1. The International Comparative Legal Guide to:
Corporate Tax 2008
A practical insight to cross-border Corporate Tax work
Published by Global Legal Group with contributions from:
ACCURA Advokataktieselskab Elvinger, Hoss & Prussen Machado, Meyer, Sendacz e Opice Advogados
Arnold Bloch Leibler Eubelius Macleod Dixon
Arthur Cox G. BREUER Michael Kyprianou & Co.
Avanzia Tax Advisors Gencs Valters Law Firm Nagashima Ohno & Tsunematsu
Gide Loyrette Nouel Pachiu & Associates
Barros & Errázuriz Abogados
Goodrich, Riquelme y Asociados
BC Toms & Co. P+P Pöllath + Partners
Hendersen Taxand
BMR & Associates Herzog, Fox & Neeman Paul, Weiss, Rifkind, Wharton & Garrison LLP
Bredin Prat Juridicon Law Firm Pepeliaev, Goltsblat and Partners
Bugge, Arentz-Hansen & Rasmussen Kilpatrick Stockton Prijohandojo, Boentoro & Co.
Bustamante & Bustamante Kim & Chang Salans LLP
Camozzi Bonissoni Varrenti & Associati Kyriakides Georgopoulos & Daniolos Issaias Salans D. Oleszczuk Kancelaria Prawnicza Sp. k.
Law Firm Slaughter and May
Cárdenas & Cárdenas Law Office Aivar Pilv
Castrén & Snellman Attorneys Ltd. Van Doorne N.V.
Law Office Jadek & Pensa
Delchev & Partners Lenz & Staehelin Werksmans Inc.
Despacho de Abogados miembros de Linklaters LLP White & Case
Macleod Dixon, S.C. LOGOS Legal Services WongPartnership
Dorda Brugger Jordis Lovells LLP Zaid Ibrahim & Co
www.ICLG.co.uk

2. Chapter 41
Russia Tatiana Vasilieva
Pepeliaev, Goltsblat and Partners Vadim Zaripov
1 General: Treaties consequences described in question 1.1. above;
(d) treaties could include or not include anti-treaty shopping rules
(see question 1.4 below). Anti-treaty shopping rules could differ.
1.1 How many income tax treaties are currently in force in
your jurisdiction? There could be other peculiarities and a taxpayer, when evaluating
their situation, should follow exactly the treaty that should be applied.
Russia currently has 67 tax treaties in force. Among them are
treaties with West-European countries (the United Kingdom, 1.3 Do treaties have to be incorporated into domestic law
Germany, the Netherlands, France, Switzerland, Sweden, Ireland before they take effect?
and others), treaties with countries of Eastern Europe, Asia, treaties
with the USA and Canada. There are also treaties with the former The international treaties of Russia are a component part of the
Soviet Republics. Russian legal system.
There was no serious activity in 2007 concerning the establishment The treaties may only take effect, however, once ratified.
of new treaties or amendment of the old treaties - only the Russian- “Ratification”, according to Russian law, means that a special federal
Belarusian treaty was amended. law should be promulgated. Each treaty includes a clause under which
However, two tendencies of 2007 should be recognised: it takes effect after an interchange of notifications that each of the
1) The Ministry of Finance pronounced several times that they contracting states has ratified it. Several years might pass from the
were going to revise the provisions (which were generally signing of an agreement to the end of ratification procedures.
the part of the tax treaty) or to establish agreements in regard
to the exchange of “tax information”. This should be done in
the frame of an anti-offshore campaign (see question 7.1 1.4 Do they generally incorporate anti-treaty shopping rules (or
below). “limitation of benefits” articles)?
2) Tax authorities concentrated on the interpretation problems.
One of the most noticeable questions in case-law (courts' Most of the treaties do not include anti-treaty shopping rules
enforcement practice) concerned the head office expenses (“limitation of benefits” articles). Some treaties do, however, have
transferred to Russian branches. Tax authorities still insist anti-treaty shopping rules (e.g., the treaties with the UK and the USA).
that Russian branches should prove with sufficient Some treaties are interpreted as including the rule that only a
documents not only the fact of transferring and the beneficiary company could use the treaty benefits (e.g., Russia -
mechanism of distributing the expenses but also the fact that Cyprus treaty in the part concerning the dividends). However, the
the head office really carried out this expenditure.
term of “beneficiary” is fairly blurred and is hardly applicable unless
the strong provisions in regard of exchange of tax information is
1.2 Do they generally follow the OECD or another model? introduced and tax authorities start using them.
In any case, tax treaties do not allow taxpayers to benefit from sham
Yes, they generally follow the OECD model and, although Russia activities (i.e., those that are not actually carried out).
is not a member of the OECD, the courts, when deciding a tax
On 12 October 2006, the Supreme Commercial Court issued a
treaty issue, could follow the interpretation given by the OECD
guideline on “what might be deemed tax evasion and avoidance”.
in its Commentary.
