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TAX SYSTEM IN THE RUSSIAN FEDERATION
Description of the Tax System
The legislation of the Russian Federation on taxes and levies consists of the Tax Code of the Russian Federation (hereinafter the Tax Code) and Federal Laws adopted in accordance with it.
The Tax Code consists of two parts. Part I of the Tax Code establishes general taxation principles in the Russian Federation, including:
• types of taxes and levies;
• the grounds on which obligations to pay taxes and levies are based (amended, terminated) and the procedure by which these obligations are to be fulfilled;
• the rights and obligations of parties;
• tax control issues;
• responsibility for tax errors and offences; and
• the procedure for appealing against the actions (or inaction) of the tax authorities and their officers.
Calculation and payment of specific taxes are regulated by the chapters of Part II of the Tax Code. At present, Part II of the Tax Code has established the procedure for calculating and paying the following main taxes and levies:
• Excise tax;
• Personal income tax;
• Unified social tax;
• Profits tax;
• Tax for using animals and underwater life resources;
• Water tax;
• State duty;
• Subsoil resources extraction tax;
• Transport tax;
• Gambling tax;
• Corporate property tax;
• Land tax.
The Tax Code does not regulate the procedure for calculating and paying of personal property tax, which is presently regulated by a separate law.
The Tax Code has also introduced special tax regimes.
The tax authorities of the Russian Federation are the Federal Tax Service and its regional bodies, which form part of the Ministry of Finance.
The tax authorities are granted certain rights, including the right to perform tax audits, to require that taxpayers submit documents that support the calculation and payment of taxes, to suspend bank account transactions, to seize taxpayers' property, etc.
The tax authorities are responsible for losses caused to taxpayers as a result of their illegal actions or inactions or illegal actions or inactions taken by respective officers. The losses caused to taxpayers should be reimbursed from the federal budget.
Registration of Entities with the Tax Authorities
All legal entities must register with the tax authorities at the entity's location, at the location of their independent subdivisions (in particular, branches and representative offices) and also at the location of their immovable property and vehicles that are subject to taxation.
A foreign legal entity must register with the tax authorities if it has property, an independent subdivision, a permanent establishment for tax purposes, or if it opens bank accounts in Russia, as well as in certain other cases.
Representative Offices and Permanent Establishments of Foreign Legal Entities
It is necessary to distinguish between a permanent establishment of a foreign legal entity for tax purposes and a representative office (branch), as an independent subdivision of a foreign legal entity in the Russian Federation. The concept of 'permanent establishment' in tax legislation of the Russian Federation is only used to determine the tax status of a foreign legal entity. This concept has no legal implications. For tax purposes, a 'permanent establishment' is taken to mean a branch, representative office, subdivision, office, agency, any other independent sub-division or other place of business through which the foreign legal entity regularly carries out certain types of entrepreneurial activity in the Russian Federation, with the exception of activity of a preparatory or auxiliary nature.
Foreign entities are obliged to register with the tax authorities if the entity performs or intends to perform activity in the Russian Federation through a subdivision for a period exceeding 30 calendar days in a year, regardless of whether the activity will lead to the creation of a permanent establishment for tax purposes.
Foreign entities should submit profits tax returns to the tax authorities within 28 calendar days of the end of the corresponding reporting period (quarter). By 28 March of the year following the reporting one, foreign entities are required to file with the tax authorities tax returns and annual reports on their activity in the Russian Federation. An independent subdivision of a foreign company in Russia and its head office abroad are a single legal entity. Therefore cash transferred from the head office to a representative office or permanent establishment in order to finance the latter's operations in the Russian Federation is not subject to any taxes in Russia.
TAXES IN THE RUSSIAN FEDERATION AND ST. PETERSBURG
The Tax Code establishes the following taxes and levies:
• federal taxes and levies;
• regional taxes and levies;
• local taxes and levies.
Federal taxes and levies are those established by Russian legislation and due to be paid throughout the Russian Federation.
The following main federal taxes and levies are applied as of 1 April 2009:
• profits tax;
• value-added tax;
• excise tax;
• personal income tax;
• unified social tax;
• subsoil resources extraction tax.
Regional and Local Taxes Levied in St. Petersburg
Regional taxes and levies are those established by the Tax Code and tax laws of the subjects of the Russian Federation and due to be paid in the appropriate regions.
