one and a half years of age, individual written employment contracts commercial or the employers internal
the woman is paid a social insurance with each of their employees. After the confidential information; steals from
allowance. Fathers, grandparents contract is signed, a respective order the employer; or fails to comply with
and other relatives are entitled to admitting the employee into work within labour protection requirements,
baby care leave only under certain the company should be issued by the resulting in significant damages;
circumstances. general director.
yy The director of a company or
yy Employees have the right to organise The grounds for terminating company branch commits a single
trade unions and participate in employment under Russian employment violation of their employment
the management of the company. legislation include, inter alia: responsibilities;
Generally, trade unions represent yy Mutual agreement has been reached yy An employee with financial
the interests of the employees in by both parties; responsibilities commits an act which
their dealings with the employer, breaches the trust of the company.
ensure that the terms of collective yy Expiry of the term of the employment
agreements are being complied with, contract; Russian law states that employment
and participate in resolving labour yy Cancellation of the employment contracts cannot be terminated on the
disputes in accordance with statutory contract upon the initiative of the initiative of the employer, inter alia, with
legislation. employer (as discussed below) or the the following types of employees:
employee; yy Pregnant women or women with
Russian labour legislation provides a children under the age of three;
yy Refusal by the employee to continue
number of guarantees to employees,
working due to a change in the yy Single women with children under 14
such as social security payments
ownership / management or control of or disabled children under 16.
and benefits, severance pay,
the employer, or due to the employer
unused vacation pay, dismissal pay,
being reorganised; Where employees are less than 18
overtime, etc.
yy Refusal of the employee to continue years of age, an employment contract
working after the employer has can be terminated with the approval
Employment contracts relocated. of the State Labour Inspectorate and
Commission on Minors.
The Labour Code states that an In general, an employee has the right to
employment contract should contain terminate a contract by giving two weeks It can prove difficult to terminate an
essential conditions (e.g. place of advance written notice to the employer, employment contract on the grounds
work, starting date, position, working unless an earlier termination date is that the employee is not suitable for
hours, salary and benefits, other) and mutually agreed upon. A fixed term the position unless there are clear job
additional conditions (e.g. trial period, employment contract can be terminated requirements with demonstrable failings
confidentiality, other). by an employee if he/she is injured by the employee. Courts generally
or disabled and unable to perform rule in favour of the employee when
Employment contracts can be considering cases of alleged wrongful
concluded for: the required work, or if management
violates employment legislation / the dismissal. In practice, companies
yy An indefinite term; or collective agreement / the employment seek, where possible, to secure the
contract, or if the employee has employees voluntary resignation.
yy A fixed term not exceeding five years.
other good grounds for doing so.
Contracts with a fixed term are only The Labour Code prohibits
In some limited circumstances, the
allowed when employment relationships employers from initiating termination
employee has the right to terminate
cannot be established for an indefinite procedures against certain
an employment contract without prior
term and specific conditions have categories of employees.
notice.
been satisfied. In particular, fixed term
contracts are permitted, inter alia, for the In a limited number of cases, an Work book
following types of employees: employer has the right to terminate a
contract. These include: Russian labour legislation requires that
yy Directors, deputy directors, chief a work book be kept for each employee
accountants; yy An employee submitted false who has worked for at least five days at
yy Employees working in companies documents when hired; a company, if this work is the employees
created for a specific project;

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24 | Doing Business in Russia: Your roadmap to successful investments

main employment. This is a fundamental and their responsible officials Different levels of minimum salary
document in which the employment (RUB1000 to RUB5000) for delayed may be established by regional local
history of each individual is recorded salary payments. In some cases, the authorities in Russia, but these levels
over his/her lifetime. This work book employers activities can be suspended cannot be lower than the Federal
indicates the grounds for termination for up to 90 calendar days. minimum level. The minimum salary
of employment contracts and records level for Moscow in the period from
If the responsible official has already
rewards and achievements at work, 1 January 2015 to 31 March 2015 is
been penalised for delayed salary
the work performed by an employee, RUB14,500.
payments, then they can be prohibited
transfers to another place of permanent
from holding executive positions for a For the purposes of calculating taxes,
work, etc.
period of 1 to 3 years. levies, penalties, liabilities under civil
Every entry into the work book is transactions, etc, a relevant minimum
If salary payments are delayed for more
attested by the signature of the statutory monthly salary of RUB100 is
than two months (three months in cases
authorised representative of the applied.
where partial delay of salary payment
employer and by the employers stamp.
has occurred), criminal liability applies. The minimum statutory monthly
Employee Trial Periods The Criminal Code provides that if it salary is used to regulate wages and
can be proven that employees were other salary related payments and to
Trial periods (typically up to a maximum
paid less than half of the salary payable calculate taxes, levies and fines.
of three months) are permitted to
assess the suitability of employees to them due to the personal motives of
the general director, or due to actions Currency and form of salary payment
for a position. Certain categories of
employees are not subject to trial motivated by self-interest, then the Direct salary payment to employees
periods (e.g. pregnant women, minors, general director can be fined up to in Russia in a foreign currency is
transferees). The trial period can be RUB120,000, or fined by an amount prohibited.
extended to six months for directors, equal to his/her wage or income from
another source for a period of up to In Russia, salaries are normally paid in
deputy directors, chief accountants, roubles. However, in accordance with
deputy chief accountants and directors one year. The general director may
also be disqualified from occupying collective agreements or employment
of branches, representative offices or contracts signed upon the written
other divisions. certain positions or engaging in certain
activities for a period of up to one year, request of an employee, workers can
or the general director may be subject be remunerated in other forms as long
The trial period for an employee
to forced labour for a term of up to two as they do not contradict Russian
cannot exceed 3 months.
years, or the general director may even legislation or international treaties to
be imprisoned for a term of up to one which Russia is party. The percentage
Salary
year. of remuneration made in non-monetary
The Labour Code guarantees timely form cannot exceed 20 percent of an
salary payments to employees as More stringent criminal liability applies if employees total salary.
follows: the salary payments are delayed in full
The employer should pay salaries at for more than two months, or if salary
Severance payments
least twice a month. If salary payment is paid at an amount below the Federal
minimum salary level (in 2015, this was The Labour Code requires severance
is delayed by more than 15 days, the
RUB5,964) for more than two months, pay to be equal to at least two-weeks
employee has the right to notify the
or if the above mentioned violations average earnings when an employment
employer and stop working. If this
caused severe consequences. contract is terminated due to the
happens, the employer is likely to be
following reasons:
obligated by a court to reimburse the
employee for each idle day with two- Minimum statutory monthly salary yy The drafting or enlisting of an
thirds of the average salary (calculated employee into military or alternative
The minimum statutory monthly salary is
based on the actual salary accrued and civil service;
used to regulate wages, compensation
the actual working time for the past 12 yy The refusal of an employee to be
and other payments made under labour
months). transferred to work in another location
legislation, and also to calculate taxes,
The employer must also pay interest on levies, penalties and other payments. should the enterprise, institution or
each day of delay for salary payment. organisation relocate;
As of 1 January 2015, the Federal
The amount must be no less than yy An employee is unable to work
minimum statutory monthly salary is
1/300th of the refinancing rate of the pursuant to a medical certificate
RUB5,964. This minimum statutory
Bank of Russia. issued in accordance with legislation;
monthly salary is used only to calculate
Administrative fines can be levied on labour remuneration and allowances yy Refusal to continue work due to
employers (RUB30,000 to RUB50,000) covering temporary inability to work. a unilateral change to the labour
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Company and Labour Law | 25

agreement conditions made by yy Application for a corporate permit yy The quota system does not apply to
the employer (such changes from the immigration authorities to HQS professionals;
are only possible in exceptional engage foreign labour (Corporate yy The Individual Permit can be issued
circumstances); Permit); for a term of up to three years;
yy An employee who previously yy Application to the immigration yy A HQS professional has the right to
performed the work is being authorities for each expatriates obtain multiple work visas for a term
reinstated after a period of leave (i.e. individual Work Permit (Individual Permit). of up to three years;
maternity leave comes to an end);
Typically it takes more than four yy The procedure to obtain an Individual
yy Refusal of an employee to find a Permit for HQS professionals takes
months to obtain an individual work
new job should the relevant medical about fourteen business days from
permit. The individual permit is
authorities prescribe this course of the moment a complete package of
issued for a period of up to one year.
action for the employee, or if the documents is submitted;
employer is not able to offer relevant
work. In a separate process, but based on yy An income tax rate of 13 percent
the work permit, a work visa must be applies to the salary paid to an HQS
If an enterprise, institution, or under their relevant employment
obtained. Its procurement also involves
organisation is dissolved, or if there contract, irrespective of their tax
several stages, in which a specified set
need to be staffing cuts, then a one-off residence status in Russia;
of documents must be submitted to the
payment of monthly average earnings
immigration authorities. yy Extended stays for business trips
is required. Additional payments are
required if the dismissed employee is It should be noted regarding work outside the region / regions for which
unable to find work, but no more than permits that each year, by 15 July, the HQS Individual Permit was
two months worth of payments (three companies must report the number obtained are allowed, as compared to
months subject to specific conditions). of foreign employees they anticipate the standard Individual Permit.
to engage in the next calendar year.
Work permits for foreign This procedure effectively constitutes Migration registration procedure
nationals a quota application system. If the Migration registration is the process of
employer does not comply with this and notifying the immigration authorities
As a general rule, foreign nationals
does not receive notification that they of a foreign citizens whereabouts
working in Russia are required to
have an approved quota, the employer (international travel, as well as internal
have a work permit. There are a few
will have any work permit applications trips within Russia). It is the hosting
exceptions to this rule, mainly related to
rejected. A company that fails to file a party which is responsible for carrying
certain CIS nationals and other foreign
quota application or whose application out registration. The hosting party is
nationals who possess residency
was denied or partially approved has either the hotel or the employer (visa
permits. Work permits are not always
the right to use a list of quota-exempt sponsor), or a landlord if the foreign
required for the employees of suppliers
positions when applying for a work national is not staying in a hotel. Upon
or manufacturers of equipment imported
permit, but only if the application meets arrival in Russia, each foreign national
into Russia for the purpose of installing,
all of the quota exemption requirements. must be registered in Russia at their
supervising the installation of, or
servicing the equipment. host location. This process should be
Work permit applications for Highly completed within seven business days
The standard work permit application of arrival every time a foreign national
Qualified Specialists (HQS)
process is quite a lengthy and arrives in Russia or travels to another
burdensome procedure consisting of Since 1 July 2010, a simplified
region (changes location) within Russia
several stages. Each stage involves procedure for obtaining Individual
for more than seven business days.
the submission of applications together Permits for HQS has been in force. A
with an extensive list of documents. The HQS is a highly-skilled professional who HQS professionals and their family
stages include: is a foreign employee and who has work members are exempt from registration
experience and skills or achievements procedures if they arrive and stay in
yy Registration with the local in a certain area and whose annual Russia for a period not exceeding 90
employment authorities; salary is generally not less than days, and exempt for 30 days if they
yy Submission of a notification to the RUB2,000,000. travel to another region in Russia. If
Employment Service stating that HQS professionals and their family
Obtaining Individual Permits for foreign
there are vacancies in the company members stay in Russia for more
nationals to work as HQS has the
for which only the employment of than 90 days (or 30 days if traveling
following benefits:
foreign citizens will satisfy. The to another region), they are required
Authorities must reach a conclusion yy The Russian employer does not need to be registered with the immigration
that this is correct (Conclusion stage); to obtain a Corporate Permit; authorities.