The purpose of business, said the Court, should not be the tax
It should be noted, however, that tax treaties do not generally follow
benefit though said benefit may accompany transactions that have
the OECD model word for word, as shown below:
real business purposes, because a taxpayer is free to achieve a
(a) a tax treaty could lift a ban or limitation established by Russian desired economic result with a minimum tax burden. A tax benefit
national law (Tax Code). Some treaties (e.g., those with Germany, resulting from transactions that are economically or commercially
the UK and France) allow certain expenses to be fully deducted, unreasonable is an “unjustified tax benefit”.
notwithstanding restrictions under the Russian Tax Code (e.g.,
The tax authorities will probably undertake attempts to apply this
advertising expenses);
guideline to cases when the taxpayer derives a tax benefit on the basis
(b) the articles on dividends, royalty and interest could differ; of the treaty (when the company is established in a country with a
(c) the clause concerning the expenses being distributed from a more favourable taxation not for “real business” but for tax benefit
head office to subdivision could be worded in a different manner purposes and leads no real business activity in this offshore zone).
and, therefore, it could entail or not entail the negative
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3. Pepeliaev, Goltsblat and Partners Russia
Once tax authorities succeeded in fighting against “inner offshore 2.2 Do you have Value Added Tax (or a similar tax)? If so, at
zones”, which allowed taxpayers paying less tax without real what rate or rates?
activity within offshore.
Yes, the Russian tax legislation stipulates Value Added Tax.
1.5 Are treaties overridden by any rules of domestic law The rates are determined in Article 164 of the Tax Code and are as
(whether existing when the treaty takes effect or follows:
introduced subsequently)?
Russia
the standard rate is 18%;
the reduced rate is 10%. This is applicable to operations with
No. The treaty overrides any rules of domestic law. certain goods (e.g., meat, milk, sugar, salt, children's and
However, the taxpayers should be very careful when applying the diabetic foods, children's beds, school exercise-books, toys,
treaty, because anti-avoidance rules being not listed in the treaty printed periodicals, science and culture books, medications
could be established right in the Russian Tax Code. In such cases and other goods listed in Article 164 of the Tax Code); and
the claim of a taxpayer that “domestic rules conflict with treaty there is a 0% rate. Taxation is imposed at the 0% rate on the
rules” will be not taken into account. The chance of winning such export of goods, as well as on the provision of certain works
and services (including transportation services) related to
a case, even if a taxpayer insists on mechanical and formal character
export and in some other cases.
of national anti-avoidance rules, is quite small.
Example:
2.3 Is VAT (or any similar tax) charged on all transactions or
are there any relevant exclusions?
Provision of Russia - UK treaty. Anti-avoidance rules, established by the
Russian Tax Code, Article 308.
The main items, the sale of which is subject to VAT are goods,
A building site or construction or (a) the period of time spent by the works and services and the importation of goods into the Russian
installation project constitutes a subcontractors on carrying out the works customs territory.
permanent establishment only if it shall be seen as the time thus expended
lasts more than 12 months. by the general contractor itself. The transfer of goods on a gratuitous basis is deemed a sale, and the
(b) supposing the works are finished and
the acceptance report is signed by the
same applies to works and services.
customer, but after this the works are
continued, the term of “new” works and
There are five groups of exclusions:
the interval between the works should be 1) Where “the place of sale” is not Russia. There are special rules
added to the total term of the existence
of the construction site if: in the Tax Code about “the place of sale of goods and the place of
- the territory of the works is the same
or a closely adjoining one;
sale of works (services)” (Articles 147 and 148 of the Tax Code).
- the contractor is the same of their Examples: If a foreign company provides legal services to a
reciprocally dependent person.
Russian company, these would be subject to VAT, because the
“place of sale” is determined in this case as a “place of the
customer's activity”.
2 Transaction Taxes
2) Where “the place of sale” is Russia, but the operation is not
recognised as being subject to taxation. Example: transactions
2.1 Are there any documentary taxes in your jurisdiction? involving the sale of land plots or shares thereof.
3) Operations that are not taxable (exempted from taxation). The
State Duty is the documentary tax in Russia.
relevant exclusions are stipulated for certain medical products and
All cases when state duty is imposed are listed in Chapter 25.3 of services, public transport services, bank services, shares, securities
the Russian Tax Code. These include: and many others.
when applications are submitted to the Constitutional Court,
4) Release from taxpayer obligations. Organisations and
to courts of law, arbitration courts or to a justice of the peace;
businessmen have the right to relief, if the sum of their proceeds
when applications are submitted for notarisation; does not exceed a total of 2,000,000 roubles (about 57,000 EUR)
when applications are submitted for an apostille; and for the three preceding calendar months in a row.
when applications are submitted for performance of legally 5) Organisations and persons who are not taxpayers for VAT
relevant actions. purposes. For example, advocates do not pay VAT because they are
Some examples when opening business in Russia: not deemed to be businessmen. Organisations and businessmen who
The state duty for certification of constituent documents of apply the simplified system of taxation are not VAT-payers either.
organisations is 500 roubles (about 14 EUR).