Local taxes and levies are those introduced by the Tax Code and tax-related regulations of municipal authorities and due to be paid in the appropriate municipal areas. Local (or regional) legislation may only introduce types of taxes and levies stipulated by the Tax Code. When doing so, local (regional) authorities establish the following elements of taxation:
• tax concessions;
• tax rates, within the limits established by the Tax Code; and
• procedure and deadlines for paying a tax.
Regional and local taxes and levies in St. Petersburg are established and enforced by the laws of St. Petersburg.
As of 1 April 2009, the following regional and local taxes and levies are applied in St. Petersburg:
• transport tax;
• corporate property tax;
• land tax; and
• gambling tax.
Profits tax is levied on a taxpayer's profit, which is determined as income less incurred expenses.
A taxpayer's income includes income from the sale of goods, work or services, property rights and non-operating income. Economically justified and documented costs are considered to be expenses for tax purposes if they are incurred by a taxpayer in order to perform operations aimed at earning income.
Income and expenses for profits tax calculation purposes are recognised on an accruals basis. Cash basis accounting for profits tax purposes is only available to taxpayers with low turnovers (less than RUB 1 million per quarter).
Profits tax legislation contains a number of rules which differ from the rules stipulated by accounting regulations. The main differences are the following:
• initial cost of fixed asset valuation;
• depreciation procedures (there are two depreciation methods for tax purposes and four depreciation methods for financial accounting purposes);
• certain expenses are deductible within standard limits. Expenses exceeding these limits are non-deductible. Standard limits are applied to certain advertising expenses, entertainment expenses, voluntary medical insurance for staff, interest expenses on loans and borrowings, etc.
Interest on loans and borrowings is deductible within established limits, irrespective of the purpose and the source of the loans and borrowings.
However, for tax purposes, there is a special rale of accounting for deductible interest on debt liabilities which is applicable to:
• liabilities of a Russian legal entity to a foreign company which owns directly or indirectly more than 20% of the Russian legal entity's share capital;
• liabilities of a Russian legal entity to a Russian entity that is recognized to be an affiliate of a foreign legal entity which owns directly or indirectly more than 20% of the Russian borrower's share capital;
• liabilities secured or guaranteed by the foreign legal entity mentioned above or its Russian affiliate,
• the total outstanding debt owed to the foreign company exceeds the equity of the Russian legal entity by more than 3 times (for banks and leasing companies - by more than 12.5 times).
Should this be the case, the maximum deductible interest expense on loans provided by the foreign legal entity must be calculated. Interest exceeding the maximum amount is considered to be dividends and taxed accordingly.
Along with financial accounting, taxpayers must maintain tax accounting for assets and business transactions which, in accordance with tax legislation, are subject to other grouping and accounting procedures. Taxpayers should maintain tax accounting on the basis of analytical registers specifically designed for this purpose.
All taxpayers are subject to the uniform profits tax rate of 20%, 2% of which is due to the federal budget and 18% to the regional budget. Legislative bodies of the regional authorities of the Russian Federation may reduce the regional tax rate to as low as 13.5%.
Current profits tax legislation does not stipulate profits tax concessions except for the loss carry forward concession. The loss carry forward period is 10 years.
Foreign companies whose activity in the Russian Federation creates a permanent establishment for tax purposes are subject to profits tax in accordance with the procedure established for Russian companies, provided that this procedure does not contradict the appropriate double tax treaty. Foreign companies whose activities do not create a permanent establishment for profits tax purposes and which receive income from a source in the Russian Federation are subject to withholding income tax.
Dividend income generated by Russian companies is subject to profits tax at the zero rate subject to the following conditions being fulfilled:
• The company receiving the dividends shall own at least 50% share in the share (pooled) capital (fund) of the entity paying the dividends, or depositary receipts giving the right to receive the dividends, for a continuous period of 365 days (or more) before a decision to pay the dividends is taken;
• The value of the share or depositary receipts exceeds RUB 500 million (USD 14.7 million);
• If the dividends are paid by a foreign company, the zero rate is applied if the country of permanent residence of this company is not included in the list of off-shore zones approved by the Order of the Ministry of Finance of the Russian Federation of 13.11.2007 #108n.
In other cases dividend income received by Russian entities is taxed at the rate of 9%.
The tax period for profits tax purposes is a calendar year. The reporting periods for profits tax are the first quarter, six months and nine months of the calendar year.