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26 | Doing Business in Russia: Your roadmap to successful investments

Business and Personal Taxation


Tax system overview yy Personal Income Tax (PIT); Local taxes and levies are those
yy Profits tax; introduced by the Tax Code and by the
Russian tax legislation consists of the
regulations of municipal authorities and
Tax Code of the Russian Federation yy Mineral extraction tax; which are paid only in the appropriate
(hereinafter, the Tax Code) and laws
yy Water tax; municipal areas. Local taxes consist of
adopted in accordance with it.
yy Levies on the consumption of natural land tax and personal property tax.
Taxes and levies are imposed in Russia and biological resources; Local (or regional) legislative bodies
at the Federal, regional and local levels.
yy State duties and registration fees. only have the right to introduce the taxes
Federal taxes and levies are those and levies delegated to their authority
Regional taxes and levies are those
established by the Tax Code and by by the Tax Code. When deciding on
established by the Tax Code and by
Federal Law and are paid throughout tax rates, local (regional) authorities
specific regional tax laws effective in
the Russian Federation. are allowed to establish the following
the regions of the Russian Federation
elements of taxation:
As of 1 January 2015, the following and which are only paid in that specific
Federal taxes and levies are effective: region. Regional taxes include property yy Tax concessions;
tax, gambling tax and transport tax. yy Tax rates within the limits established
yy Value-Added Tax (VAT);
by the Tax Code;
yy Excise tax;
yy Procedures and deadlines for tax
payments.
The above tax system results in different
levels of tax burden for taxpayers
registered in different regions.

Tax registration requirements


No separate tax registration needs
to take place in order to pay VAT a
taxpayer obtains a single tax ID number
for all taxes. However, taxpayers have to
obtain supplementary tax registration ID
numbers (KPP) from the tax authorities
for the places where their separate
subdivisions are located.
A separate subdivision is a subdivision
located in a separate location away
from the head office (e.g. in another
city). A separate subdivision implies the
creation of stationary working places
for periods of longer than one month.
Foreign Legal Entities (FLEs) have to
obtain tax registration with the local
tax authorities within 30 calendar days
from the date that activities begin at that
location.

NIZHNY NOVGOROD

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Business and Personal Taxation | 27

Business taxation Tax concessions Taxation of Foreign Legal Entities


The gratuitous receipt of assets from (FLEs)
Profits tax a parent company, a subsidiary or an For FLEs whose activities in the Russian
individual does not result in taxable Federation give rise to permanent
Tax base income if: establishment (PE), profits tax on
Taxable profit is calculated as income income minus the expenses attributable
yy The recipients or transferors
minus expenses as recorded in the tax to the Russian PE is due.
ownership in the other partys share
accounts.
capital amounts to more than 50 percent Under Russian tax legislation, the
Income is generally determined on an (with the exception of transferors which activities of an FLE give rise to a PE:
accrual basis. The application of a cash are incorporated in one of the
1 If an FLE has a place of business
basis is allowed only if average sales countries (offshore zones) on a list
in Russia (branch, office, bureau
proceeds for four consecutive quarters issued by the Ministry of Finance);
or other independent subdivision);
are less than RUB1,000,000, excluding yy The individual owns more than 50 and the FLE conducts business
VAT per quarter (USD16,320)7. percent of the recipient company; activities in Russia on a regular
Expenses are deductible if they are yy The property received (except for basis. In particular, a construction
incurred to generate income, are money) is not disposed of within one site located in Russia, under certain
economically justifiable and are properly year from the date of receipt. circumstances, can be considered
documented. Certain expenses the PE of the FLE performing the
Receipt of property, property rights or
specifically referred to in the Tax Code construction activities.
non-property rights from a shareholder
are treated as non-deductible.
in order to increase the net assets, as 2 If an FLE acts in Russia through
Consolidated profits tax reporting is well as the forgiveness of debt by a a dependent agent. A dependent
allowed only if the parent company shareholder and the reinvestment of agent is understood in Russian
has a 90 percent or higher share in payable dividends to (but not received legislation, as well as under the
subsidiaries and the total annual amount by) a shareholder does not result in applicable double tax treaty (if any),
of VAT, excise taxes, profits tax and taxable income, regardless of the as a company or individual which,
mineral extraction tax is RUB10 billion percentage of shares owned by the on the basis of contractual relations
or more (USD163 million)8. Additionally, contributing shareholder. with a principal, has and habitually
the groups total sales must be RUB100 exercises the right to conclude
Current profits tax legislation does not
billion or more (USD1.63 billion)9, contracts and negotiate the essential
stipulate other profits tax concessions.
and total assets must be RUB300 terms of contracts in the name of the
billion or more (USD4.89 billion)10. Tax losses can be carried forward for 10 principal or to bind the principals
Consequently, only a few major Russian years. participation into a business activity
companies are able to use consolidated (except for activities which are of an
profits tax reporting. Tax accounting auxiliary or preparatory nature, such
The Tax Code requires taxpayers as marketing).
Tax rates (including permanent establishments) Generally, the approach to calculating
The maximum profits tax rate is 20 to maintain separate accounts for profits tax for the permanent
percent, including 2 percent paid to the profits tax purposes. Tax accounting establishments of foreign legal entities
Federal budget and 18 percent to the rules differ from Russian statutory is similar to the approaches established
regional budget. The regional profits tax accounting principles (e.g. with regard for Russian legal entities, with certain
rate can be reduced to 13.5 percent at to depreciation, recognition of interest exceptions. In particular, these
the discretion of the regional authorities. expenses, etc.) exceptions include those resulting from
the applicable provisions of double
Certain types of income are taxed via The methodology applied for profits tax treaties (e.g. the allocation of
a withholding mechanism at flat rates tax purposes should be clearly management costs).
stipulated by the Tax Code (for details, explained in the taxpayers tax
see the withholding income tax section accounting policy. Once chosen, FLEs having no PE in Russia are
below, p.35). the tax accounting policy cannot be subject to withholding tax on income
changed during the financial year, sourced in Russia (for details, see the
except in response to changes in withholding income tax section below,
legislation. p.35).

7,8,9,10
Actual exchange rate of the Central Bank of the Russian Federation as of 1 March 2015 (RUB61.2718 : USD1)

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28 | Doing Business in Russia: Your roadmap to successful investments

Filing and payment Generally, Foreign Legal Entities having (including the free-of-charge supply of
Taxpayers (except Permanent no Permanent Establishment in Russia goods) and the transferal of property
Establishments (PEs) and certain other are subject to 20 percent withholding rights;
taxpayers) are allowed to file profits tax income tax on most Russian-sourced yy Transfer of goods (work, services)
returns either monthly or quarterly. PEs income, such as interest, royalties, income for the taxpayers own needs if the
should file profits tax returns quarterly. from leasing and rental operations, etc. incurred expenses are non-deductible
An annual return is due by 28 March of Freight income is taxed at 10 percent. for profits tax purposes;
the year following the reporting year. Withholding income tax rates can be yy Construction and installation work
Taxpayers (except PEs) pay monthly reduced in accordance with double tax carried out to benefit only the
advance payments on profits tax. PEs treaties concluded between the Russian taxpayer;
pay quarterly advance payments. Final Federation and the actual country of the
beneficiarys residence. yy The import of goods into Russia and
payments are due on 28 March of the to other territories under Russian
year following the reporting year. For a list of double tax treaties and the jurisdiction.
withholding tax rates applicable under
Withholding income tax these treaties on dividends, interest Place of Supply Rules
A FLE in receipt of income sourced in and royalties, see Appendix 1. Chart of
Withholding tax rates, p.52. The Tax Code stipulates specific place
Russia which is not attributable to its of supply rules that determine whether
Russian PE (e.g. rent, royalties, interest A Foreign Legal Entity should confirm goods, work or services are supplied
and dividends, freight income, etc.) is that it is resident in a country that is party in Russia and thus whether they are
subject to withholding income tax at source. to a double tax treaty with the Russian subject to Russian VAT.
Income derived from the business Federation in order to enjoy the reduced
withholding income tax rates. Confirmation Goods are deemed to be supplied on
activities of the FLE in Russia (e.g. Russian territory for VAT purposes if:
nonrecurring consultancy services) must be documented in a certificate
which do not give rise to a PE, are issued by the relevant foreign authorities. yy the goods at the beginning of their
exempt from withholding income tax. A FLE should also confirm that it is the shipment or transportation are located
actual beneficiary of the dividends. in Russia or on other territories under
There is no withholding tax on the Russian jurisdiction;
repatriation of profits from a local In the absence of a proper certificate
Russian representative office or from and confirmation of actual beneficiary yy the goods at the moment of their sale
the branch of an FLE to the head office. status, tax should be withheld and are located in Russia or on other
However, the proceeds from liquidation remitted to the budget at the standard rate. territories under Russian jurisdiction,
are subject to taxation at source. and are not in transit / being shipped
Filing and payment through Russia.
Tax rates Income tax should be withheld from the Notably, the shipment or sale of
Withholding income tax rates vary income payable to the FLE and remitted hydrocarbons or hydrocarbon products
depending on the type of taxable to the budget on the date when payment from the territory of the Russian
income. is made to the FLE. continental shelf is considered as supply
on Russian territory.
Tax rates for dividend income are: A Russian Legal Entity (or FLE with a PE
in Russia) should also file a withholding Work is / services are generally deemed
yy 0 percent on dividends payable to a to be supplied in Russia if the supplier
income tax calculation.
Russian legal entity (RLE) if this RLE of the work (services) has a place of
has owned at least 50 percent of the business in Russia. However there are
shares in the dividend payer for 365 Value Added Tax
specific place of supply rules in the
consecutive days, providing that the Value Added Tax (VAT) is an indirect Tax Code that govern certain specific
dividend payer is not resident in an tax the burden of which is carried by work services (for instance, for services
off-shore country (e.g. the British Virgin the end-customer but which should be related to movable or immovable
Islands, Guernsey, Jersey, or any other accounted for by the supplier. property; for intangible services like
state on a list compiled by the Ministry consulting, marketing, and engineering;
of Finance of the Russian Federation). Taxable Supplies
for transportation and freight forwarding
yy 13 percent on dividends received by Generally, VAT should be charged by services; for work (services) rendered
an RLE from an RLE or Foreign Legal the taxpayers (companies, individual on the Russian continental shelf, etc).
Entity (except for FLEs incorporated entrepreneurs, importers) on the
in the countries on the Ministry of following transactions: Tax Agent Mechanism
Finances list). yy Sales of goods (work, services), If foreign companies that are not
yy 15 percent on dividends payable to an provided that the sales take place on registered with the Russian tax
FLE by an RLE. the territory of the Russian Federation authorities supply goods (work,
2015 JSC KPMG. All rights reserved.
Business and Personal Taxation | 29

services) in Russia, and these supplies under the reverse-charge mechanism,


are deemed to have taken place in and VAT paid when importing goods into
Russia in accordance with the place Russia, provided that:
of supply rules, then the buyer, who is
yy goods, work, services and property
tax-registered in Russia, is required to
rights are acquired in order to carry
calculate the amount of Russian VAT,
out VAT-able transactions in Russia;
withhold this VAT from the amount of the
fee payable to the foreign supplier, and yy goods, works, services and property
remit that VAT to the Russian federal rights are booked in the taxpayers
budget on behalf of the foreign company accounts and the taxpayer has the
(the tax agent mechanism). respective primary documents;