State duty shall be paid at a rate of 2,000 roubles (57 EUR) for state 2.4 Is it always fully recoverable by all businesses? If not,
registration of a legal entity. what are the relevant restrictions?
The state duty for accrediting foreign organisations established on
the territory of the Russian Federation is 60,000 roubles (1,700 Under the Russian Tax Code, the sum of the deduction is estimated
EUR) for each branch. as the amount of VAT presented to the taxpayer when purchasing
goods, works or services or paid by the taxpayer when importing
Some examples when having a dispute with Tax Office and
goods on to the Russian customs territory. Since 1 January 2006,
applying to a court:
the tax deduction has been based on the VAT-invoice.
The usual taxpayers' petition to the court is to declare the tax
There is a list of situations when the Tax Code prohibits tax
decision be invalid. In this case the stamp duty is 2,000 roubles (57
deduction:
EUR). However, if the claim is “material”, e.g., to force the Tax
Office to return a tax, the stamp duty should be calculated as a 1) when the organisation or businessmen who buy goods (works,
certain percent from the sum of claim. The maximum stamp duty services) are not VAT-payers (e.g., advocates, organisations and
is 100,000 roubles (2,800 EUR). businessmen who apply the simplified system of taxation);
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4. Pepeliaev, Goltsblat and Partners Russia
2) if the goods (works or services) are acquired for the purposes of of the non-resident licensor, they would be taxable at the 24%
carrying out activities that are not subject to VAT (see question 2.3 corporate tax rate. In this case, the tax treaty's provisions
above; there are five occasions). The unrecoverable VAT is concerning permanent establishments are applied.
deductible as an expense for corporate profit tax purposes;
3) in some cases, the tax amount accepted for deduction shall be 3.2 Would there be any WHT on interest paid by a local
liable to refunding (this rule took effect on 1 January 2006). Those company to a non-resident?
Russia
cases include, e.g., the case of transfer of property as a contribution
to authorised capital of companies; and There is a 20% WHT on interest paid by a Russian company to a
4) the VAT deduction is limited if there is a limitation on the costs non-resident (30% for a non-resident individual who is a lender).
for corporate tax purposes (e.g., in cases of business trips and If a treaty establishes other rules, the rules of the treaty shall apply.
entertainment expenses).
If royalties are attributable to a permanent establishment in Russia
Tax deduction will be declared by tax authorities and courts to be of the non-resident lender, they would be taxable at the 24%
invalid in the cases when: corporate tax rate. In this case the tax treaty's provisions
(a) taxpayer is a participant of a sham mechanism of VAT concerning permanent establishments are applied.
reimbursement; Special rates are established with respect to interest on municipal and
(b) taxpayer knows (for example, in case of affiliated companies) state securities (15%, 9% and 0%, depending on the type of security).
that their supplier is performing infringement transactions to shelter
the VAT; 3.3 Would relief for interest so paid be restricted by reference
(c) taxpayer acts imprudently when concluding and fulfilling the to “thin capitalisation” rules?
contract with bad-faith supplier and at the same time the bad-faith
character of the supplier is obvious. Yes. Under the Russian Tax Code, the rules of “thin capitalisation”
These provisions (a-c) are listed in the Plenary Ruling of the Higher are applied with respect to interest (i.e., interest on any kind of debt
Arbitration Court No. 53 dated 12 October 2007. liability: credits; commodity and commercial credits; loans; bank
deposits; bank accounts; or other borrowings) to be paid by a local
It is difficult to define the current enforcement practice based on
company to a non-resident if:
this Ruling as definite and mature: tax authorities still exercise the
position that “if a supplier has not paid VAT to the budget, the 1) the foreign company that, directly or indirectly (see the
taxpayer, in any case, has no right to recover VAT” and there are hot explanation below), owns over 20% of the authorised capital of the
debates still going in the courts. Russian debtor-company is: a) the creditor of that Russian
company; b) an affiliated company of another Russian company
that is the creditor of the given Russian debtor-company; or c) the
2.5 Are there any other transaction taxes? warrantor of the given Russian company's debt (this also applies
when an affiliated Russian company is a warrantor). The last two
There are no other transaction taxes in Russia. The excise taxes as conditions ('b” and “c”) have been in operation since 1 January
indirect taxes exist (see question 2.6 below). 2006; and
Also, customs duties are generally payable on a wide range of 2) the amount of debt (so-called “controlled debt”) is more than
imported goods and on a number of exported goods. treble (or 12.5 times - for banks and leasing companies) the
difference between the sum of assets and the amount of liabilities of
2.6 Are there any other indirect taxes of which we should be the Russian debtor-company.
aware? If there are such conditions, only the limited sum (the ultimate
amount) could be included in expenses by a Russian borrower. The
Excise taxes. The Russian tax legislation stipulates excise taxes for: sum in excess of this is deemed to be a dividend of the foreign
sale on the territory of the Russian Federation of excisable company, not interest. So, the article of the treaty concerning
goods (e.g., ethyl alcohol, some alcohol-containing products, dividends, not interest, will apply.
