17.10.06

Outstaffing in Russia
Marina Sitnikova
Accountant, Alinga Consulting Group

In today’s modern economy, employers must strive to both maximize income and minimize expenses. One simple way to decrease expenses is through the use of outstaffing.

Outstaffing, a practice already widely used in the West, has been gaining popularity in Russia for some time. This article will focus on the advantages and pitfalls of outstaffing in Russia.

Basically, outstaffing entails the transfer of some employees working in one company to another legal entity who, in turn, incurs full legal responsibility for them; The “transferred” employees continue to work at their regular positions at the “host company,” but the responsibilities for maintaining their documentation, related salaries and taxes, and other work issues become the responsibility of the “provider company” to whom the employees were transferred.

Russia’s system of simplified taxation allows firms to save on salary taxes by releasing them from the responsibility of paying the Unified Social Tax. By outstaffing, companies using standard taxation transfer some of their employees to a company which uses simplified taxation. This reduces the number of personnel on staff in the host company and consequently, its payroll and tax burden.

Between the “host” and “provider”, there must be a civil contract specifying services rendered - namely, the "rent" of personnel. Simply put, under this contract, the provider company agrees to render this service, and the host company agrees to pay for it. The cost of this service can be written off under miscellaneous expenses, reducing the host company’s profit tax (Line 19, Clause 1, Article 264, of the Tax Code of the Russian Federation).

The employees of the host company, using standard taxation, legally become the employees of the provider company, using simplified taxation and receive all wages from the provider company. According to Clause 2 of Article 346.11 of the Tax Code, simplified taxation releases the company from paying the Unified Social Tax, replacing it with a Unified Tax based only on the “estimated results of the organization’s activities.” The taxpayer on the simplified system is also released from profit and property taxes, and VAT. Those on simplified taxation must still pay obligatory pension insurance payments, according to legislation of the Russian Federation.

Outstaffing can also help companies already using simplified taxation. For example, a company pays taxes on income minus expenses at a rate of 15%. Outstaffing allows these insurance costs to be transferred to the expense column, effectively reducing the tax base for the uniform tax companies operating on simplified taxation.

However, it is necessary to remember that according to Clause 4 of Article 346.13 of the Tax Code, a business loses its right to simplified taxation according to stipulations in Lines 1 and 3 of Clause 1, Article 346.25 of the Tax Code. These stipulations are that earnings may not exceed twenty million RUR, basic operating costs may not exceed 100 million rubles, and the average number of workers may not exceed 100. The right to use simplified taxation is lost as of the beginning of the quarter in which any of these parameters was exceeded. For this reason it is sometimes advantageous to register several legal entities on simplified taxation with different types of business activity.

Considering that outsourcing is a practice not specifically regulated by Russian legislation, tax inspectors recognizing the opportunities apparent in outstaffing contracts will likely take interest in them. It is possible that inspectors will regard such a contract as a method of tax evasion – evading the 26% Unified Social Tax in favor of making pension insurance payments at a rate of 14%. Inspectors can attempt to void such a contract in court on the grounds of tax evasion. Therefore, before instituting an outstaffing arrangement, an economic feasibility study should be performed and special attention given documenting the transaction. A firm should be able to prove that outstaffing serves a business purpose other than lowing taxes.

There are also many problems arising from “renting” personnel. First, complexities can arise calculating the expenses when determining profit tax. Such services can be considered miscellaneous expenses connected with manufacture and realization (Line 19 of Clause 1, Article 264 of the Tax Code). However, as with any other expense, this should be proven (economically justified) and documented (Article 252 of the Tax Code).

Also, the host company must maintain records of the number of days (and hours) worked by each “rented” employee. To avoid problems with tax payments, wages should not differ greatly from the wages earned by employees working similar positions in the same geographical region as the company in question. Otherwise, inspectors can claim that the tax payer has inflated expenses.

Outstaffing is not without problems and legislation regarding this already widespread practice have yet to be enacted. While the practice does have positive aspects, the employer should consider all of the pluses and minuses.