09.09.11

Alinga Consulting Group was founded in 1999 by a small, international team of professionals that had been working in the Russian market since 1992. As foreign investment has increased demand for professional accounting and audit services, and as growing companies now require outstaffing and HR documentation services, Alinga has kept pace with a range of solutions for business in Russia. As a member of such organizations as IGAF, AmCham Russia, AEB, and the Moscow Audit Chamber, Alinga takes customer service as seriously as it takes the accuracy of its services. Corporate Profit Tax in the Russian Federation By Alexei Spirikhin, Manager Audit and Tax Department     About the Author Alexey Spirikhin, Manager  Audit and Tax Department   Alexey Spirikhin holds an economics degree in Finance and Credit from the Tyumen State University.   In 2005 he received a Certificate in GAAP Accounting from the American Institute for Business and Economics. Alexei is also currently completing his ACCA exams.   Alexei has extensive experience in the agricultural, food/entertainment, real estate, and transportation sectors.   Alexei currently holds the position of Audit Manager and is involved in audits conducted in accordance with both International Standards on Auditing (ISA) and Russian Standards on Auditing (RSA).   Follow Alinga:   Also on our Site: IFRS vs. RAS Debt Refinancing: Tax and Accounting Issues in Russia The Post-Merger Integration Process: The "Russia" Factor Thin Capitalization And Controlled Debt: Taxation And Legal Issues   Alinga Consulting Group +7 (495) 988-21-91 consult@acg.ru     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.   Rates   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.   Exceptions   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: Funds received by a Russian legal entity without consideration:  - If the transferring party (individual or legal entity) owns more than 50 percent of the share capital of the receiving party (Russian company Parent – Subsidiary); - If more than 50 percent of the share capital of the transferring party is owned by the receiving party (Subsidiary - Parent). This exemption applies only if the assets received are not transferred to third parties within one year from the day of receipt (exception - monetary funds received). 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.   Administration   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.   Separate subdivisions   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