tobacco products, cars, petrol, petrochemical products) by
The ultimate amount of the interest is defined by dividing the sum
the producers;
of the interest in the reporting tax period by the capitalisation
transfer of excisable goods produced by persons from the coefficient. The mechanism of calculating the coefficient is
clients' raw materials, transfer of excisable goods within the
described in Article 269 of Tax Code.
structure of the organisation for subsequent production of
non-excisable goods and certain other transactions; There exist a lot of disputable issues in regard to the 'thin cap' Article
receipt of denatured ethyl alcohol by an organisation holding (even including disputes concerning calculation of the thin cap
a certificate for production of alcohol-free products; and coefficient) and their covering usually takes 2-3-hour seminar, so, as a
certain other operations. first step, we want to draw an attention of companies to 2 problems:
1) “Thin cap” and non-discrimination. Tax authorities
periodically try to apply Article 269 even in situation when foreign
3 Cross-border Payments company is established in the country which has bilateral treaty
with Russia and such treaty has the non-discrimination clause. In its
3.1 Would there be any WHT on royalties paid by a local Letter No. 03-08-05, dated 20 December 2006, the Ministry of
company to a non-resident? Finance indicated that the thin cap rules should apply in any case,
irrespective of the non-discrimination rules in the international tax
There is a 20% WHT on royalties paid by a Russian company to a treaty. That Letter concerned the treaty with the Netherlands. By
non-resident (30% for a non-resident individual who is a licensor). now, the courts ruled in favour of taxpayers.
If a treaty establishes other rules, the rules of the treaty shall apply. 2) “Sisterly” companies. We should note that “indirect
If royalties are attributable to a permanent establishment in Russia ownership” according to the Tax Code means “ownership through
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5. Pepeliaev, Goltsblat and Partners Russia
the succession of other companies”. Thus, “sisterly” companies concerning financial transactions. A Russian company will not be
should not be deemed as controlled companies. By now, the courts able to apply a 0% rate on dividends if it receives dividends from
support this position. such a country.
3.4 If so, is there a “safe harbour” by reference to which tax 3.7 Does your country have transfer pricing rules?
relief is assured?
Russia
The Russian Tax Code does contain rules about adjusting prices
See question 3.3 above. applied by contracting parties to the market prices. Moreover, the
The “safe harbour” is available when: Ministry of Finance is finishing their work on the new transfer
pricing rules that will be orientated on international experience and
(a) the coefficient of thin capitalisation is exactly within the frames
will regulate international transactions involving countries with
established by Article 269 of Russian Tax Code; or
favourable tax regimes to a greater degree than internal
(b) even if the coefficient could be outside the frames of Article transactions. The approximate date when the draft of the law
269, but the foreign company and Russian debtor are independent should be approved by the Government is November, 2007. Hence,
(directly or indirectly) from each other; or it could be expected that the law will be passed through the State
(c) even if the coefficient outside the frames of Article 269 and the Duma (legislative body) within the first half of 2008 and will be
foreign company and Russian debtor are interdependent, but there enacted on 1st January 2009.
is a tax treaty with the clause of non-discrimination and there are no At first, we will shortly describe the current legislation:
signs and evidence of sham (pretended) transactions. In this last
The tax authorities can correct the price and calculate additional
case the dispute between taxpayer and Tax Office could arise, but if
tax and a penalty when the price applied by the parties to a
the dispute will not be ruled in the pre-trial order, the court should
transaction deviates upwards or downwards by more than 20%
rule the case in favour of taxpayer.
from the market price.
The tax authorities can, however, check and correct the price only
3.5 Would any such “thin capitalisation” rules extend to debt
in a limited number of cases; for example, in the event of a
advanced by a third party but guaranteed by a parent
transaction between related persons, in the event of a barter
company?
transaction or in the event when, within a short period of time, the
taxpayer applies a price differing by more than 20% from the prices
Yes, see question 3.3 above.
applied by said taxpayer to identical goods (works, services).
