An overview of Russia's tax system.
Companies are required to register with the Russian tax authorities, which will also include registration with the Russian Social Security Fund. Documents for state registration should be prepared and submitted to the local Tax Inspectorate in accordance with Chapter 12 of the August 8, 2001 Federal Law on State Registration of Legal Entities. An authorized legal entity, the Moscow Department of Russia’s Ministry of Finance (15, Tulskaya Street, Moscow), provides counseling to businesses on registration procedures and documents.
Further information on company registration, including the list of documents to be submitted and contact information for local tax authorities may be obtained from http://eng.nalog.ru/.
Major revisions to Russia’s tax code took place from 1999 to 2003. The resulting tax legislation more closely matches the needs of a growing market economy, and many provisions that distorted Russia’s 1990s-era business environment and kept many businesses in the shadow economy were removed.
The most fundamental changes of the new chapters of the Tax Code’s Part II affected the value added tax, excise taxes, and individual income tax. These changes aimed at improving Part II of the Russian Tax Code were passed by the Duma and enacted in 2003. Ongoing tax reform has further improved procedural rules and reduced the overall tax burden in the country. Companies operating in Russia should consult with a professional tax advisor to learn about the nuances of requirements. A general overview of Russian taxes follows.
The profits tax is levied on net profits. The standard profits tax rate is 20% (17% is allocated to regional Russian authorities and 3% to federal). The regional authorities may, at their discretion, reduce the regional profits tax to a rate as low as 12.5%. The tax rate was reduced in tandem with the introduction of more generous definitions of deductible expenses, the combined impact of which was to significantly reduce the profit tax burden and stimulate the Russian economy following its late 1990s financial downturn. The provisions on profit taxation enable foreign companies operating in Russia to benefit from the reduced withholding tax rates and exemptions under Russia's double taxation treaties (the United States and Russia instituted a double taxation treaty in 1992), which could be advantageous for U.S. companies in certain cases. For example, representative offices are permitted to deduct expenses incurred on their behalf by a parent company located abroad.
Value Added Tax (VAT) and Import Duties
Russia’s VAT is designed as a tax to be borne ultimately by consumers, but is collected on a basis similar to the European Union model. VAT is calculated on sales value and is applied at a uniform rate of 20% as of January 1, 2019, except for certain foodstuffs, pharmaceuticals and children's clothes, which are taxed at 10%. Some products including certain financial services and medical equipment are entirely exempt, along with some intangibles such as inventions, software, and industrial designs.
Imports are also subject to VAT, calculated based on the item’s Customs value plus Customs duties and fees. Additionally, import duties (tariffs) are assessed at specified rates, ranging from 5% to 30%. As of January 1, 2010, import duty rates for some goods increased with the introduction of the Eurasian Customs Union (EACU). The EACU initially consisted of Belarus, Kazakhstan, and Russia, and was expanded to include Armenia and Kyrgyzstan in 2015, the same year when the Customs Union was transformed into the Eurasian Economic Union (EAEU). Import duties are assessed according to classification and are applied to the Customs value of the imported goods, including shipping charges and insurance. Goods imported by foreign partners as in-kind contributions to the charter capital of a new enterprise may be exempt from import duties during a period specified in the charter documents and exempt from import VAT under certain conditions (e.g., the goods qualify as technological equipment which has no analogues manufactured in Russia).
In general, goods manufactured or assembled in Russia, whether by a Russian or foreign company, and then exported out of Russia, are not subject to VAT. If these goods are exported before payment is received, then no VAT should be collected. However, if payment is received before shipment, the exporter must pay the applicable VAT and then request a refund from tax authorities upon completion of the export transaction.
Social Welfare Taxes
As of January 1, 2010, the Unified Social Tax was replaced by social security (payroll) contributions to the State Pension Fund, Social Security Fund, Federal Medical Insurance Fund, and Territorial Medical Insurance Fund. A business is liable for the entirety of social security contributions and no amount is withheld from employees’ wages.
Social security contributions apply at the aggregate rate of 30% of an employee’s annual salary, and the percent of salary/rate of contribution may be adjusted in the future by the Russian government. The portion of an employee’s annual salary in excess of this threshold is exempt from the social security contributions. Social security contributions are distributed as follows: 22% to the State Pension Fund (SPF), 2.9% to the Social Security Fund (SSF), and 5.1% to the Federal Medical Insurance Fund. Social security contributions are mandatory for all payments to resident employees. Salary or other payments to foreign citizens temporarily present in Russia (i.e., not having a permanent resident permit) are not subject to social security contributions. Since January 1, 2017, the FTS has accepted reports and payments for workplace accident contributions, which will remain under the purview of the SSF, while pensions are now under the purview of the SPF.
Reduced social security contribution rates apply to certain business categories, including software and high-tech companies (14% from 2011 until 2023) and companies engaged in special innovation projects (14%). Companies that are members of the Skolkovo project pay 20% to the SPF and are exempt from payments to the SSF and the Federal Medical Insurance Fund. Workplace accident insurance is paid by the employer in addition to social security contributions. Rates vary depending on the established class of professional risk.
Withholding on Dividends, Interest, and Royalties
Foreign legal entities without a business presence in Russia are subject to a withholding tax of 10% on freight services provided in Russia. Most income including interest, royalty, income from leasing, and rental operations is taxed at a 20% rate. Dividends are taxed at a rate of 15%. These rates are often reduced pursuant to an applicable double taxation treaty. Interest on certain types of state and municipal securities, mortgage-backed bonds, and certain income from certificates of participation in a mortgage pool also benefit from reduced rates. For example, the United States-Russia tax treaty may potentially reduce the Russian dividends tax rate to as low as 5%, depending on whether ownership and investment criteria are met, and the tax on interest and royalties could drop to 0%. Lease payments and other income are subject to a 20% withholding rate.
Land, Property and Personal Income Taxes
Local authorities may impose a tax on land according to its type and location. The rate is higher in Moscow and St. Petersburg than in other cities and rural areas.
The personal income tax rate for Russian residents is a flat rate of 13% imposed on worldwide income, whereas non-residents are taxed at 30% of Russian-sourced income.