Having withheld and paid the VAT to the yy the taxpayer has VAT invoices
state budget, the buyer can then recover duly prepared in accordance with
this VAT against its output VAT under the requirements provided by the
general rules for the recovery of input Tax Code (documents confirming
VAT. payment of VAT for cases involving
the recovery of import VAT and
payment of VAT under the reverse
VAT Base charge-mechanism).
VAT should be calculated and paid upon
Under certain conditions, it is also
receipt of prepayments and/or on the
possible for taxpayers who made
total transaction price at the moment
prepayments to suppliers to recover the
the goods are shipped, when work is
VAT amount included in the prepayment
performed, services are rendered or
amount.
property rights are transferred. If the
moment payment occurs differs from When both VAT-able and non-VAT-
the moment that shipping takes place, able supplies are delivered or supplies
VAT should be accounted as at the are subject to different VAT rates, in
earliest of the two dates. If the date the most cases taxpayers should account
taxable base is calculated is the date for supplies and the respective input
of prepayment, then the taxpayer is VAT separately. Recovery of VAT
obliged to calculate the taxable base in these cases is subject to specific
again at the moment of shipment. VAT rules (proportional recovery, collecting
paid with respect to prepayments can supporting documents, etc).
subsequently be claimed for recovery
PERM
after shipment. VAT Invoice
When VAT is calculated by the tax
A VAT invoice is a special VAT document
agent, the obligation to withhold VAT by
needed for VAT recovery. The structure
the tax agent occurs at the moment of
of this document is established by the
payment and benefits the foreign seller
Russian Government. The VAT invoice
(which is not registered with the Russian
differs from a commercial invoice and
tax authorities).
can be issued either in hardcopy or in
When the value of goods (work, services) electronic format (if electronic document
has been changed (in particular, when interchange with the counterparty
changes have taken place in the price is agreed, it must be conducted
of the goods (work, services) or their in accordance with the specific
quantity), the seller should issue a requirements of the law).
corrective VAT invoice and the parties
should correct their VAT obligations in In some cases, taxpayers are not
the way prescribed by VAT law. required to issue VAT invoices, notably if
they perform VAT exempt transactions.
If supplies are provided to buyers who
Recovery of VAT do not pay VAT or who are exempted
Generally, Russian taxpayers are from the obligation to pay VAT, it is
entitled to claim for recovery input VAT permissible upon the mutual consent
related to purchased goods (work, of both parties for VAT invoices to not
services) and property rights, VAT paid be issued.
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30 | Doing Business in Russia: Your roadmap to successful investments

VAT Rates certain services in the sphere of art the budget upon submission of a special
Generally, the sale of goods (work, and culture, etc.; application. Generally VAT refunds can
services) is taxable at a standard VAT yy Banking operations and insurance only be made after the tax authorities
rate of 18 percent. services; REPO operations; have performed a desk tax audit and
confirmed the legitimacy of the input
A reduced VAT rate of 10 percent applies yy The transfer of certain types of VAT claimed. Since 2010, taxpayers
to the sale of certain types of medical intellectual property (IP) rights or have also been entitled to VAT refunds
goods, books and periodicals, foods the transfer of rights allowing for IP through use of the accelerated VAT
and childrens goods (in accordance to be used on the basis of a licence refund procedure, which generally
with the list of goods established by the agreement. allows them to receive a cash tax
Government of the Russian Federation). The import of certain types of goods into refund prior to completion of the desk
The sale of certain types of goods Russia can also be VAT-exempt. tax audit. However, this procedure can
(work, services) is subject to a zero- apply only if the taxpayer has already
percent VAT rate. The zero percent VAT The Tax Code provides for certain paid a substantial sum of taxes, or if the
rate applies, inter alia to: export sales; types of VAT exemptions, in taxpayers provide a bank guarantee,
international transportation services particular exemptions related to or if they are residents of a territory
and related freight forwarding services; financial and social welfare services. classified as being of advanced social
transportation and rendering of certain and economic development.
services related to the transportation
of oil, oil products, natural gas and Customs Union VAT Payment and Filing
electricity power outside Russia; certain The legislation of the Eurasian Customs VAT returns should be submitted
types of air transportation; certain Union between Russia, Belarus and quarterly in electronic form by no later
services rendered at river and sea Kazakhstan (the Customs Union) than the twenty-fifth day of the month
ports; and certain services rendered by establishes special VAT rules with following the quarter that has ended.
Russian railway carriers in relation to the respect to transactions between citizens Generally, the VAT should be paid by
international transportation of goods. in the different member states of the one third of the amount due by the
To apply a zero-percent VAT rate, the Customs Union. The export of goods twenty-fifth day of each of the three
supplier should collect the necessary from one member state to another is consecutive months following the
supporting documents within the subject to a zero-percent VAT rate. reporting quarter.
established time limit and submit a VAT The zero-percent VAT rate should be
return with the supporting documents to supported by provision of the relevant Taxpayers submit VAT returns on a
the Russian tax authorities. documents, including documents quarterly basis and pay the VAT in
showing the application to import the three equal monthly installments.
Generally, the sale of goods (work, goods and that the import VAT has
services) on the territory of Russia is been paid. The documents should be
taxable at a VAT rate of 18 percent. stamped by the tax authority of the
A VAT rate of 10 or 0 percent applies member state where the goods were
in certain cases. exported. SAINT PETERSBURG

The import of goods from one member


state to another is subject to import VAT
Exemptions
in the other member state. A taxpayer is
Certain types of activities are subject to obliged to submit a separate VAT return
exemption from VAT, in particular: with respect to this import of goods.
yy Leasing premises located in Russia
to foreign individuals and foreign VAT Payable to the Russian State
entities accredited in Russia (if there Budget
are reciprocity rules applying in the VAT payable to the budget is generally
respective foreign jurisdiction); determined as the difference between
yy Selling residential real estate, certain the amount of output VAT accounted
medical goods, medical services, for on supplies subject to VAT, and
foods produced by school cafeterias, the amount of input VAT incurred on
public conveyance services, religious purchases (plus the amount due to be
and ceremonial services, educational paid to the budget in special cases) in a
services rendered by licensed respective tax period.
nonprofit educational institutions,
An excess of input VAT over output VAT
could be refunded to the taxpayer from
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Business and Personal Taxation | 31

Social Security Contributions Payments subject to personified A foreign nationals contributions are
Social security contributions are payable contributions and rates paid in full on the remuneration they
in Russia in the form of mandatory Insurance contributions are payable on earn in Russia based on their permanent
insurance contributions to the Russian remuneration and other payments to or temporary residence permit.
Pension Fund, Social Insurance Fund, individuals under employment and civil An employer of foreign nationals who
and Medical Insurance Fund for each contracts. Some forms of compensation are staying temporarily in Russia on a
employee (personified contributions), as are exempt from insurance visa must pay personal contributions
well as via contributions for mandatory contributions, including business to the Pension Fund and to the Social
social insurance against occupational trip expenses, temporary disability Insurance Fund (unless the employee is
accidents and diseases. allowances, employee dismissal a HQS).
expenses (excluding compensation
Insurance contributions are levied on No personified contributions are payable
for unused paid vacation days),
companies, individual entrepreneurs for HQS.
professional development expenses,
and individuals making payments to
and some others.
other individuals as part of employment
Personal contribution concessions
relations and under civil contracts for the For 2015, personified contributions
provision of services or the performance are payable at the rates provided in Reduced insurance contribution
of work, and under other specific types the table below subject to an annual rates apply to agricultural producers,
of contracts. Contributions are also remuneration threshold established businesses in technology and
levied on self-employed individuals, for contributions to the Pension Fund innovation special economic zones,
including individual entrepreneurs, and the Social Insurance Fund. The taxpayers applying the simplified tax
notaries and lawyers. No mandatory threshold is subject to annual revision by regime (for certain activity types), legal
contributions are payable by employees. the Russian government. entities employing disabled individuals
(provided that certain conditions are
met), and IT companies, among others.
Annual Rates on Rates on remuneration
Type of insurance
threshold per remuneration up to in excess of the
contribution
employee the threshold threshold Mandatory social insurance against
Pension Fund RUB711,000 22 percent 10 percent occupational accidents and diseases
Social Insurance Fund RUB670,000 2.9 percent - Apart from the aforementioned
personified contributions, employers
Federal Mandatory n/a 5.1 percent 5.1 percent
Medical Insurance Fund are required to pay mandatory social
insurance contributions against
occupational accidents and diseases.
These contributions are payable
on the total payroll at a flat rate that
varies depending on the risk category
that the employing company belongs
to according to the Russian Social
Insurance Fund. The minimum rate is
0.2 percent of payroll; the maximum rate
is 8.5 percent. Generally, office activity
is subject to insurance contributions
against injuries and professional illness
at a rate of 0.2 percent.

Filing and payment


Insurance contributions are payable on
a monthly basis.
Generally, those making payments
should file various reports with the
Pension Fund and the Social Insurance
Fund on a quarterly basis.

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32 | Doing Business in Russia: Your roadmap to successful investments

Property tax With respect to immovable property, The tax rates are established by the Tax
Property tax is levied on those for which the tax base is the cadastral Code and range from RUB1 to RUB200
properties listed on a taxpayers balance value, the tax rate (in Moscow) cannot (USD0.023.26) per unit of horse power
sheet as fixed assets (except for land exceed 1.7% in 2015, and 2% from and can increase or decrease by up to
plots). 2016. For other Russian regions, the ten times, depending on the region.
rate in 2015 should not exceed 1.5%,
The regional authorities are allowed to
and 2% from 2016.
Tax base offer tax incentives and allowances for
certain categories of taxpayer.
Generally the tax base is the net book Tax concessions
value of the average annual fixed The terms for the submission of
assets according to Russian statutory The Tax Code stipulates a number of transport tax payments and the filing of
accounting. For a number of property property tax concessions. In particular, advance calculations are established by
types (administrative and business companies are exempt from property the authorities of the region where the
centres; nonresidential premises aimed tax on assets classified as Federal vehicle is registered. However, the final
to be used / actually used as offices highways intended for public use and on annual payment and annual tax return
or for trading and catering; a FLEs assets constituting an integral, technical is due no earlier than 1 February of the
immovable property that does not have component of such highways. The list of following year.
PE status in Russia, or is not being these assets has been compiled by the
used in the PEs operations in Russia; Government of the Russian Federation.
Land tax
residential premises not accounted for Property tax paid by a Russian legal
as a fixed asset on the balance sheet), Land tax is calculated based on the
entity on property located outside of
the tax base is the cadastral value of the cadastral value of land plots according
Russia can be offset when paying
specific facility. to the Russian Federation legislation
property tax in Russia. To carry out this
applicable to the region where the land
Movable property that has been booked offsetting, the taxpayer should submit
plot is located.
as a fixed asset since 1 January 2013 a document confirming the payment of
is exempt from tax, except for facilities property tax abroad. Under the Tax Code, the land tax rate for
booked as a result of reorganisation lands intended for agricultural purposes
or the liquidation of a legal entity, or as Filing and payment and housing must not be higher than 0.3
a result of a transfer between related percent, and no higher than 1.5 percent
The regional authorities set the terms of the cadastral value of the land plot
parties. for advance and final property tax for any other purposes. The regional
FLEs having no PE in Russia are subject payments. authorities can decrease this rate, and
to property tax only on immovable Property tax calculations are filed also offer tax incentives or allowances to
property located in Russia. quarterly. The annual property tax return certain taxpayer categories.
should be filed by 30 March of the year Advance payments are due quarterly,
Tax rate following the reporting year. with the final tax payment due no later
The maximum tax rate is 2.2 percent. than 1 February of the following year.
Other taxes
Lower tax rates are established for
assets classified as public railways, Transport tax Water tax
pipelines and power lines, and on Water tax is payable by companies that
Foreign legal entities and Russian legal
assets constituting an integral, technical consume water for special and clearly
entities should both pay transport tax if
component of the above. The list of indicated business purposes.
they own registered transport vehicles.
these types of assets was compiled
Taxable vehicles include automobiles, Tax rates differ for various types of water
by the Government of the Russian
motorcycles, scooters, buses, airplanes, consumption and are set in roubles per
Federation. The rates for these assets
helicopters, merchant vessels, yachts, 1000 cubic metres of water consumed.
are one percent in 2015, 1.3 percent
sailing boats, boats, snowmobiles, etc.
in 2016, 1.6 percent in 2017, and 1.9 Water tax returns are filed quarterly, with
The tax base is calculated based on the
percent in 2018. payments also being made quarterly.
engine volume, gross tonnage or type of
The regional authorities can reduce the vehicle.
property tax rate to zero percent.