The main problem of current legislation is the weakness of tax
3.6 Is any withholding tax imposed on dividends paid by a authorities when calculating the market price level: there are no
locally resident company to a non-resident?
sufficient official information on prices and no effective means to
get this information; there is no debugged mechanism of
There is a 15% WHT on dividends paid by a Russian company to a
exchanging financial information with foreign states (this process
non-resident (30% for a non-resident individual shareholder).
was stated to be debugged approximately 1 year ago), etc. In these
If a treaty establishes other rules, the rules of the treaty shall apply. circumstances, Tax Offices are unable, practically, to prove a
According to the Russian Tax Code, if dividends derive from a deviation from the market prices.
permanent establishment, they would also be taxed at the rate of The future amendments planned are, among other things:
15%. However, according to the “non-discrimination” principle, to specify the list of “related persons” in more detail;
dividends deriving from a permanent establishment should be taxed
to make the taxpayer responsible for proving the applied
at the rate of 9% as are Russian dividends. The “non- prices and establishing the requirements on the list of
discrimination” principle should be stipulated in the international documents which a taxpayer should provide;
tax treaty. The taxpayers, most likely, will be obliged to defend their to specify, expand and provide a closed list of controllable
position in court. transactions, including, in particular, such controlled
It should be noted that beginning from the 1st January 2008 tax transactions as conclusion of a contract with companies that
preferences for Russian recipients of dividends are in force. Such new are taxpayers in a low-tax jurisdiction (by now, the Ministry
rules are caused by the policy of supporting investments and striving proposes including in the list several countries, e.g., the BVI,
Cyprus, Ireland (Dublin and Shannon), Malta, the Isle of
for creating the status for Russia as the holding companies centre. The
Man, etc.);
distributor of dividends could be both Russian and foreign.
to introduce a new procedure for calculating market price
The WHT on dividends being received by Russian companies is 0% and a market price interval (NB. a market price is one that
if: falls within the limits of said interval);
the term of share ownership is no less than 365 days by the to provide additional methods for calculating the market
day of establishing the decision of distributing the dividends; prices; and
and to establish the institute of preliminary agreements on pricing
this term was not interrupted; and (advanced tax rulings).
the share is not less than 50 %; and
this share gives the right for receiving no less than 50 % of
the whole sum of dividends; and 4 Tax on Business Operations: General
the cost of share acquiring was more than 500,000,000
roubles (about 14,000,000 EUR). 4.1 What is the headline rate of tax on corporate profits?
Under the Tax Code, the Ministry of Finance is going to prepare a
list of countries with favourable regime of taxation and (or) the The headline corporate tax rate is 24%.
regime of which does not provide for the disclosure of information The profit tax at a rate of 17.5% is paid to the budget of the constituent
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6. Pepeliaev, Goltsblat and Partners Russia
entity of the Russian Federation, and the government of the 4.4 If it otherwise differs from the profit shown in commercial
constituent entity of the Russian Federation may reduce its 17.5% rate accounts, what are the main other differences?
in order to attract investment. The tax rate may not be less than 13.5%
- this is the so called regional incentives. As a rule, regional incentives The main difference is that there is a separate rule for calculating profit
include reduced rate of profit tax and property tax, but the most for tax purposes (see question 4.3 above). Taxpayers maintain
considerable incentive is the property tax incentive. independent Analytical Tax Recording Registers for tax purposes.
Russia
The 24% rate applies to the income of a foreign company when the The main differences are:
income derives from a permanent establishment. there is a list of non-deductible expenses in the Tax Code;
The headline rate of the profit tax on a foreign company's income some expenses (such as certain advertising expenses) may be
not deriving from a permanent establishment is 20%. allowed within certain limits;
There are special rates applicable to certain incomes. For example, some incomes are not incomes for tax purposes;
there is a special rate for dividends (15% on the foreign company's the rules of depreciation for accounting purposes and for tax
dividend income not deriving from a permanent establishment). purposes are different (e.g., there is no depreciation for tax
purposes when a taxpayer hands over property for free use by
somebody); and
4.2 When is that tax generally payable?
costs for tax purposes may be allowed in another period in
financial accounting, etc.
Generally, the tax is payable on or prior to 28 March of the year
following the tax period (the calendar year from 1 January to 31
December). 4.5 Are there any tax grouping rules? Do these allow for relief
in your jurisdiction for losses of overseas subsidiaries?
Within the tax period, a taxpayer should pay advance payments.
There are no special tax grouping rules in the Tax Code. The rules
4.3 What is the tax base for that tax (profits pursuant to do not allow a parent company to record the losses of its
commercial accounts subject to adjustments; other tax subsidiaries in its own accounting independently of the type of
base)? subsidiary - home or overseas.
Each company estimates the tax base independently.
