16.12.07

Note: The following is an English-language synopsis of a much more detailed Russian-language article. The synopsis is intended to familiarize English-speaking managers with an important tax issue. Those hoping to actually apply this information should refer their accountants to the Russian version.

Expenses Incurred During the Fulfillment of Civil Contracts
Roman Subbotin
Accountant, Alinga Consulting Group

How do travel expenses incurred by a contract employee affect the company for whom that employee is working? 

Such civil contracts are regulated by Article 709 of the Civil Code of the Russian Federation. As there is no work contract with the firm, the provisions made in the Labor Code of the Russian Federation do not apply and thus the expenses cannot be written off as a standard business trip.

Corporate Profit Tax

According to an official letter issued by the tax authorities, expenses incurred to fulfill obligations created by civil contracts can be deducted from the company’s tax corporate profit tax base.

However, businesses should always be aware that the expense must be documented and the documentation must specifically show the business as the entity which paid the expense.

Unified Social Tax

How such expenses affect the Unified Social Tax has been slightly more complicated. Essentially, according to official letters from the tax authorities and according to the logic that the expense was incurred via a civil and not through a work contract, the sum should not be included in the company’s Unified Social Tax base. (Again, for a fuller explanation of this, see the Russian version of this article.)

However, the tax authorities, in the course of audits, and regardless of the letters, have shown a propensity to treat the expense as labor related and thus, as one that should be included in that tax base. In at least one case, arbitration courts even supported this opinion, although the Russian High Court of Arbitration later overturned the ruling.

Not wanting the hassle of battling such issues all the way to the High Court, most companies have historically simply included the amount in the Unified Social Tax base in order to avoid a confrontation.

However, this situation should be improved with the start of 2008. Amendments to the Tax Code, which will come into effect at the beginning of January will introduce to federal law specific wording saying that expenses incurred by legal entities in the course of fulfilling civil contracts will not be subject to the Unified Social Tax.

Because federal laws are much more powerful than official letters or logic when it comes to taxation in Russia, these amendments should embolden businesses to use expenses incurred from the fulfillment of civil contracts as tax write-offs in the future.

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