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Business and Personal Taxation | 33

Special tax regimes Unified imputed income tax is levied on The following entities cannot apply the
The Tax Code also provides special a taxpayers imputed income. Imputed simplified tax system:
tax regimes under which a taxpayer is income is determined as the base return yy Russian legal entities with branches;
entitled to pay one single tax instead rate of business activity during the
period multiplied by physical indicators yy Foreign legal entities and
of numerous different taxes. These representative offices (branches) of
regimes can be applied if certain (the area of land employed, number
of vehicles or number of staff) and FLEs;
requirements are satisfied. Special tax
regimes include simplified tax, unified adjusting factors. yy Banks, insurance companies, pension
agricultural tax, tax on imputed income funds, investment funds, parties to
Imputed income tax is paid at a rate of
and special rules on production sharing production sharing agreements,
15 percent.
agreement regimes. unified agricultural tax taxpayers, etc.;
The unified imputed income tax that yy Entities in which other legal entities
Unified tax on imputed income is payable can be reduced (to 50 have participation shares exceeding
percent of the initial tax accrual) by 25 percent.
The local tax authorities allow certain deducting insurance contributions
taxpayers to apply a unified tax on for mandatory pensions insurance, The simplified tax rate can be:
imputed income if the taxpayers are medical insurance and social insurance yy 6 percent on revenues; or
engaged in: for temporary disability or maternity
yy 15 percent on profits (revenues minus
yy Domestic consumer services; leave. It can also be reduced for
deductible expenses). However,
yy Veterinary services; mandatory social insurance against
the regional authorities can reduce
occupational accidents and diseases,
yy Vehicle maintenance, repair and the 15 percent tax rate to 5 percent,
as well as temporary disability payments
washing; depending on the taxpayers
to employees for the first 3 days
category.
yy Leasing car parking places and car of temporary disability paid by the
parking services; employer, and for voluntary insurance Taxpayers must make quarterly advance
payments under insurance contracts payments, making the annual final
yy Passenger and cargo transportation
covering the employers expenses. payment by 31 March of the following
services (certain restrictions apply);
calendar year. Advance tax estimates
yy Retail trade and catering (certain Tax returns and payments are due and annual tax returns are due on
restrictions apply); quarterly. the same terms as the corresponding
yy Certain kinds of advertising; payments.
Simplified taxation system
yy Accommodation provision services Unified agricultural tax
(certain restrictions apply). The simplified tax system replaces
profits tax, VAT (except for VAT payable Agricultural producers are allowed to
Unified imputed income tax is applicable on imports) and property tax (except apply the unified agricultural tax. This
if the taxpayer satisfies the following for tax payable based on the cadastral tax replaces profits tax, VAT (except for
criteria: value). VAT payable on imports) and property tax.
yy The average number of annual staff is The unified agricultural tax is levied on
A company can apply the simplified tax
equal to or lower than 100; income minus deductible expenses.
system if it satisfies the following criteria
yy Other legal entities have contributed in the first nine months of the year Income is calculated in accordance
less than 25 percent to the taxpayers preceding the planned adoption of the with general profits tax rules. Expenses
share capital. simplified tax system: are deductible only if they are referred
The unified imputed income tax is not yy The companys revenue does to in the established list, economically
applied together with the simplified tax not exceed RUB45,000,000 justifiable and properly documented.
or a unified agricultural tax. (USD734,454)11, though this limit is
subject to annual indexation; The unified agricultural tax rate is six
Unified imputed income tax taxpayers
percent.
are exempt from the following taxes yy The net book value of fixed assets
(with regard to those operations subject does not exceed RUB100,000,000 Advance payment is due after the first
to this tax): (USD1,632,000)12; six months, with final payment and
yy Profits tax; yy The average annual number of staff completion of the tax return due by 31
yy VAT (except for VAT payable on does not exceed 100. March of the following year.
imports);
yy Property tax (except for tax payable
based on cadastral value).
11,12
Actual exchange rate of the Central Bank of the Russian Federation as of 1 March 2015 (RUB61,2718 : USD1)

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34 | Doing Business in Russia: Your roadmap to successful investments

Personal taxation benchmarked at a rate of 2/3rds of the yy 15-percent applies to dividend income
refinancing rate of the Central Bank of from Russian companies received by
Personal Income Tax Russia on loans in Russian roubles, a tax non-resident;
Personal Income Tax (PIT) in Russia or interest is up to 9 percent per yy 13-percent applies to the Russian
generally depends on the taxpayers annum on loans in other currencies. employment income of tax non-
tax residency status. An individual is The use of credit cards issued by residents who are foreign employees
considered a Russian tax resident if non-Russian banks is also likely to with the status of HQS, and to certain
he/she is physically present in Russia trigger deemed taxable income for the other specific categories of taxpayers.
for a period of 183 days or more for cardholder.
12 consecutive months. Short-term yy Favourable prices (non-market rates) Generally, tax residents pay PIT on
travel (less than 6 months) outside are paid by an individual on goods the majority of income types at a flat
Russias borders for medical treatment or services purchased from related rate of 13 percent.
or educational activities does not qualify parties.
as an interruption to the individuals yy Securities and financial instruments
presence in Russia. are acquired at a price below the Tax deductions
The day of arrival and day of departure market level. Standard tax deductions
should be included as days in Russia
Taxable income includes income Standard monthly tax deductions of
when calculating the number of days
received in cash, in kind, and in the form RUB3,000 and RUB500 can be granted
a person has been present in Russia
of deemed income. Income in kind is to certain categories of individual
when determining an individuals tax
assessed based on the market price of taxpayers (such as disabled war
residency status.
the goods received or services provided. veterans, handicapped persons, etc).
If a company makes a salary payment If a taxpayer is eligible for multiple
Deemed income arises as a result of:
locally in Russia, the company should tax deductions, the higher deduction
determine the individuals tax residency yy Interest payments on loans from
applies.
status on each date of payment in order organisations and individual
to apply the appropriate withholding entrepreneurs at an amount lower In addition, a standard tax deduction of
tax rate. Residency is determined on than the payments calculated at the RUB1,400 per child, per month can be
the basis of a 183-day period within rate of 2/3rds of the refinancing rate granted to a parent of up to two children,
the 12-month period immediately of the Central Bank of Russia on and RUB3,000 for each additional child
preceding the date the income was paid. loans in Russian roubles, or at a rate up to the age of 18, or for a child who
Consequently, the tax withheld may not of 9 percent per annum on loans in is a full-time undergraduate student
be the amount of tax ultimately due. other currencies. The use of credit up to the age of 24. The tax deduction
cards issued by non-Russian banks is is doubled for one parent if the other
According to official clarifications from
also likely to trigger deemed taxable parent agrees to refuse the deduction or
the Russian Ministry of Finance, the final
income for the cardholder in cases if the parent is divorced.
tax liabilities are determined based on
when the overdraft facility is used.
the individuals tax residency status for These tax deductions are available only
the reporting calendar year. This status yy The acquisition of goods, work or if cumulative annual income does not
is determined based on a 183-day services from related parties at a exceed RUB280,000.
period in the reporting calendar year. preferential price.
yy The acquisition of securities and Social tax deductions
Tax residents are subject to PIT on
financial instruments at a price below Social tax deductions are available
all their income, irrespective of the
the market level. on amounts given to specific charities
country in which it arises; whereas
non-residents are subject to PIT only on which qualify against government
Tax rates criteria, though only on up to 25 percent
income sourced in Russia.
A 13-percent PIT rate applies generally of income received in the tax period.
Tax base to all types of income received by a Social deductions are also available on:
tax resident except for certain types of
Taxable income includes income yy Expenses incurred by the taxpayer on
non-employment income (e.g. deemed
received in cash, in kind, and in the form the education of him/herself and each
income resulting from the interest
of deemed income. Income in kind is of his/her children;
derived from the use of loans is taxable
assessed based on the market price of
at the rate of 35 percent); yy Expenses for medical treatment and
the goods received or services provided.
A 30-percent PIT rate applies generally medicines for the taxpayer and his/
Deemed income results when: to all types of income received by a tax her spouse, parents, children;
yy Interest payments are made on non-resident, except for the following yy Contributions to voluntary medical
loans from organisations and sole rates which specifically apply to insurance for the taxpayer and his/her
proprietors when the payments are particular types of income: spouse, parents and children;
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Doing Business in Russia: Your roadmap
Business
to successful
and Personal
investments
Taxation | 35