There are special separate rules for calculating profit for tax
purposes. It may be that a certain income is deemed an income for There are, however, some current rules:
tax purposes but not for financial accounting purposes, and vice à) if the ownership interest in a subsidiary is more than 50%,
versa. The same applies to costs. property received free of charge from one company to
another would not be treated as profit;
In fact, “daughters” of foreign companies keep three types of
b) the tax authorities are entitled to check the prices applied in the
accounting books:
transactions between a parent company and a subsidiary (see
accounting books according to national accountings question 3.7 above);
standards;
c) since 1 January 2007, three-months` tax arrears of a subsidiary
books being filled on the basis of International accounting can be collected from the parent company if this parent
standards (IAS); company receives the profits of the subsidiary into its own
and tax books, bank account and vice versa; and
although the Ministry of Finance carries out the works to approach d) a Russian receiver of dividends could apply 0% tax under certain
all the accounting rules to each other. conditions (see question 3.6 above).
The tax base is determined as TAXABLE INCOME minus COSTS The planned amendments concern a “consolidated taxpayer”. The
that meet the requirements of Article 252 of the Russian Tax Code. Treasury is discussing the idea of a “consolidated taxpayer”. In
particular, this would make it possible to sum the profits and losses
INCOME. The Tax Code contains a closed list of incomes that are
of “parents” and subsidiaries and to solve the transfer pricing
not deemed to be an income for tax purposes (Article 251).
problem for holding companies, but only within Russia.
COSTS. There are some requirements for costs to be deductible for
tax purposes. These costs must be documented and economically
justified. The requirement for “economic justification of costs” was 4.6 Is tax imposed at a different rate upon distributed, as
one of the most disputable questions before the Decision of the opposed to retained, profits?
Russian Constitutional Court No. 320-O-P dated 04 June 2007.
The Russian profit tax rate is applied to a Russian corporate
The Constitutional Court ruled:
taxpayer's taxable profit, regardless of whether that profit is
“Economically justified costs” means “the costs connected to distributed or retained.
business and profit”;
the Tax Office is not allowed to evaluate whether the costs
are expedient or not (only the owner of business could decide 4.7 What other national taxes (excluding those dealt with in
the question of costs' expediency); and “Transaction Taxes”, above) are there - e.g. property taxes,
etc.?
the burden of evidence lies on the Tax Office.
There are two types of non-deductible expense: There is a closed list of taxes that can be imposed in the Russian
expenses that are not documented or economically justified; Federation (those listed in Articles 13, 14 and 15 of the Tax Code).
and These are:
expenses listed in Article 270 of the Tax Code (e.g., a penalty Nine federal taxes: VAT; excise taxes; tax on personal
paid to the government). incomes; uniform social tax; tax on profits of organisations
(corporate tax); tax on extraction of minerals (severance tax);
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7. Pepeliaev, Goltsblat and Partners Russia
water tax; fee for the right to use fauna and aquatic biological 5.3 Is there a participation exemption or relief for
resources; and state duty. reinvestment?
Three regional taxes: tax on property of organisations; tax on
the gambling industry; and transport tax. There is no such relief in Russia.
Two local taxes: land tax; and individual property tax.
We have already mentioned some federal taxes. 6 Branch or Subsidiary?
Russia
As for the other major taxes, the tax on personal incomes is levied
at a rate of 13% for residents and 30% for non-residents. As for the
6.1 What taxes (e.g. capital duty) would be imposed upon the
unified social tax, payments to an employee or an individual formation of a subsidiary?
contractor who is not registered as an individual entrepreneur are
subject to the unified social tax. The rate of this tax is regressive;
Russia does not impose taxes on incorporation of a subsidiary.
the maximum rate is 26%.
State duty will, however, be imposed in cases when, under Russian
law, applications have to be submitted to state authorities (see
4.8 Are there any local taxes not dealt with in answers to question 2.1 above).
other questions?
As mentioned above, there are three regional taxes and two local 6.2 Are there any other significant taxes or fees that would be
taxes. incurred by a locally formed subsidiary but not by a
branch of a non-resident company?
Recently, an experiment in one region of Russia (Velikhiy
Novgorod) of replacing property taxes (tax on property of The essential advantage of the subdivision (branch) against
organisations, individual property tax and land tax) with a real subsidiary (“daughter” company) is the absence of taxation under
estate tax came to an end. transferring money and other property from the head to subdivision
Information about property taxes: and back.
Tax on property of organisations. The property recorded in There are no other significant differences between taxation of a
financial accounting as fixed assets is subject to this tax. The locally formed subsidiary and a permanent representative office of
maximum rate is 2.2%. a non-resident company in the Russian territory.
Individual property tax. Real estate (e.g., flats, houses) is subject For VAT purposes, a non-resident company should be registered as
to this tax. The rate is progressive (from 0.1% to 2%). a VAT-taxpayer at the location of its branch (permanent
Land tax. A person (organisation or individual) that owns land (or establishment); otherwise VAT is withheld and paid by a fiscal
has the right to use it, except for by lease) has to pay this tax. The agent; the non-resident company may not deduct this VAT.
maximum rate is 1.5% or 0.3%, depending on the land category.