VAT is levied on the sale of goods, work or services in the Russian Federation, on construction and assembly work performed for a company's own purposes, on the importation of goods into the Russian Federation, as well as on several other operations.
The earlier of the following two dates is considered as the date of determining the taxable base:
a) the date of delivery (transfer) of goods, work or services and property rights;
b) the date of payment/partial payment for goods, work or services to be delivered or the transfer of property rights.
The VAT standard rate is currently 18% on most goods, work or services.
A lower 10% rate applies to certain items, such as food, goods for children, medications, medical goods and periodicals (with the exception of printed advertising material and printed material of an erotic nature), etc.
A 0% rate applies to exported goods, as well as to work and services directly related to the production and sale of exported goods, provided appropriate supporting documents are submitted to the tax authorities within 180 days (270 days for the goods placed under customs export regime in the period from 1 July 2008 to 31 December 2009) of the date when goods are placed under the customs export regime. Supporting documents include a delivery contract (or a contract on performing work or providing services), a bank statement confirming the actual receipt of the revenue from the sale of goods or services, a customs cargo declaration (its copy) stamped by the customs authorities to confirm export and a copy of waybills, bills of lading and other documents confirming goods' export outside the RE If the necessary supporting documents are not provided within 180 days (270 days for the period from 1 July 2008 to 31 December 2009) export operations (or the performance of work or the provision of services) are subject to the non-export tax rate, i.e. 10% or 18% accordingly.
VAT exemption shall apply to imported technological equipment, components and spare parts to this equipment, contributed to the charter (share) capital (this provision shall be effective after the list of technological equipment (including components and spare parts) the analogs of which are not produced in the RF is approved by the Government of the Russian Federation), medical equipment sold in accordance with the list approved by the Government of the Russian Federation, basic medical services, financial services rendered with regard to providing monetary loans, as well as certain other transactions.
VAT payable to the budget is determined as the amounts of output VAT accrued on dispatched goods (work, services) less input VAT charged by suppliers of goods (work, services), or paid to the customs authorities. Input VAT is deducted based on invoices completed in accordance with the established procedure and obtained from the seller when purchasing goods, work or services for use in connection with activity which is subject to VAT, as well as primary documents confirming the import of goods into the customs territory of the Russian Federation and the payment of the respective VAT amounts to the customs authorities.
Foreign legal entities are also VAT-payers in relation to turnover connected with the sale of goods, work and services in the Russian Federation. If a foreign legal entity is not registered with the Russian tax authorities and sells goods, work or services in the Russian Federation, it is the responsibility of the buyer, whether a Russian legal entity or foreign legal entity registered with the Russian tax authorities, to remit VAT as a tax agent to the budget of the Russian Federation on its behalf. To this end, when making payments to a foreign legal entity for VATable transactions, a Russian legal entity must withhold VAT from the amount payable and transfer it to the budget.
The tax period with regard to VAT is a quarter. Starting from third quarter of 2008, the tax due to the budget for the reporting period can be paid in three equal installments no later than 20th day of each three months following reporting period.
Excisable goods include ethyl alcohol, spirit-containing goods with the volume fraction of alcohol exceeding 9% (except medications, perfumes and cosmetics), alcohol products, beer, tobacco goods, petrol, crude gasoline, diesel fuel, motor oil, vehicles and motorcycles with an operating engine capacity of more than 150 horse power.
In particular, excise tax is levied on the following transactions:
• sale of the excisable own production on the territory of the Russian Federation;
• transfer of excisable goods for processing on a tolling basis;
• transfer by parties of excisable goods produced by them on a tolling basis to the owner of the tolling materials or to other parties in the Russian Federation;
• import of excisable goods into the Russian Federation.
Exported excisable goods are exempt from tax. In order to obtain an exemption, the taxpayer is obliged to submit documents confirming the actual export of excisable goods to the tax authorities. The list of documents is similar to the one for VAT purposes. The taxpayer is exempted from excise tax when exporting excisable goods provided a letter of guarantee/bank guarantee obtained from an authorised bank is available, stating that the bank undertakes to pay excise tax and interest payable should the taxpayer fail to submit documents confirming actual export within a 180-day period. If no such letter is available, the excise tax must be paid by the taxpayer when exporting excisable goods and can be offset or refunded by the tax authorities only after the taxpayer submits documents confirming the actual export.