yy Contributions to a private pension sole proprietor can apply professional received. Specific rules may apply to
fund for the benefit of the taxpayer, tax deductions of up to 20 percent of the non-Russian citizens who depart from
his/her spouse, parents and any income derived from business activities. Russia.
disabled children;
Professional deductions can also be
yy Additional insurance contributions to granted to individuals who receive Tax refund
the cumulative part of state pensions. income under a civil-law service or work A PIT declaration should also be
The above deductions cannot exceed agreement. The deductions are based required if individuals want to claim
RUB120,000 in one calendar year per on documented expenditures related to certain tax deductions or refund the PIT
taxpayer (except expenses for certain the performance of services under these which was withheld by the tax agent
expensive medical treatments on a agreements. (under certain circumstances).
specific list approved by the Russian Individuals who receive authors fees or
Government, deductible by the actual fees for the creation, execution or other Other taxes payable by
expense amounts; and except for use of specific intellectual property can individuals
expenses for the education of the apply for professional tax deductions
taxpayers children, deductible within a that amount to their documented Personal property tax
limit of RUB50,000 per child). expenses or in a fixed amount if the Houses, apartments, cottages, garages
documents supporting the expenses and other buildings, premises and
Property-related tax deductions
are unavailable (from 20 to 40 percent, constructions owned by individuals are
Property related tax deductions are depending on the type of intellectual subject to personal property tax.
available on expenses related to the property).
purchase of (construction of) dwellings Tax rates differ from 0.1 percent to 2
Individuals who provide services or percent depending on the value of the
and on land plots for the construction
perform work under relevant civil-law property. The rates may be adjusted by
of a dwelling (or along with a dwelling
contracts may claim a deduction of regional laws.
place) in Russia (up to RUB2,000,000).
expenses (supported by documentation)
Interest on the loans used to pay for Certain categories of taxpayers are
directly related to their provision of
the above mentioned purchases / exempt from personal property tax (e.g.
services / performance of work.
constructions may also be claimed as a pensioners).
deduction (up to RUB3 million).
Tax residents can benefit from Individual property tax is assessed by
On the sale of residential property claiming standard, social and the tax authorities annually and should
and land plots that have been owned property-related deductions, as well be paid by taxpayers based on a tax
for less than three years, a deduction as professional deductions. assessment performed not later than the
up to RUB1,000,000 or in the amount 1 October of the subsequent calendar
of documented actual expenses for year.
the acquisition can be claimed. On Filing and payment
the sale of other property owned for Individuals who possess immovable
Generally, individual entrepreneurs,
less than 3 years, a deduction of up to property are subject to personal
Russian legal entities, Representative
RUB250,000, or in the amount of the property tax.
Offices and Branches of Foreign
actual documented expenses for the
legal entities registered in Russia and
acquisition, may be claimed.
which make payments to individuals,
Income from the sale of property that are considered tax agents, and they Transport tax
has been owned by the seller for three are required to withhold PIT from Individuals owning transport vehicles
years or more is tax-exempt, provided the compensation payable to such are subject to transport tax.
that the seller is a Russian tax resident individuals and remit the associated PIT
in the year of sale. to the Russian financial authorities. Taxable vehicles include automobiles,
As of 2016, new rules on property- motorcycles, scooters, buses /
If PIT was not withheld by a tax agent, coaches, airplanes, helicopters, motor
related tax deductions will apply to sales the latter must notify the tax authorities
of residential property and land plots. vessels, yachts, sailing boats, ships,
and the individuals who received the snowmobiles, etc.
income that was not subjected to tax
Professional tax deductions Transport tax is determined based on
withholding. The onus then falls on
Professional tax deductions can be the individuals to file a PIT declaration the vehicles engine power, seating
granted to individuals conducting and pay PIT with regard to any taxable capacity and the respective tax rates
registered entrepreneurial activity. income. Generally, the PIT declaration established by regional laws.
These deductions apply to documented should be filed no later than the 30
business related expenses. If business April of the year following the reporting Individuals possessing transport
related expenses are undocumented, a year the item of taxable income was vehicles are subject to transport tax.
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36 | Doing Business in Russia: Your roadmap to successful investments

Financial Reporting
Russian Accounting yy The Federal Law on Governmental Many of these regulations are in
Support for Small Businesses in essence close to International Financial
Principles the Russian Federation provides Reporting Standards (IFRS). Bringing
Russian accounting is regulated by a a simplified procedure covering the national accounting system into
system of legal acts consisting of four accounting and reporting compilation. line with IFRS has been part of the
different levels. accounting reforms that began in 1998.
yy The Federal Laws On Joint Stock
The first level consists of laws Companies and On Limited It is intended that new accounting
regulating the way accounting is Liability Companies, which regulations shall be issued in the future.
established and maintained by establish information disclosure The topics covered will be in accordance
companies, including: and presentation requirements, with the current list of IFRS standards.
yy The Federal Law on Accounting, stipulate that data contained in the For instance, Russian accounting
which contains basic accounting and annual financial statements must be regulations currently have no standards
reporting requirements. confirmed by the internal auditor, and on the leasing or impairment of assets.
yy The Civil Code of the Russian determines the procedure by which Additionally, the existing accounting
Federation, which consolidates the annual financial statements are regulations are revised on a regular basis
many accounting issues. The Civil approved as well as the situations to enhance their compliance with IFRS.
Code of the Russian Federation in which an external audit opinion is
required. The third level comprises
defines a legal entity as having its methodological instructions on
own balance sheet, establishes the The second level consists of accounting, including recommendations
requirement that annual financial accounting regulations (standards), in which specific procedures for applying
statements are approved annually, which regulate accounting policies, accounting principles and regulations
and provides definitions of subsidiary the compilation and presentation of are set out for particular types of activities.
and associated companies, as well financial statements, and accounting for
as determining the procedures for fixed and intangible assets, inventory, One of the most important documents
reorganising and liquidating different loans, income, expenses, financial at this level is the Chart of Accounts and
kinds of legal entities. investments, profits tax, etc. related instructions.

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Financial Reporting | 37

The fourth level includes documents The key accounting principles in the yy The matching principle: this
issued by the company itself, which Russian Federation are: states that business operations are
determine its accounting policies in all recorded in the reporting period in
systematic, technical and organisational yy Separate entity principle: in which they occur, regardless of when
aspects and are approved by an internal accordance with which the assets receipts or payments related to these
decision taken by the company on its and liabilities of the company are transactions are actually made.
accounting policies. If there are any separated from the assets and
yy Principle of timeliness and
specific accounting methods that are liabilities of the owner or the assets
completeness in recording
not specified in the relevant accounting provided to the entity by other
transactions: the accountant
standards, companies have the right persons.
should make records according to
to develop them independently and to yy Going concern principle: the the timelines set and reflect all of the
adopt them by including them in the assumption that the company will transactions made.
decision they have taken regarding their continue operating in the foreseeable
accounting policies. yy Prudence principle: the accountant
future.
should record liabilities and expenses
Branches and representative offices yy Principle of accounting policy rather than assets and income and
of foreign companies located in the consistency: the accounting policy should not allow for any hidden
Russian Federation are allowed to selected by the company is applied reserves.
maintain their accounting on the basis consistently from one reporting
yy Substance-over-form principle:
of regulations established in the country year to another, and a change in the
transactions should be accounted for
in which the foreign company resides, accounting policy is only possible if
based on their economic substance
unless these regulations contradict there are changes in the legislation
and business circumstances rather
IFRS. However, branches and of the Russian Federation or in
than their legal form.
Representative Offices are still required accounting regulations, or if new
to submit annual activity reports to accounting methods are developed by yy Principle of non-contradiction:
the tax authorities along with their tax the company, or there are significant analytical accounting data should
returns. changes in operating conditions. be identical to synthetic accounting
data on the last calendar day of each
month.
yy Rationality principle: application of
a rational accounting method based
on the companys size and business
environment.
yy Materiality principle: data on
material assets, liabilities, income,
expenses and transactions should be
recorded separately if this information
is essential for evaluation of the
entitys financial position or financial
results.
Companies use a working chart of
accounts developed on the basis of
the centrally (government) established
Chart of Accounts.
All business operations performed by
companies should be supported by
relevant source documents in Russian.
These documents are the primary
accounting documents underlying the
financial statements. Source documents
prepared in other languages should be
translated into Russian on a line-by-line
basis.

KAZAN
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38 | Doing Business in Russia: Your roadmap to successful investments

Statutory reporting Companies submit annual financial yy Companies (except for agricultural
requirements statements to: cooperatives and unions of such
yy Shareholders; cooperatives) whose annual
A companys financial statements must earnings from the sale of goods
reflect the companys economic and yy Statistics authorities; (or the performance of work or
financial position fully and reliably along yy Tax authorities; provision of services) for the year
with any change in this position and preceding the financial year exceed
yy Other interested users (if the
the financial results of the companys RUB400,000,000 (USD6,528,500),
shareholders so decide).
activities. or for which the value of assets on the
Currently, according to the Federal Law balance sheet at the end of the year
In accordance with Russian legislation, On Consolidated Financial Reporting,
commercial legal entities prepare preceding the financial year exceeds
only credit, insurance and listed Russian RUB60,000,000 (USD979,300);
annual financial statements for each companies are obliged to consolidate
financial year. A financial year is financial reporting in accordance with yy Companies presenting and (or)
the calendar year (1 January 31 the version of IFRS which was officially publishing consolidated financial
December) with exceptions for when a adopted and published by the Ministry of reports;
legal entity is registered, reorganised Finance of the Russian Federation. yy Companies for which audits are
or liquidated. If required by law, a mandatory according to other Federal
commercial legal entity is required to Considering the fact that a typical
laws.
prepare and submit interim financial companys financial statements are
statements for periods that are shorter prepared in accordance with Russian A mandatory audit must be carried
than a financial year. Annual financial statutory legislation, and that this differs out every financial year.
statements, except for when directed from IFRS, in order to present the
otherwise by legislation, include the financial statements to foreign owners
or investors it is normally a requirement Audits of listed companies, credit
following:
that the statutory financial statements and insurance companies, non-state
yy The balance sheet; are prepared with an IFRS reconciliation pension funds, companies in which
yy Financial result reports; included. Presenting financial statements the state owns more than 25 percent,
in accordance with IFRS and, state corporations, state companies
yy Appendices to the above two reports and consolidated financial reporting
containing additional information consequently, increasing their
transparency, will facilitate the inflow of can only be carried out by professional
on changes in equity, cash flows, audit organisations. Because audits
movements of borrowed funds, foreign investment into the economys
production sector and increase the are subject to self-regulation, to provide
changes in accounts receivable and audit services in the Russian Federation
payable, notes, etc; possibility of more companies obtaining
credit. a professional auditing firm should
Tax returns and audit opinions are not be a member of an appropriate self-
included in the financial statements. regulating organisation.
Audit requirements
The information in the financial The Federal Law on Audit requires that
statement for the reporting year and the the following Russian entities have
previous two years must be presented mandatory annual audits:
in comparable formats. A companys
financial statements must include the yy Open joint-stock companies;
results of the activities of the companys yy Listed companies;
branches, representative offices and yy Companies participating
other structural subdivisions. professionally in the stock market;
If the company has subsidiaries or yy Credit or insurance companies,
associated companies, consolidated clearing agencies, mutual insurance
financial statements must be prepared associations, currency, commodity
for them in addition to the companys and stock exchanges, incorporated
own financial statements. The investment funds, non-budgetary
consolidated financial statements state funds, management companies
must include figures from the reports of of incorporated investment funds, and
companies located both in the Russian unit investment funds or non-state
Federation and abroad. pension funds (apart from non-
budgetary state funds);

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Financial Reporting | 39

MOSCOW

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40 | Doing Business in Russia: Your roadmap to successful investments