6.3 How would the taxable profits of a local branch be
determined?
5 Capital Gains
The profit deriving from a permanent establishment. The
5.1 Is there a special set of rules for taxing capital gains and provisions according to which the branch will be considered a
losses? permanent establishment are very similar to those of Article 5
(“Permanent establishment”) of the OECD Model Tax Convention.
Companies. There are no special rules for calculating capital gains The taxable income of a foreign company operating through a
and losses. A net capital gain must be included in the tax base. permanent establishment (branch) will be:
The gains and losses from selling certain goods (for example, income received as a result of operating in Russia through a
securities) are, however, calculated separately. Such losses cannot permanent establishment, reduced by costs incurred by the
reduce total profits. permanent establishment;
Individuals. There are special rules for calculating capital gains. income from possession, use or disposal of the assets of the
For example, income from the sale of property can be reduced by permanent establishment, reduced by costs connected with
the so-called “property deductions”. The amount of the income receiving this income; or
depends on the category of the property and the time the taxpayer other incomes from Russian sources (including interest,
has owned the property. Instead of using “property deductions”, royalty and others) to the permanent establishment.
taxpayers may reduce their income by the actual costs incurred in Deductible costs are generally determined by taking into account
purchasing the given property. The rules are similar to these the same cost deductibility rules as apply to Russian companies.
applied in regard to securities. The head office expenses could be deducted.
It is important to know that the tax base and the tax are calculated
5.2 If so, is the rate of tax imposed upon capital gains separately by each branch of a foreign company and cannot be
different from the rate imposed upon business profits? consolidated. Yet, the tax base of branches operated within a single
production process (and in similar cases) is calculated jointly.
There is no separate rate for capital gains. The general 24% profit If a foreign company has a branch because it engages in “preparatory
tax rate for organisations is applicable. and auxiliary” activities for the benefit of third parties and does not
receive any remuneration, the foreign company is deemed to have
taxable income equal to 20% of the branch's expenses.
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8. Pepeliaev, Goltsblat and Partners Russia
6.4 Would such a branch be subject to a branch profits tax (or We described how anti-avoidance doctrine was applying with regard
other tax limited to branches of non-resident companies)? to VAT in question 2.4. However, Ruling No. 53 which replaced the
“bona fide” concept is applied in regard to all taxes. The Ruling is
There is no special branch profits tax in Russia. based mainly on two doctrines: (a) the doctrine of the prevalence of
substance over form; and (b) the doctrine of business purposes.
6.5 Would a branch benefit from tax treaty provisions, or some The Court ruled that:
of them?
Russia
1) officials should prove the circumstances on which their
decision was based;
No. Generally, the profit of a non-resident company received 2) tax benefits can be recognised as unreasonable, in particular,
through a branch is taxed in the same way as the profit of a Russian when: (a) for taxation purposes, operations are not
company. This applies to interest paid to a permanent considered according to their economic sense; and (b)
establishment, royalty and so on. Usually, Russia - Foreign country operations have not resulted from justified economic or other
treaty provides that “if the profit is related to a permanent factors (purposes of a business nature);
establishment in Russia, the taxes should be imposed in Russia”. At 3) tax benefits cannot be considered as an independent business
the same time, the head office expenses could be deducted when purpose, though a benefit may accompany transactions that
calculating tax base of permanent establishment. have a real business purpose, because a taxpayer is free to
achieve a desired economic result with a minimum tax
burden; and
6.6 Would any withholding tax or other tax be imposed as the 4) the fact in itself of infringement of the tax duties by the
result of a remittance of profits by the branch? partner of the taxpayer is not proof that a tax benefit is
unreasonable.
There is no dividend withholding tax or any other type of “branch
There are still no requirements for the taxpayer to disclose an
level” tax upon the remittance of branch profits to a foreign head
avoidance scheme. In practice, if a taxpayer applied a tax avoidance
office.
scheme, a Tax Office should prove this (usually, taxpayers do not
agree with the claim and the dispute is transferred to the court), and
7 Anti-avoidance if the Tax Office succeeds, the taxpayer should pay the tax, interest
and penalty (20% from the unpaid tax).