Excise rates may be levied as a percentage or ad valorem. For instance, the excise tax rate for 2008 levied on petrol ranges from RUB 2,657 to RUB 3,629 per ton, on diesel fuel - from RUB 1,080 per ton, on beer - from RUB 0 to RUB 9.80 per litre.
Cigarettes are subject to a combined rate, i.e. in roubles, depending on the number of cigarettes sold, and as a percentage of the cost calculated on the basis of the maximum selling price determined by the taxpayer. The total amount of excise tax is determined as the total of these two components. For example, the excise rate for filtered cigarettes is set at RUB 150 per 1,000 cigarettes plus 6% of the value calculated on the basis of the maximum selling price, but no less than RUB 260 per 1,000 cigarettes, and for non-filtered cigarettes at RUB 72 per 1,000 cigarettes plus 6% of the value calculated on the basis of the maximum selling price, but no less than RUB 93 per 1,000 cigarettes.
The tax period for excise tax purposes is a calendar month.
Personal Income Tax
Personal income tax is levied on the income of individuals who are tax residents in the Russian Federation, i.e. who reside in the Russian Federation for at least 183 days within twelve successive months, as well as non-residents receiving income from sources in the Russian Federation. Personal income tax is levied on the aggregate annual income earned in a calendar year:
• for tax residents in the Russian Federation - from sources both in the Russian Federation and abroad; and
• for individuals without permanent residence for tax purposes in the Russian Federation - only from sources in the Russian Federation (in particular, such income includes remuneration for performing work in the Russian Federation even if the payments are made from abroad).
A flat tax rate of 13% is applied to all income except certain types covered by other tax rates, including:
• 9% - on dividend income from shares received by individuals who are tax residents in the Russian Federation;
• 30% - on income of non-residents excluding income in the form of dividends derived from interest in Russian entities, subject 15% tax rate;
• 35% - on certain types of income (e.g., the value of any winnings and prizes in excess of RUB 4 thousand received in competitions and at advertising events, material benefits in the form of interest savings).
In general, tax is calculated, withheld and paid by tax agents which are Russian companies, separate subdivisions of foreign companies and individual entrepreneurs, who pay income to individuals. Should it not be possible for tax to be withheld by a tax agent or if certain types of income are received (from sources located outside the Russian Federation, from the sale of property, etc.), the taxpayer is obliged to calculate and pay tax. The taxpayer is obliged to independently submit income tax returns to the Russian tax authorities. The deadline for submitting tax returns is no later than 30 April of the year following the reporting one.
In order to obtain a tax exemption, offset tax from the budget, or to receive tax deductions and other tax privileges established in a double tax treaty, the taxpayer must submit to the Russian tax authorities an official confirmation that he is a resident of a country with which the Russian Federation has concluded a double tax treaty and a document on the receipt of income and payment of tax outside the Russian Federation, confirmed by the tax authorities in the foreign country.
The Tax Code also provides for standard, social, property and professional tax deductions, some of which can be significant for certain taxpayers.
The tax period for personal income tax purposes is calendar year.
Unified Social Tax
Unified social tax is levied on person making payments to individuals.
Unified social tax is levied on payments and other remuneration accrued to individuals under labour and civil law contracts (the scope of which is performing work or rendering services), as well as copyright agreements. Exempt from taxation are business trip expenses, temporary disability allowances, child care allowances, professional development expenses and certain other expenses.
The maximum rate of unified social tax totals 26%, including:
• Federal Budget - 20%;
• Social Insurance Fund - 2.9%;
• Compulsory Medical Insurance Fund - 3.1%.
Unified social tax is calculated and paid using a regressive scale. Regressive rates lower than 26% apply to staff salaries in excess of RUB 280 thousand (as of 1 April 2009 - USD 8 thousand) (as a cumulative total from the beginning of the year).
IT companies, may apply a regressive scale to staff salaries in excess of RUB 75 thousand (as of 1 April 2009 - USD 2 thousand). This regulation is applicable if a company is state-accredited, has an average headcount of at least 50 employees and IT-related income constituting no less than 90% of overall profit (70% of which is the income received from foreign entities).
For the companies which have a resident status in a special economic zone for technical innovation and make payments to individuals working in the zone, the UST rate is reduced. The maximum UST rate is 14% instead of 26%.
Tax contributions should be calculated as an appropriate portion of the tax base and paid by taxpayers separately to the federal budget and each fund.