Appendix 1.
Chart of Withholding Tax Rates
Country Dividends percent Interest percent Royalties percent * Algeria: 5 percent on dividends
Albania 10 10 10 this rate applies if the recipient
company (not a partnership) directly
Algeria 5; 15* 0; 15* 15
owns at least 25 percent of the
Argentina 10; 15* 0; 15* 15 capital in the Russian company;
Armenia 5; 10* 0 0 otherwise, 15 percent. 0 percent on
Australia 5; 15* 10 10 interest applies to interest paid by
Austria 5; 15* 0 0 the government or its local
authorities or paid to the
Azerbaijan 10 0; 10* 10
government, its local authorities or
Belarus 15 0; 10* 10
the central bank; otherwise, 15
Belgium 10 0; 10* 0 percent.
Botswana 5; 10* 0; 10* 10
* Argentina: 10 percent on dividends
Brazil 10; 15* 0; 15* 15 this rate applies if the recipient
Bulgaria 15 0; 15* 15 directly owns at least 25 percent of
Canada 10; 15* 0; 10* 0; 10* the capital in the Russian company;
Chile 5; 10* 15 5; 10* otherwise, 15 percent. 0 percent on
interest applies to interest paid to
China 10 0; 10* 10
the government or the central bank;
Croatia 5; 10* 10 10
otherwise, 15 percent.
Cyprus 5; 10* 0 0
* Armenia: 5 percent on dividends
Cuba 5; 15* 0; 10* 5
this rate applies if the holding value
Czech Republic 10 0 10 is at least USD 40,000 or its
Denmark 10 0 0 equivalent in national currencies;
Egypt 10 0; 15* 15 otherwise, 10 percent.
Finland 5; 12* 0 0 * Australia: 5 percent on dividends
France 5; 10; 15* 0 0 this rate applies to dividends paid
out of profits that have carried the
Germany 5; 15* 0 0
normal tax rate if the dividends are
Greece 5; 10* 7 7
paid to an Australian company (not a
Hungary 10 0 0 partnership) that directly holds at
Iceland 5; 15* 0 0 least 10 percent of the capital of the
India 10 0; 10* 10 Russian company. Also, the Australian
Indonesia 15 0; 15* 15 companys holding must be worth at
least AUD 700,000, and the dividends
Iran 5; 10* 0; 7.5* 5
must be exempt from tax in Australia;
Ireland 10 0 0
in all other cases, 15 percent.
Israel 10 0; 10* 10
* Austria: 5 percent on dividends
Italy 5; 10* 10 0
this rate applies if the recipient
Japan 15 0; 10* 0; 10* company (not a partnership) directly
Kazakhstan 10 0; 10* 10 owns at least 10 percent of the
Korea (Dem. Peoples 10 0 0 capital in the Russian company, and
Rep.) the holding value exceeds USD
Korea (Rep.) 5; 10* 0 5 100,000; otherwise, 15 percent.
Kuwait 0; 5* 0 10 * Azerbaijan: 0 percent on interest
Kyrgyzstan 10 0; 10* 10 applies to interest paid to the
Latvia 5; 10* 5; 10* 5 government; otherwise, 10 percent.
Lebanon 10 0; 5* 5 * Belarus: 0 percent on interest
Lithuania 5; 10* 10 5; 10* applies to interest paid to the
government or the national bank;
Luxembourg 5; 15* 0 0
otherwise, 10 percent.
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Appendix 1. Chart of Withholding Tax Rates | 41

Country Dividends percent Interest percent Royalties percent * Belgium: 0 percent on interest
applies to interest paid to the
Macedonia 10 10 10
government, its local authorities,
Malaysia -; 15* 0; 15* 10; 15*
public bodies and to banks and
Mali 10; 15* 0; 15* 0 other financial institutions; otherwise,
Malta 0; 5; 10* 5 5 10 percent.
Mexico 10 0; 10* 10 * Botswana: 5 percent on dividends
Moldova 10 0 10 this rate applies if the recipient
Mongolia 10 0; 10* -* directly owns at least 25 percent of
Montenegro 5; 15* 10 10 the capital in the Russian company;
otherwise, 10 percent. 0 percent on
Morocco 5; 10* 0; 10* 10
interest applies to interest paid to
Namibia 5; 10* 0; 10* 5
the government, its local authorities,
Netherlands 5; 15* 0 0 a political subdivision or the central
New Zealand 15 10 10 bank; otherwise, 10 percent.
Norway 10 10 0 * Brazil: 10 percent on dividends
Philippines 15 0; 15* 15 this rate applies if the recipient
Poland 10 10 10 directly owns at least 20 percent of
Portugal 10; 15* 0; 10* 10 the capital in the Russian company;
otherwise, 15 percent. 0 percent on
Qatar 5 0; 5* 0
interest applies to interest paid to
Romania 15 0; 15* 10
the government or public bodies;
Saudi Arabia 0; 5* 0; 5* 10 otherwise, 15 percent.
Serbia 5; 15* 10 10
* Bulgaria: 0 percent on interest
Singapore 5; 10* 0; 7.5* 7.5 applies to interest paid to the
Slovak Republic 10 0 10 government or the Bank of Bulgaria;
Slovenia 10 10 10 otherwise, 15 percent.
South Africa 10; 15* 0; 10* 0 * Canada: 10 percent on dividends
Spain 5; 10; 15* 0; 5* 5 this rate applies if the recipient
Sri Lanka 10; 15* 10 10 company owns at least 10 percent of
the capital or has voting power over
Sweden 5; 15* 0 0
the Russian company; otherwise, 15
Switzerland 0; 5; 15* 0* 0
percent. 0 percent on interest
Syria 15 0; 10* 4.5/13.5/18 applies to interest paid to the central
Tajikistan 5; 10* 0; 10* 0 bank; otherwise, 10 percent. 0
Thailand 15 -; 0; 10* 15 percent on royalties the rate
Turkey 10 0; 10* 10 applies to computer software,
patents and know-how; otherwise,
Turkmenistan 10 5 5
10 percent.
UAE -/0* -/0* -*
* Chile: 5 percent on dividends this
UK 10* 0 0
rate applies if the recipient directly
Ukraine 5; 15* 0; 10* 10
owns at least 25 percent of the
USA 5; 10* 0 0 capital in the Russian company;
Uzbekistan 10 0; 10* 0 otherwise, 10 percent. 5 percent on
Venezuela 10; 15* 0; 5; 10* 10; 15* royalties the rate applies to
Vietnam 10; 15* 10 15 equipment rentals; otherwise, 10 percent.
* China: 0 percent on interest applies
to interest paid to public bodies, the
central bank, the government or its
local authorities; otherwise, 10 percent.

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42 | Doing Business in Russia: Your roadmap to successful investments

* Croatia: 5 percent on dividends owns at least 25 percent of the * Korea (Rep.): 5 percent on
this rate applies if the recipient capital in the Russian company; dividends this rate applies if the
company owns at least 25 percent otherwise, 10 percent. recipient company owns directly at
of the capital of the Russian company, * Iceland: 5 percent on dividends least 30% of the capital in the
and the holding value is at least this rate applies if the recipient Russian company and the value of
USD 100,000 or its equivalent in company (not a partnership) owns at the holding is at least USD 100,000;
another currency; otherwise, 10 least 25% of the capital in the otherwise, 10 percent.
percent. Russian company and the value of * Kuwait: 0 percent on dividends
* Cyprus: 5 percent on dividends the capital investment is at least this rate applies if to dividends
this rate applies if the holding value USD 100,000; otherwise, 15 distributed to the government, local
is at least EUR 100,000; otherwise, percent. authorities, public entities, the
10 percent. * India: 0 percent tax rate on interest central bank, public financial
* Cuba: 5 percent on dividends this applies to interest paid to the institutions; otherwise, 5 percent.
rate applies if the recipient company government, its local authorities, * Kyrgyzstan: 0 percent tax rate on
(not a partnership) directly owns at public bodies or the central bank; interest applies to interest paid to
least 25 percent of the capital in the otherwise, 10 percent. the government, its local authorities,
Russian company; otherwise, 15 * Indonesia: 0 percent tax rate on public bodies and the central bank;
percent. 0 percent on interest interest applies to interest paid to otherwise, 10 percent.
applies to interest paid to the the government, its local authorities, * Latvia: 5 percent on dividends
government, its local authorities or political subdivision, the central this rate applies if the recipient
public bodies; otherwise, 10 percent. bank; otherwise, 15 percent. company (other than a partnership)
* Egypt: 0 percent on interest applies * Iran: 5 percent on dividends this owns directly at least 25% of the
to interest paid to the government, its rate applies if the recipient company capital in the Russian company and
local authorities, public bodies or the (not a partnership) directly owns at the capital invested exceeds USD
national banks; otherwise, 15 percent. least 25 percent of the capital in the 75,000; otherwise, 10 percent. 5
* Finland: 5 percent on dividends Russian company; otherwise, 10 percent on interest applies to
this rate applies if the recipient percent. 0 percent on interest interest on loans of any kind granted
company (other than a partnership) applies to interest paid to the by a bank or other financial
directly owns at least 30 percent of contracting state, its local institution of one contracting state to
the capital in the Russian company, authorities, public bodies or the a bank or other financial institution of
and the holding value is at least national banks; otherwise, 7.5 the other contracting state;
USD 100,000 or its equivalent in percent. otherwise, 10 percent.
national currencies; otherwise, 12 * Israel: 0 percent on interest applies * Lebanon: 0 percent on interest
percent. to interest paid to the government, applies to interest paid to the
* France: 5 percent on dividends local authorities and the central government, its local authorities,
this rate applies if the French bank; otherwise, 10 percent. public bodies; otherwise, 5 percent.
company (i) has directly invested at * Italy: 5 percent on dividends this * Lithuania: 5 percent on dividends
least FRF 500,000 in the Russian rate applies if the recipient company this rate applies if the recipient
company and (ii) is taxed in France directly owns at least 10 percent of company (other than a partnership)
but is exempt with respect to the capital in a Russian company directly owns at least 25% of the
dividends (i.e. participation and the holding value is at least capital in the Russian company and
exemption). A 10 percent rate USD 100,000; otherwise, 10 percent. the value of the capital investment is
applies if only one of the * Japan: 0 percent tax rate on interest at least USD 100,000; otherwise, 10
requirements is fulfilled; otherwise, applies to interest paid to the percent. 0 percent on interest applies
15 percent. government, its local authorities, to interest paid to the government,
* Germany: 5 percent on dividends public bodies or the central bank; its local authorities, public bodies,
this rate applies if the German otherwise, 10 percent. 0 percent on the central bank; otherwise, 10
company owns at least 10 percent royalties this rate applies to percent. 5 percent on royalties
of the capital in the Russian copyright royalties; otherwise, this rate applies to equipment
company and the holding value is at 10 percent. rentals; otherwise, 10 percent.
least EUR 80,000; otherwise, 15 * Kazakhstan: 0 percent tax rate on * Luxembourg: 5 percent on
percent. interest applies to interest paid to dividends this lower rate applies if
* Greece: 5 percent on dividends the contracting state, local the Luxembourg recipient directly
this rate applies if the recipient authorities or public bodies; owns at least 10 percent of the
company (not a partnership) directly otherwise, 10 percent. capital in the Russian company and

