One of the most sophisticated taxes is the corporate profit tax regulated by Chapter 25 of the Russian Tax Code. Taxpayers for profit tax purposes are Russian legal entities and foreign legal entities carrying out activities in the Russian Federation through permanent establishments and/or receiving income from sources in Russia. Russian legal entities are taxed on their worldwide income. A permanent establishment of a foreign legal entity (the term “permanent establishment” is used only for tax purposes) is a branch, representation office, division, bureau, agency, any other separate subdivision or other place of activities through which the foreign legal entity regularly carries out entrepreneurial business within the territory of the Russian Federation related to:
use of subsurface resources and other natural resources,
construction and assembly,
the sale of goods from warehouses (owned or leased by the entity) located in Russia,
handling of other works, rendering services, etc.
A foreign legal entity is considered to have a permanent establishment from the moment when regular entrepreneurial business is carried out through a division.
Preparative and supporting (auxiliary) activities of a division of a foreign legal entity are not considered as activities leading to formation of a permanent establishment if the special features of a permanent establishment mentioned above are absent (regular entrepreneurial business, etc). Such activities are as follows: use of premises only for purposes of storage, demonstration, and/or shipment of goods owned by the foreign entity only up to the moment before shipment begins; maintenance of the permanent place of activity only for purposes of purchasing goods by this foreign entity; maintenance of the permanent place of activity only for purposes of market research for goods or services realized by foreign entity, if such activities are not the primary activity of the entity; or maintenance of the permanent place of activity only for the purpose of concluding partnership agreements to be carried out in Russia. The following activities also do not result in creation of a permanent establishment: the secondment of personnel to work for another entity in Russia; export and import of goods from or into Russia; and the possession of securities, share interests and other assets in Russia.
Basis of taxation
The basis of taxation for the corporate profit tax is the profit received by the taxpayer:
For Russian legal entities – income received less expenses incurred;
For foreign legal entities – income received through a permanent establishment, reduced by those expenses incurred by the foreign legal entity that are related to the permanent establishment’s activities as well as income received from other sources in Russia.
Chapter 25 of the Tax Code establishes a common maximum rate for calculating tax – 20 percent. This 20 percent rate is split into two components: 2 percent paid to the federal budget and 18 percent paid to the regional budget. Regional authorities may reduce this tax rate to as low as 13.5 percent for certain categories of taxpayers, but this affects only the portion paid to the regional budget. Tax rates on the income of foreign legal entities which are not connected with activities in Russia through a permanent establishment are:
20 percent from all types of income with the exception of income received in the form of dividends, income received from the activities related to international transportation and income received from separate debt obligations (state debt obligations);
10 percent from activities related to international transportation;
15 percent on income received in the form of dividends paid by a Russian entity to a foreign company and dividends paid by a foreign company to a Russian legal entity.
In these cases the profit tax is calculated taking into account double taxation treaties between Russia and a foreign state.
According to Chapter 25 of the Tax Code several forms of income are not subject to Corporate Profit Tax. The following one is worth mentioning:
Gains received from sales of capital assets are taxed at the standard tax rate (20 percent). Such gains are calculated as gross proceeds less net book value (for depreciable assets) or acquisition cost (for other assets). The expenses related to sales of the assets are deductible as well.
Taxpayers must submit quarterly tax returns for each reporting period (quarter) and annual returns for the calendar year. Quarterly returns are due within 28 days after the end of the reporting period, annual returns are due by March 28 of the year following the reporting year.
If Russian legal entities have registered separate subdivisions located throughout the territory of Russia, they must file separate tax returns in each tax district where the subdivision is registered. Also Russian companies must allocate taxable profits between the head office and the subdivisions in different regions. The calculation of profit tax is based on the net book value of fixed assets, or at the discretion of the taxpayer, on either the number of employees or the payroll. In this case the calculated profit tax in the part of regional budget is paid at the place of location of the subdivision and the federal part of the tax is paid by the head office.
Profit Tax Payments
Profit tax is paid on either a monthly or quarterly basis. Provided a monthly basis is used, the profit tax is paid to the corresponding budget within 28 days after the end of the month, and monthly advance payments are equal to one-third of the total advance payments for the preceding quarter. Quarterly advance payments are paid within 28 days of the month following the reporting quarter and are based on actual recognized profit.
Elimination of Double Taxation
Income received by a Russian legal entity from sources outside Russia is accounted for in the profit tax base and all expenses incurred by the Russian company within the territory of Russia and outside Russia are completely deductible. Any taxes paid in accordance with the legislation of foreign countries by a Russian company are credited against the Russian profit tax payable, but the amounts of profit tax paid outside Russia are eligible for credit relief only within the amounts of tax payable in Russia