The coming changes seem to be more effective:
7.1 How does your jurisdiction address the issue of preventing
tax avoidance? For example, is there a general anti- On December 2006, the plans of the Ministry of Finance were
avoidance rule or a disclosure rule imposing a requirement announced. They concerned:
to disclose avoidance schemes in advance of the a) transferred pricing rules (see question 3.7 above);
company's tax return being submitted?
b) rules concerning the consolidated taxpayer. These rules should
At present, Russia has two types of measures that are being used in resolve the problem of inner (within Russia) transfer pricing;
preventing tax avoidance: c) CFC rules (controlled foreign companies), which would allow
1) the anti-avoidance legislation: tax authorities including the profit of a subsidiary offshore company
into the profit of the Russian parent company under certain
general rules (transfer pricing rules and the rule on the right of
tax authorities to reclassify the deal and charge extra taxes); conditions;
special rules applicable in certain situations (namely, thin d) revising and establishing the agreements on exchanging of
capitalisation rules, rule of calculating the term of excising financial information; and
the construction site, etc.). e) the establishing of the “rule of resident”. The Ministry of Finance
We described anti-avoidance provisions of Russia in questions 1.1 is going to change the term “Russian legal entity” with the term
- 6.6 above. “Russian resident”. This should mean that a foreign company
2) the anti-avoidance court doctrine had been in the process of completely controlled and managed by a Russian company would
formation for several years (a long time courts used the be deemed to be a Russian resident and would be taxed in Russia.
“bona-fide” concept) and completed in Plenary Ruling No.
53 of the Higher Arbitration Court of Russia that put into
practice the term “unjustified tax benefit”.
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9. Pepeliaev, Goltsblat and Partners Russia
Tatiana Vasiljeva Vadim Zaripov
Pepeliaev, Goltsblat & Partners Pepeliaev, Goltsblat & Partners
Krasnopresnenskaya Nab. Krasnopresnenskaya Nab.
Entrance 7, World Trade Center-II Entrance 7, World Trade Center-II
Moscow 123610 Moscow 123610
Russia Russia
Russia
Tel: +7 495 967 0007 Tel: +7 495 967 0007
Fax: +7 495 967 0008 Fax: +7 495 967 0008
Email: t.vasiljeva@pgplaw.ru Email: t.vasiljeva@pgplaw.ru
URL: www.pgplaw.ru URL: www.pgplaw.ru
Tatiana Vasiljeva focuses on Tax and Investment law. After several Vadim Zaripov specialises in the sphere of tax law, professional
years of working for an Advocacy Office and being a member of the contacts with state authorities and non-government organisations.
Expert Council of one of the leading auditing Russian companies, He is a tax expert with the Chamber of Commerce and Industry of
she joined Pepeliaev, Goltsblat and Partners. the Russian Federation, Russian Union of Industrialists and
She provides tax advice to Russian and non-Russian clients. Entrepreneurs, Delovaya Rossiya Association and the Chamber of
For non-Russian clients: application of international treaties Tax Consultants. He is also Deputy Chairman of the Presidium of the
concerning avoidance of double taxation; advice on setting up a Russian Association of Tax Law and a member of the International
subsidiary or permanent establishment in Russia or other country of Fiscal Association.
the CIS; advice on federal and regional incentives in Russia, For over 10 years, Vadim has been providing tax advice to leading
Economic zones in Russia and the CIS etc. Russian companies; he has accumulated extensive experience in
For Russian clients: advice on Russian tax and corporate law; solving complex taxation issues, developing tax security systems for
comparative analyses of foreign law systems when the client is going customers and defending major taxpayers in arbitration courts.
to start business in a third country; application of international As an expert, Vadim Zaripov has taken part in summarizing judicial
treaties; advice on cross-border activities; application of the practice pertaining to the issues of tax benefits, reimbursement of
viewpoints of the ECHR and the European Court of Justice in VAT, substantiation of expenses; in developing initiatives for
arbitration and constitutional proceedings. improvement of legislation relating to tax administration, VAT, profit
She has successful and extensive court practice in both taxation and tax and other taxes, simplified procedures for declaring individual
administrative spheres. Tatiana represents clients in the arbitration income; and in elaborating draft laws aimed at enhancing the tax
courts (their tax subdivision), in High Arbitration Court and the treatment of business activities in certain industries.
Constitutional Court of the Russian Federation (retroactive
application of tax laws).
She has close relations with a lot of law companies in the CIS and
Europe and enjoys working in cooperation with them. The
cooperation allows her to provide high quality advice in a sphere of
comparative law.
Combining a western-oriented approach with local know-how Pepeliaev, Goltsblat & Partners is the leading full-service,
largest independent law firm in Russia. Today the company has more than 120 attorneys based in Moscow and St.
Petersburg and a total staff of over 200 people. The accomplishments of our Corporate Practice have played a
significant role in solidifying our reputation as being one of the premier law firms. We take great pride in the value we
bring to the corporate needs of our clients and offer expertise in the following fields:
Mergers & Acquisitions Corporate Restructuring
Corporate Finance Legal Audit / Due Diligence
Corporate Governance Securities
Competition & Antitrust Law / Natural Monopolies Corporate Pension Plans
Legal Entities, Branches, Representative Offices / Joint Ventures Complex Transactions
Corporate Restructuring
Legal Audit / Due Diligence
Securities
Corporate Pension Plans
Complex Transactions
We offer our clients both consulting services on current issues arising in the course of their business and assistance
with complex projects.
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