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Doing Business in Russia:
Appendix
Your roadmap
1. Chart to
of successful
Withholdinginvestments
Tax Rates | 43

the holding value is at least EUR partnership) directly owns at least * Romania: 0 percent on interest
80,000 or its equivalent in national 25% of the capital in the Russian this lower rate applies to interest
currency; otherwise, 15 percent. company and the value of the capital paid to the government, the national
* Malaysia: 15 percent on dividends investment is at least USD 100,000; bank, foreign trade bank, or
this rate applies to profits of joint otherwise, 15 percent. Eximbank; otherwise, 15 percent.
ventures; otherwise, the domestic * Morocco: 5 percent on dividends * Saudi Arabia: 0 percent on
rate applies; there is no reduction this rate applies if the value of the dividends this lower rate applies
under the treaty. 0 percent on holding of the recipient company is to dividends distributed to the
interest applies to interest paid to at least USD 500,000; otherwise, 10 government, its local authorities,
the government and the central percent. 0 percent on interest this public bodies, the central bank;
bank; otherwise, 15 percent. 10 lower rate applies to interest on otherwise, 5 percent. 0 percent on
percent on royalties this rate foreign currency deposits and paid interest this lower rate applies to
applies to authors rights, equipment by the government; otherwise, 10 interest paid by the government, its
rentals; 15 percent on royalties percent. local authorities or paid to the
this rate applies to films and * Namibia: 5 percent on dividends government, its local authorities,
broadcasting programs and this rate applies if the recipient public bodies; otherwise, 5 percent.
copyrights on items of literature or art. company (other than a partnership) * Serbia: 5 percent on dividends
* Mali: 10 percent on dividends this directly owns at least 25% of the this rate applies if the recipient company
rate applies if the value of the capital in the Russian company and (other than a partnership) directly
holding is at least FRF 1 million; the value of the capital investment is owns at least 25% of the capital in
otherwise, 15 percent. 0 percent on at least USD 100,000; otherwise, 10 the Russian company and the value
interest applies to interest paid by percent. 0 percent on interest this of the capital investment is at least
the government or its local lower rate applies to interest paid to USD 100,000; otherwise, 15 percent.
authorities, paid to the government, the government, its local authorities * Singapore: 5 percent on dividends
its local authorities or the central or public bodies; otherwise, 10 this rate applies if the recipient of the
bank; otherwise, 15 percent. percent. dividends is the government of the
* Malta: 5 percent on dividends * Netherlands: 5 percent on dividends other contracting state or company
this rate applies if the recipient this rate applies if a Netherlands which directly owns at least 15
company owns at least 25% of the company (other than a partnership) percent of the share capital in the
capital in the Russian company and directly owns at least 25 percent of company paying dividends and has
the total amount of investments into the capital in a Russian company and invested in this company at least
capital is at least EUR 100,000; has invested in it at least EUR 75,000 USD 100,000 or its equivalent in
otherwise, 10 percent. The zero rate or its equivalent in national currency; another currency; otherwise, 10
applies to pension fund dividends, if otherwise, 15 percent. percent. 0 percent tax rate on interest
such dividends are derived from applies to interest paid to the
* Philippines: 0 percent on interest
investments made using the assets government of the other contracting
this lower rate applies to interest
of that pension fund. state; otherwise, 7.5 percent.
paid to the government, its local
* Mexico: 0 percent on interest this authorities or public bodies; * South Africa: 10 percent on
lower rate applies to interest paid to otherwise, 15 percent. dividends this rate applies if the
the government, the central bank recipient company owns at least 30
* Portugal: 10 percent on dividends percent of the capital in the Russian
and public bodies and interest paid this rate applies if the Portuguese
in respect of a loan for a period of at company and has directly invested
company has directly owned at least in this company at least USD
least three years granted, guaranteed 25 percent of the capital in the
or insured by the specified banks.; in 100,000; otherwise, 15 percent. 0
Russian company for an percent tax rate on interest applies
other cases, 10 percent. uninterrupted period of at least 2 to interest paid by public bodies;
* Mongolia: 0 percent on interest years prior to the payment; otherwise, 10 percent.
this lower rate applies to interest otherwise, 15 percent. 0 percent tax
* Spain: 5 percent on dividends
paid to the government or the central rate on interest applies to interest
this 5 percent rate applies if (i) the
bank; in other cases, 10 percent. paid to the government, its local
Spanish company has invested at
Taxation of royalties the domestic authorities or public bodies;
least EUR 100,000 in the Russian
rate applies; there is no reduction otherwise, 10 percent.
company and (ii) the dividends are
under the treaty. * Qatar: 0 percent on interest this exempt in Spain. A 10 percent rate
* Montenegro: 5 percent on lower rate applies to interest paid to applies if only one of the conditions
dividends this rate applies if the the government, its local authorities is met; otherwise, 15 percent. 0
recipient company (other than a or public bodies; otherwise, 15 percent. percent on interest this lower rate

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44 | Doing
44 | Doing
Business
Business
in Russia:
in Russia:
Your Your
roadmap
roadmap
to successful
to successful
investments
investments

applies to long-term loans (minimum interest applies to interest paid to interest apply to interest paid by (or
7 years) granted by credit institutions the government, its local authorities, to) the government, its local
residing in a contracting state; public bodies or the central bank; authorities, the central bank or public
otherwise, 5 percent. otherwise, 10 percent. bodies; 5 percent tax rate on interest
* Sri Lanka: 10 percent on dividends * Thailand: 0 percent tax rate on applies to interest paid to a bank;
this rate applies if the recipient interest applies to interest paid to otherwise, 10 percent. 10 percent on
company (other than a partnership) the government, public bodies, the royalties this rate applies to fees
directly owns at least 25 percent of central bank, Export-Import Bank of for technical services; otherwise, 15
the capital in the Russian company; Thailand; 10 percent tax rate on percent.
otherwise, 15 percent. 0 percent on interest applies to interest paid to * Vietnam: 10 percent on dividends
interest this lower rate applies to financial institutions. The domestic this rate applies if the recipient
interest paid to the government, its rate applies in other cases; there is company has invested in the capital
local authorities, public bodies, the no general reduction under the of the Russian company at least
central bank; otherwise, 10 percent. treaty. USD 10 million; otherwise, 15 percent.
* Sweden: 5 percent on dividends * Turkey: 0 percent tax rate on
this rate applies if a Swedish interest applies to interest paid to
company (other than a partnership) the government or the central bank; CFC rules
owns 100 percent of the capital in a otherwise, 10 percent. With effect from 1 January 2015, the
Russian company (or in the case of * UAE: 0 percent on dividends this profits of controlled foreign companies
a joint venture, at least 30 percent of rate applies only if the recipient is a (CFC) may be taxable if the controlling
the capital in the joint venture) and financial or investment institution. 0 person is a Russian, i.e. if the parent
foreign capital invested exceeds percent tax rate on interest this company or individual, under the so-
USD 100,000 or its equivalent in rate applies only if the recipient is a called CFC rules, is Russian.
national currencies; otherwise, 15 financial or investment institution. Under the provisional regime for 2015,
percent. The treaty does not cover royalties. CFCs encompass:
* Switzerland: 0 percent on * UK: 10 percent on dividends
dividends this rate applies if yy FLEs (Foreign Legal Entities), in
applies if dividends are subject to which a resident of Russia effectively
dividends distributed to a pension tax in the hands of the recipient
fund (or similar institution, the owns at least 50% of the capital,
company; otherwise, 15 percent. and foreign structures that do not
government, any political subdivision
or local authority or the central bank; * Ukraine: 5 percent on dividends possess a legal personality (funds,
5 percent rate on dividends applies if this rate applies if the holding value partnerships, trusts, etc.) over which a
the Swiss company (other than a is at least USD 50,000; otherwise, Russian resident has control.
partnership) directly owns at least 20 15 percent. 0 percent tax rate on From 2016, the CFC rules will also
percent of the capital in the Russian interest applies to interest paid to extend to:
company and the holding value the government or the central bank;
otherwise, 10 percent. yy FLEs in which a resident of Russia
exceeds CHF 200,000 or its
effectively owns at least 25% of the
equivalent in another currency; * USA: 5 percent on dividends this
capital, and
otherwise, 15 percent. rate applies if the recipient company
owns at least 10 percent of the yy FLEs in which a resident of Russia
* Syria: 0 percent on interest this
capital or voting power in the Russian effectively owns at least 10% of
lower rate applies to interest paid to
company; otherwise, 10 percent. the capital, if residents of Russia
the government, its local authorities,
cumulatively own at least 50% of the
public bodies; otherwise, 10 percent. * Uzbekistan: 0 percent tax rate on
capital.
4.5 percent on royalties this rate interest applies to interest paid to
applies to films and broadcasting the government, its local authorities The Tax Code provides for a number of
programs; 13.54.5 percent on or the central bank; otherwise, 10 exemptions, which if applicable
royalties this rate applies to percent. exempt CFC profits from taxation in
copyrights on items of literature, art Russia. Two principal exemptions are
* Venezuela: 10 percent on
or science; otherwise, 18 percent. available for CFCs that have:
dividends this rate applies if the
* Tajikistan: 5 percent on dividends recipient company (other than a yy an effective tax rate not lower than
this rate applies if the recipient partnership) directly owns at least 10 75% of the weighted average Russian
company directly owns at least percent of the capital in the Russian profits tax rate, or
25 percent of the capital in a company and the holding value is at yy a share of passive income not
Russian company; otherwise, 10 least USD 100,000; otherwise, 15 exceeding 20% of the total income.
percent. 0 percent tax rate on percent. 0 percent tax rate on

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Doing Business
Doing Business
in Appendix
Russia:
in Russia:
Your
1. Chart
roadmap
Your
oftax
Withholding
toand
successful
legal Tax
lighthouse
investments
Rates | 45 | 45

Both exemptions only apply to yy Executive functions are performed yy a person who has the right to
CFCs that are resident in treaty- regularly in Russia by the independently use and/or dispose of
protected jurisdictions, provided management board or top-level the income by virtue of:
that these jurisdictions exchange employees, or participation (direct or indirect) in
tax information with Russia (as yy Certain (listed) administrative the company,
determined by the Ministry of Finance). functions are performed in Russia, control over the company, or
namely: bookkeeping or accounting, other circumstances, or
The undistributed profits of CFCs are
the generating or processing of yy a person in whose interest another
subject to:
company documents, and operational person has the power to dispose of
yy profits tax at 20% if a controlling HR functions. the income.
person is a Russian-resident Further, the Tax Code provides a
company, or However, the effective management
rule cannot see an FLE recognised negative list of persons who could not be
yy PIT at 13% if a controlling person as a tax resident of Russia if it carries considered beneficial owners of income.
is a Russian-resident individual. out its business activities at its place This relates to persons who:
Taxes on CFC profits, such as foreign of residence using qualified personnel yy possess limited powers in relation to
income tax and withholding tax levied and its assets are outside Russia (that the disposal of that income, or
at source, are creditable against the is, providing the business is resident in yy carry out merely intermediary
Russian CFC tax. a treaty-protected jurisdiction). Some functions in relation to that income in
exceptions apply to FLEs engaged in the interest of another person, without
specific listed activities. performing any other functions and
New residency rules
An FLE whose tax residency shifts to without assuming any risks.
Normally, only legal entities Russia becomes subject to unlimited
incorporated in Russia are The payer of income, who acts as a
tax liability in Russia, i.e. its worldwide withholding tax agent, has the right to
considered Russian tax residents. income becomes subject to Russian
However, new residency rules, request documentary proof of beneficial
profits tax. ownership from an income recipient.
effective from 1 January 2015,
provide that an FLE can also be Beneficial ownership If the latter is not able to provide such
recognised as tax resident in Russia proof, the tax agent may withhold tax at
requirement
if it is effectively managed in Russia. the full domestic rate.
A domestic beneficial ownership
In addition, the Tax Code provides for
Russia will be acknowledged as the requirement has been introduced into
a so-called look-through approach,
place of effective management if at the Tax Code as a condition controlling
i.e. the right to apply (under certain
least one of the following is true for whether reduced withholding tax rates
circumstances) a reduced withholding
the FLE: can be applied in accordance with the
tax rate under the treaty with the
treaties signed with Russia.
yy Most board of director meetings beneficial owners jurisdiction, even
take place in Russia (i.e. more The Tax Code defines a beneficial if another person is an immediate
than in any other country), owner as: recipient of income.