Pension Fund contributions are deductible from the amount of tax due to the federal budget for the same period. Insurance charges to the Pension Fund are levied on the same basis as unified social tax. The maximum tax rate is 14%.
The tax period for UST purposes is a calendar year. The reporting periods for UST are the first quarter, six months and nine months of the calendar year.
Subsoil Resources Extraction Tax
Subsoil resources extraction tax should be paid by companies and individual entrepreneurs which are considered to be users of subsoil resources. Tax rates are established for each type of subsoil resource, as a percentage of the cost of the subsoil resources extracted, and range from 3.8% to 17.5%. Oil is subject to a base tariff of RUB 419 per 1 tonne. Natural gas fuel is subject to a special rate of RUB 147 per 1,000 cubic metres. Furthermore, certain types of subsoil resources including those used for social or strategic purposes are subject to an incentive rate of 0%.
The tax period for subsoil resources extraction tax purposes is a calendar month.
Transport tax should be paid by persons who have registered transport vehicles subject to taxation.
Transport tax is levied on ground, sea and air vehicles. The tax base is the engine capacity, passport static traction, gross tonnage or a single transport vehicle.
Tax rates established by the Tax Code (RUB 2 to RUB 50 per unit of horse power) can be increased or decreased in accordance with the decision of the regional authorities, by up to 5 times. In 2009, in St. Petersburg, these tax rates range from RUB 10 (motorcycles) to RUB 250 (jet skis) per horse power.
The tax period for transport tax purposes is currently a calendar year. The reporting periods for corporate taxpayers with regard to transport tax are the first, second and third quarters.
Companies should perform their tax calculations independently, whereas the amount of tax due to be paid by individuals is calculated by the tax authorities who notify the individuals thereof via tax notifications. The tax authorities calculate the amount of tax on the basis of the information presented to the tax authorities by agencies performing state registration of vehicles in the Russian Federation.
Corporate taxpayers should make advance payments. In St. Petersburg, advance payments are to be made no later than the last day of the month following the completed reporting period.
Tax returns are to be submitted by taxpayers no later than 1 February of the year following the completed tax period.
In St. Petersburg corporate taxpayers are to pay tax accrued on the basis of the results of the relevant tax period by 1 February of the year following the completed tax period. Individual taxpayers are to pay tax by 1 June of the year following the completed tax period on the basis of the relevant tax payment notification.
Corporate Property Tax
Corporate property tax is levied on taxpayers' movable and immovable property (including property transferred for temporary ownership, use, fiduciary management as well as contributed to joint venture or received under concession agreement) recorded in the balance sheet as fixed assets. Land plots are not subject to taxation. The taxable base is the average annual cost of taxable property. For taxable base calculation purposes, the property is taken at its net book value recorded by the taxpayer in the financial statements.
The tax period for corporate property tax purposes is a calendar year. Reporting periods are the first three months, six months and nine months of a calendar year.
The tax rate in St. Petersburg is 2.2% of the average annual value of property. Payments are made on a quarterly basis. Tax returns are submitted at the end of the tax period and advance payment calculations are submitted at the end of the reporting periods.
The Tax Code stipulates a number of corporate property tax concessions. In particular, companies are exempt from property tax with regard to assets classified as public railways, federal highways for public use, trunk pipelines and power lines, as well as assets constituting an integral technical component of the above. The list of such assets is issued by the Government of the Russian Federation.
Property tax paid by the Russian legal entity with regard to its property located outside the Russian Federation can be offset when paying tax in the Russian Federation. For such offsetting the taxpayer should submit an application for the tax to be offset and a document confirming that property tax has been paid abroad to foreign tax authorities.
Furthermore, St. Petersburg provides property tax concessions.
The tax base for land tax is the cadastral value of land plots which are subject to land tax.
The tax period for tax purposes is a calendar year. The reporting periods are the first, second and third quarters of the calendar year.
• Rates of land tax are established in the range from 0.004% to 1.5% of the cadastral cost of a plot of land;
• Land tax is payable at the place of location of the taxable plots of land;
• Organisations and individual entrepreneurs calculate the amounts of tax and tax advance payments independently. The reporting periods for these taxpayers are the first, second, and third quarter of a calendar year. Advance payments are to be remitted no later than the last day of the month following the reporting period. The final tax due is to be paid no later than 1 February of the year following the reporting period;
• Individuals who are not entrepreneurs pay land tax on the basis of a tax notification by 1 April of the year following the expired tax period;
• Some categories of persons are exempt from land tax by virtue of the Law.
