26.07.06

If a company is not financed from the federal budget, it is not required to deduct personal income tax or unified social tax from cash per diem payments which exceed the limit established by the government. This fact was finally officially confirmed by the Russian Ministry of Finance on 12.07.06 in Order No. 92n.

As is already known, per diem payments within the limits set are exempt from personal income tax and unified social tax payments (paras. 217, 238, Tax Code of the Russian Federation). Order No. 64n, issued by the Ministry of Finance on 02.08.04, which came into force on 1st January 2005, established maximum cash per diem payments for a range of countries. This order applies to all organizations, regardless of their source of funding. The financial authorities believed that any company which exceeded the limit of cash per diem payments should pay income and unified social taxes on the sum exceeding the limit (Russian Ministry of Finance letter No. 03-05-01-04/54)

The Supreme Court of Arbitration struck the first blow against the position of the Ministry of Finance. In its decision of 26.01.05, No. 16141/04, the court concluded that a company is permitted to set an upper limit in a labor contract. The company will then not be required to pay the unified social tax or deduct income tax from the sum which is within the limits stated in the contract. And on 1st January 2006 a limit on cash per diem payments, established in the Government Resolution No. 812 of 26.12.05, came into force. This document states that it applies only to organizations financed from the federal budget.

However the financial authorities made the necessary corrections to Order No.64n only six months later. The Russian Ministry of Finance Order No. 92, of 12.07.06, states that the limits on per diems, established by Order No. 64n, apply only to organizations financed from the federal budget. This means that all other organizations can set their own upper limits on the per diems payable during overseas business trips in a labor contract, and that these organizations will not be required to pay unified social or personal income taxes on sums within these limits.