11.06.08

A situation recently occurred with a foreign company which operates a representative office in Russia. The office is headed by a foreign individual employed by the parent company. The parent company pays his salary and pays taxes in his country of permanent residence.

Is the representation office obligated to pay personal income tax, social tax, and pension tax on the director’s salary? The Ministry of Finance (MinFin) answered these questions in Letter #03-04-06-02/52 from May 20, 2008.

Regarding personal income tax: profits received in the RF are subject to income tax regardless of whether the receiving party is a tax resident of the RF or not.  Thus, according to the Tax Code (TC), payments for duties or services and other actions performed on the territory of the RF are subject to personal income tax. Therefore, MinFin states that salary paid to the director of the representation office for his services of overseeing and managing the activity of the Russian representation office is unquestionably subject to personal income tax. 

Regarding social and pension tax, the answer is also not beneficial for the taxpayer. All payments to foreign citizens, based on labor contracts or civil law contracts, are subject to Unified Social Tax (UST) according to the TC. It is not dependent on the status of the employer (Russian or foreign entity) or the status of a person receiving payments.

Referring to the Law “On Mandatory Pension Insurance in the RF,” MinFin flatly states that pension insurance fees must be paid from all payments to foreign individuals, regardless of the status of the employer.

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Source: Российский налоговый портал