Furthermore, St. Petersburg provides land tax concessions introduced before 01 January 2006, which are valid over the period for which they were granted, as well as concessions granted to the residents of special economic zones.
Special Tax Regimes
The Tax Code has established the following special tax regimes:
• unified agricultural tax;
• unified imputed income tax for certain types of activity;
• simplified taxation system;
• taxation system applied under production sharing agreements.
Unified agricultural tax
This tax treatment is established for producers of agricultural products allowing paying unified agricultural tax only. Consequently, payers of agricultural tax are exempted from profits tax (except for profits tax levied on income from dividends and income from certain debt obligations), property tax and VAT (except for VAT payable on the importation of goods into the Russian Federation) and UST, but not pension insurance contributions.
Unified agricultural tax is levied on income less the amount of deductible expenses. The structure and amount of income are determined in accordance with chapter 25 'Company profits tax' of the Tax Code. The structure of deductible expenses is determined by the list which is only valid for unified agricultural tax purposes. Such expenses must be economically justified and supported by appropriate documents.
However, the payers of unified agricultural tax are not released from performing the duties of tax agents.
The tax period is a calendar year the reporting period is half a year. Tax return should be submitted to the tax authorities only at the end of tax period (not later than 31 of March of the year following the previous tax period).
The tax rate is set at 6%.
Unified imputed income tax for certain types of activity
Unified imputed income tax is calculated and paid by the companies and individuals, who carry out business activities subject to this tax on the territories where the tax is introduced such as municipal areas, urban districts, Moscow and St. Petersburg. Starting from 1 January 2009, certain companies and individuals which carry out business activities with an average number of staff may not exceed 100 people, certain companies owned by other companies by more than 25% and some other institutions / organizations / individual entrepreneurs shall not apply unified imputed tax treatment.
In St. Petersburg, the unified imputed income tax has been introduced in particular in relation to the following business activities:
• consumer services;
• veterinary services;
• services with regard to repairing, servicing and washing motor vehicles;
• retailing in stationary trading units without a shopping floor, as well as in non-stationary trading units;
• passenger and cargo transportation services rendered by entities and individual entrepreneurs using no more than 20 vehicles;
• services with regard to provision of car parking places for temporary ownership (use) as well as storing motor vehicles at chargeable parking facilities (excluding penalty parking);
• public catering services rendered through public catering facilities without a special room for client service;
• distribution of outdoor advertising through advertising constructions;
• retail through shops and showrooms with trading area no more than 150 sq.m.
Legal entities - payers of unified imputed income tax are exempt from the following taxes with regard to the operations subject to this tax:
• profits tax;
• VAT (with the exception of VAT on goods imported into the customs territory of the Russian Federation);
• corporate property tax; and
• unified social tax (except that unified imputed income tax does not replace contributions to the Pension Fund of the Russian Federation).
However, payers of unified imputed income tax are not released from performing the duties of tax agents.
Taxpayers must maintain separate accounting of assets, liabilities and operations with regard to activities subject to and exempt from unified imputed income tax.
Tax is levied on a taxpayer's imputed income. Imputed income is determined as the base return rate for the taxable period established by the Tax Code multiplied by physical indicators specific for the activity (area, number of vehicles and number of staff) and adjusting factors.
The tax rate is established at 15% of the amount of imputed income. The amount of quarterly tax is reduced by the amount of insurance contributions paid to the Pension Fund for the same period as well as by the amount of temporary disability allowances paid (up to a maximum of 50% of the imputed tax).
The tax period for this tax is a quarter. Unified imputed income tax must be paid on the results of the tax period and is due by the 25th of the month immediately following the tax period.
Simplified taxation system
Companies and individuals can be permitted to transfer to the simplified taxation system. To do so, they must meet simultaneously the following main criteria:
• if the company submits an application to transfer to the simplified taxation system in 2010, its sales revenue for the first nine months of 2009 may not exceed RUB 23.070 thousand;
• the residual cost of depreciable own assets (fixed and intangible assets) may not exceed RUB 100 million;
• the average number of staff for the tax (reporting) period may not exceed 100 people; and
• other companies' shares in the taxpayer's share capital may not exceed 25% (excluding legal entities with share capital completely formed by contributions from non-governmental organizations for disabled).