EKATERINBURG

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46 | Doing Business in Russia: Your roadmap to successful investments

Appendix 2.
Fines for tax and customs
violations
Fines based on the Tax Code

Type of infringement Fine

RUB10,000 (approximately USD163) if the registration deadlines are missed.


Late registration with the tax If activities have been conducted without registration: 10 percent of the income
authorities received as a result of the activities, though not less than RUB40,000 (approximately
USD653)*

5 percent of the amount due for each full or part month late, but not more than 30
Late submission of tax returns
percent, and not less than RUB1,000 (approximately USD16.3)*

RUB10,000 (approximately USD163)*


Substantial violation of the rules If committed in several tax periods: RUB30,000 (approximately USD490)*
governing the accounting of taxable
income and expenses If this has resulted in understatement of the tax base: then 20 percent of the amount of
tax underpaid (if any), but not less than RUB40,000 (approximately USD653)*

20 percent of the tax underpaid as a result of the understatement of the taxable base or
Payment default or underpayment of illegal actions.
taxes
40 percent of the tax underpaid if the tax underpayment was deliberate.

Non-withholding and/or default of 20 percent of the tax not withheld and not paid by the tax agent.
payment of taxes by a tax agent

In the above cases, if a taxpayer corrects the errors themselves and pays the additional
taxes and late payment interest payable, fines for erroneous bookkeeping and tax
calculation should not be assessed.
Normally late payment interest is charged at 1/300th of the refinancing rate of the
Central Bank of the Russian Federation (8.25 percent as of 5 February 2015) for each
day the tax payment was delayed. At present, the interest would be 0.027 percent per
day.

Fines based on the Administrative Code

Type of infringement Fine

Violation of the terms of RUB500RUB1,000 (from USD8 to USD16) for


registration with the tax missing registration deadlines;
authorities RUB2,000RUB3,000 (from USD33 to USD49), if
the activity is executed without registration.

Violation of the terms for RUB300RUB500 (from USD5 to USD8),


submission of tax returns or a warning.

Non-submission of For individuals: RUB100RUB300 (from USD3 to


essential information for USD9),
tax control purposes For company executives: RUB300RUB500
(from USD9 to USD15) for the non-submission of
information, or submission of information that was
incomplete for completion of the necessary tax
control purposes.

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* Actual exchange rate of the Central Bank of Russian Federation as of 1 March 2015 (RUB61.2718 : USD1)
Appendix 2. Fines for tax and customs violations | 47

Fines based on the Criminal Code

The Criminal Code assigns responsibility fine of RUB200,000RUB500,000 (from payable or exceeds RUB30,000,000
for tax evasion by an individual or a legal USD3,260 to USD8,160), or a fine of the (approximately USD489,630).
entity. amount of salary or other income the An organisation or an individual is free of
According to the Russian Criminal Code, offender accrued over a period from one criminal liability if they have committed
the officials of a company are subject to to three years. tax evasion for the first time and have
criminal fines for any underpayment of Tax evasion is considered material if the paid to the budget, in full, all of their tax
taxes by the company. amount of unpaid taxes over three years arrears and late payment interest, and all
In particular, material tax evasion can exceeds RUB10,000,000 (approximately associated fines.
result in imprisonment terms of up to six USD163,200), and provided that the
years, prohibitions on the execution of amount of unpaid taxes exceeds 20
specific activities for three years, and a percent of the total amount of taxes

Fines for customs violations

Type of violation Fines

Unlawful transportation of goods Fine of 50 percent to 300 percent of the value of the goods and/or vehicles, with the
and/or vehicles across the customs possibility of the goods / vehicles being seized.
border of the Customs Union

Non-declaration of goods and/ Fine of 50 percent to 200 percent of the value of the goods and/or vehicles, with the
or vehicles via the established possibility of the goods / vehicles being seized.
procedures

Incorrect declarations (e.g. provision Fine of 50 percent to 200 percent of the underpaid customs payments, with the
of incorrect information regarding the possibility of the goods / vehicles in question being seized.
name, description, classification code
of goods, etc), if the declaration led to
underpayment of customs duties

Violations of the requirements of the Fine of 100 percent to 200 percent of the value of goods and/or vehicles, with the
customs procedure possibility of the goods / vehicles being seized.

Illegal acquisition, use, storage, Fine of 50 percent to 200 percent of the value of goods and/or vehicles, with the
or transportation of goods and/or possibility of the goods / vehicles being seized.
vehicles

Evasion of customs duties Fine of RUB100,000RUB500,000 (from USD1,632 to USD8,160) or of 13 years


salary, or confinement for a period of up to two years.
If there has been an especially large customs duties evasion, a fine of RUB300,000
RUB500,000 (from USD4,896 to USD8,160) or of 23 years salary, or confinement of
up to 5 years with a forfeit of the right to hold some posts or carry out some activities for
a period of up to 3 years (or without any forfeit).
The evasion of customs duties is considered large scale if the total sum of unpaid
customs duties exceeds RUB1,000,000 (approximately USD16,321) and is considered
exceptionally large scale if it exceeds RUB3,000,000 (approximately USD48,964).

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48 | Doing Business in Russia: Your roadmap to successful investments

Appendix 3. KPMGs Tax & Legal


Department: Cutting Through
Complexity
Our team Corporate tax services
KPMG has teams dedicated to addressing all of the tax issues
KPMG in Russia and the CIS employs more than 400 tax and
that corporations confront:
legal consultants, including both local and foreign specialists.
They bring with them vast experience not only in advisory yy Indirect tax;
services but in the business world as well. yy Transfer pricing;
With his extensive knowledge of tax advisory services in yy Effective management of tax liabilities (and its outsourcing);
Russia, Mikhail Orlov, the Head of Tax & Legal in Russia and
yy Development of problem-solving methods;
the CIS, also chairs the Tax and Customs Law Expert Council
of the Russian State Duma and drafts legislation and works yy Tax considerations during restructuring;
as a Public Tax Ombudsman under the Russian Federations yy International tax planning;
Presidential Commissioner for the Rights of Business People.
yy Tax structuring for mergers and acquisitions, including
As the head of a strong and cohesive team of professionals, support for after companies have been integrated.
Mikhail makes it the departments priority to be not only our
clients consultants who help solve urgent and sensitive issues
quickly and efficiently, but also to be their trusted partners. Personnel services
We provide services for individuals and company staff. These
Our approach to key issues: services include helping to ensure personal compliance
with tax legislation, implementing relevant company-wide
yy International tax planning (including de-offshorization programmes, pension planning and assisting with other
services). We will help you find the most effective way personnel issues. Our specialists are also able to provide
to build your international group structure. If you have professional wealth management services. Personnel
subsidiaries located abroad, we will help you structure their services also tie into secondment structuring, both inbound
activities. and outbound, and related tax, legal and immigration issues.
yy Transfer pricing. We have completed more than 100 Legal advice
complex analyses of transfer prices for Russian and
international clients across many different sectors. In addition to our standard corporate registration services,
yy Mergers and acquisitions. Our team provides a full range KPMG assists with mergers and acquisitions and provides
of services from financial, legal and tax due diligence legal support for both companies and individuals undertaking
to restructuring advice and legal advice on transaction projects, including legal due diligence and drafting transaction
agreements. documents.

yy Tax dispute resolution. Our litigation group provides Complex tax projects
support during tax disputes, which includes representing
The specialists at KPMG Tax & Legal have experience
clients interests in court, supporting clients during tax
supporting, from a tax and legal perspective, IT projects and
audits and throughout the pre-trial settlement process,
projects requiring financial and strategic consulting.
preparing appeals of court decisions and appeals for tax
We analyse financial risks, develop progressive approaches
authorities to take action or to remain uninvolved, and
and adapt systems to conform with Russian and international
interpreting laws and practice for clients who are dealing
legislation. Our experience with such projects includes
with state authorities
introducing new software systems, overseeing commercial
restructuring of holding companies, advising on money
laundering, advising on issues related to corporate
intelligence, and resolving commercial issues. Moreover,
we actively participate in projects where we work to improve
personnel management and support the improvement of
operational efficiency within our clients companies.

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Doing Business in Russia: Your roadmap to successful investments | 49

Glossary of terms
AUD Australian dollar
BRIC Brazil, Russia, India And China
BVI British Virgin Islands
CHF Swiss franc
CIS Commonwealth of Independent States
CJSC Closed joint stock companies
ERP Enterprise Resource Planning
EUR Euro
FCZ Free customs zone
FDI Foreign direct investment
FLE Foreign legal entity
FMS Federal Migration Service
FRF French Franc
FZ Federal law (Federalniy Zakon)
GDP Gross domestic product
HQS Highly qualified specialist
ID Identification
IFRS International Financial Reporting Standards
IT Information and technology
JSC Joint stock companies
Kg Kilogram
LLC Limited liability companies
OJSC Open joint stock companies
PE Permanent establishment
PIT Personal income tax
R&D Research and development
RA Rating agency
RF Russian Federation
RLE Russian Link Exchange
RO Representative office
RUB Russian ruble
SEZ Special economic zone
UCT Unified Customs Tariff
UK United Kingdom
US United States
USD United States dollars
USSR Union of Soviet Socialist Republics
VAT Value added tax
YoY Year-on-year

2015 JSC KPMG. All rights reserved.


Contact us:

Oleg Goshchansky Mikhail Orlov


Chairman and Managing Partner, Head of Tax and Legal
KPMG in Russia and the CIS in Russia and the CIS
Partner Partner
T: +7 (495) 937 44 77 T: +7 (495) 937 44 77
F: +7 (495) 937 44 99 F: +7 (495) 937 44 99
E: ogoshchansky@kpmg.ru E: morlov@kpmg.ru

Sean Tiernan Andrei Shvetsov


CIS Head of Advisory CIS Head of Audit
Partner Partner
T: +7 (495) 937 44 77 T: +7 (495) 937 44 77
F: +7 (495) 937 44 99 F: +7 (495) 937 44 99
E: seantiernan@kpmg.ru E: ashvetsov@kpmg.ru

Our offices
KPMG in Russia
Head Office, Urals Regional Center
Russia and the CIS Ekaterinburg
Moscow T: +7 343 253 0900
T: +7 495 937 4477
South Regional Center
North-West Regional Center Rostov-na-Donu
Saint Petersburg T: +7 863 204 0050
T: +7 812 313 7300
Republic of Tatarstan
Volga Regional Center Kazan
Nizhny Novgorod T: +7 843 210 00 90
T: +7 831 296 9202
Krasnoyarsk
Siberia Regional Center T: +7 391 257 0400
Novosibirsk
T: +7 383 230 2255 Perm
T: +7 342 259 4400

www.kpmg.ru

The information contained herein is of a general nature and is not intended to address KPMG Thought Leadership app
the circumstances of any particular individual or entity. Although we endeavor to provide
accurate and timely information, there can be no guarantee that such information is accurate
as of the date it is received or that it will continue to be accurate in the future. No one
should act on such information without appropriate professional advice after a thorough
examination of the particular situation.

Legal services may not be offered to SEC registrant audit clients or where otherwise
prohibited by law.

2015 JSC KPMG, a company incorporated under the Laws of the Russian Federation,
a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Printed in Russia.

The KPMG name and logo and cutting through complexity are registered trademarks or
trademarks of KPMG International.