Simplified taxation may not be enjoyed by companies which have branches and representative offices, nor by banks and insurance companies.
Companies which have transferred to the simplified taxation system shall pay unified income tax and be exempt from:
• profits tax (profits tax is levied on income from dividends and income from certain debt instruments);
• VAT (with the exception of VAT on goods imported into the customs territory of the Russian Federation);
• corporate property tax; and
• unified social tax.
However, taxpayers using the simplified taxation system are not released from performing the duties of tax agents, and from paying insurance contributions to the Pension Fund.
Taxes are levied on one of the following at the taxpayer's choice:
• income less the amount of deductible expenses.
The taxpayer may annually change the object of taxation (in order to change the object of taxation the tax authorities shall be informed before 20 December of the year precedent to the year when the taxpayer plans to change the object of taxation). The taxpayer may not change the object of taxation within a tax period.
Income and expenses (except for acquisition of fixed assets and acquisition (creation) of intangible assets) are recognised on a cash basis, i.e. as soon as they are paid.
Tax rates are set as follows:
• 6% - for taxpayers who have chosen to tax their income. The amount of tax for the tax (reporting) period is reduced by the amount of insurance contributions paid to the Pension Fund for the same period, as well as by the amount of temporary disability allowances paid (which may not. however, exceed 50% of the taxpayer's tax);
• 15% - for taxpayers who have chosen to tax their income less the amount of deductible expenses. The legislation of the subjects of the Russian Federation may stipulate graduated rates from 5 to 15% depending on the category of taxpayers. The minimum amount of tax to be paid by such taxpayers may not be less than 1% of their income.
The tax period for simplified taxation system purposes is a calendar year. The reporting periods for simplified taxation system are the first quarter, six months and nine months of a calendar year.
Taxpayers-companies should make advance tax payments by the 25th of the month following the reporting quarter, whereas year end taxes should be paid by 31 March of the following year. Tax and advance payments are paid at the entity's location. Legal entities submit annual tax returns only at the end of a tax period not later than 31 of March of the year following the previous tax period.
Income generated by a foreign company as a result of its activity in the Russian Federation which does not create a permanent establishment is subject to withholding tax if it is referred to in the Tax Code. Such income includes:
• income from using intellectual property rights in the Russian Federation;
• income from selling real estate located in the Russian Federation;
• income from leasing assets used in the Russian Federation;
• income from international transportation services, etc.
Income not included in the list which is paid to a foreign organisation having no permanent establishment for tax purposes in the Russian Federation (e.g., non-recurrent consultancy services) is exempt from withholding tax.
Withholding tax should be collected and remitted to the budget by a Russian company which is the source of this income.
The withholding tax rate depends on the nature of the income earned:
• 10% - on freight income;
• 15% - on dividends received by a foreign company from Russian entities;
• 20% - on other types of income.
Withholding tax may not have to be paid or may be reduced in accordance with the terms of international double tax treaties concluded between the Russian Federation and other countries. To this end, the foreign company must have confirmation that it is a permanent resident of a country with which the Russian Federation has a double tax treaty (certificate of residency). The confirmation should be certified by the relevant authorities of the corresponding foreign government. Should such confirmation be prepared in Russian, the tax agent shall be provided with a translation into Russian.
The tax authorities have the right to control the accuracy of transaction prices for tax purposes in the following instances:
• transactions between related parties;
• barter transactions;
• cross-border transactions;
• when prices fluctuate by more than 20% over a short period of time, as compared to prices charged for similar goods, work or services.
Individuals and (or) entities are considered to be related parties for tax purposes if the relationship between them can directly affect the conditions or economic results of their activities or the activities of entities or persons they represent. In particular, the parties are considered related if the aggregate direct and/or indirect shareholding of one organisation in the other exceeds 20%.
If the tax authorities believe that prices applied by related parties deviate from market prices by more than 20%, the tax authorities may assess additional taxes and interest on the basis of market prices.
The Ministry of Finance of the Russian Federation has drafted amendments in terms of the definition of related parties, the list of controlled transactions and the requirement to declare them. Moreover, the draft stipulates that taxpayers involved in controlled transactions can conclude preliminary pricing agreements with the tax authorities. There is also an alternative draft law prepared by the Ministry of Economic Development and Trade of the Russian Federation. As of 1 April 2009 there is no single draft law with regard to changes in transfer pricing regulations.