1 Tax Treaties and Residence
1.1 How many income tax treaties are currently in force in Russia?
There are 80 (eighty) treaties on the avoidance of double taxation in Russia currently in force with various countries, including the UK, the USA, Japan, China, Singapore and others. The latest of them was concluded between the Russian Federation and Malta on the 24th of April 2013.
1.2 Do they generally follow the OECD or another model?
Yes, they follow the OECD.
1.3 Do treaties have to be incorporated into domestic law before they take effect?
In accordance with Russian domestic law, treaties on aspects of taxes which change acting tax legislation are subject to be incorporated through ratification.
1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)?
No, but Russia has started a DTT amendments campaign aimed at including “limitation on benefits” articles.
1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)?
Generally no, but court practice allows for DTT provisions to be overridden when they breach public order or the sovereign interests of the state.
1.6 What is the test in domestic law for determining corporate residence?
A company is deemed to be a tax resident of the respective state if it has been duly and lawfully established under the state’s corporate laws.
2 Transaction Taxes
2.1 Are there any documentary taxes in Russia?
Yes. For example, in accordance with the Tax Code, state duties are deemed as documentary taxes.
2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates?
The tax system in the Russian Federation includes Value Added Tax (VAT) at three rates: 0%, 10%, and 18%. Each rate corresponds to different types of taxable items and/or respective trade procedures.
2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions?
In general, all transactions are VAT taxable (such as the transfer of the right of ownership, execution of works, rendering of services, transfer of goods, and execution of works and rendering of services for self-interest purposes).
At the same time, under arts. 145, 145.1., 149 and 150 of the Tax Code, some transactions are directly excluded from VAT taxation i.e. the sale of specific types of goods (i.e. medical devices and drugs, basic consumer goods), property leases to foreign entities (in accordance with a special list approved by the Ministry of Finance), exclusion from VAT taxation of specific types of taxpayers, etc.
2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions?
VAT in Russia is a recoverable tax, with respective restrictions deriving from the use of special tax regimes by taxpayers.
2.5 Are there any other transaction taxes?
No, there are no other transaction taxes.
2.6 Are there any other indirect taxes of which we should be aware?
Excise duties and customs duties are forms of indirect taxation in Russia.
3 Cross-border Payments
3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident?
Yes, dividend payments from residents to non-residents are taxable at a 15% flat rate. An exemption from this rule derives from DTT and taxpayers could benefit from a 5% to 10% reduction in tax rates.
3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident?
Income from the use of the Russian Federation in the rights of intellectual property (royalties) are included in the list of taxable incomes at the source. The tax rate is 20%. This rate can be adjusted by a DTT between Russia and the country of a non-resident company incorporation, which varies from 0% to 15%.
3.3 Would there be any withholding tax on interest paid by a local company to a non-resident?
The standard tax rate for interest payments is 20%, but this can be reduced by DTT. Reduced rates vary from 0% to 15%.
3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules?
Under recent court practice, interest payments that formally could be excluded from taxation must, in fact, be taxed with the respective reference to “thin capitalisation” rules, but only in cases when the DTT does not directly stipulate so-called unlimited relief.
3.5 If so, is there a “safe harbour” by reference to which tax relief is assured?
When the DTT directly stipulates unlimited relief, the taxpayer could benefit from a zero tax rate on interest payments.
3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company?
No, they would not.
3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non-resident?
No, there are no other restrictions.
3.8 Is there any withholding tax on property rental payments made to non-residents?
If a non-resident pays taxes in Russia, these rental payments can be deducted from the total revenue and reduce the tax on corporate profits.
3.9 Does Russia have transfer pricing rules?
Yes, Russia has introduced new transfer pricing rules since the 1st of January 2012. However there is no clear practice at this time and a potential risk of this is a recalculation of taxes under such “controlled” transactions by the tax authorities in the case that the terms of transactions greatly differ from common market practice.
4 Tax on Business Operations: General
4.1 What is the headline rate of tax on corporate profits?
The headline rate of tax on corporate profits is 20%.
4.2 When is that tax generally payable?
The tax period is the calendar year but taxpayers are obliged to make an advance payment during reporting periods over 3, 6 and 9 months of the year. At the end of the tax period, taxpayers adjust payments by making additional payments or by claiming overpayments back.
4.3 Is the tax base accounting profit subject to adjustments, or something else?
As a general rule, the corporate income tax base is not the same as accounting profit. The Tax Code stipulates special rules for corporate income tax base calculation and also defines revenue and expenses and establishes what cannot be classified as expenses.
4.4 If the tax base is accounting profit subject to adjustments, what are the main adjustments?
Tax and accounting adjustments are not the same, so one must refer to the Tax Code rules regarding appropriate tax adjustments of the tax base. An example of accounting adjustment of the corporate tax base is depreciation, which is calculated under accounting profit rules.
4.5 Are there any tax grouping rules? Do these allow for relief in Russia for losses of overseas subsidiaries?
In Russia, there is a structure of a consolidated group of taxpayers. It is implemented to minimise tax. Also, the primary responsibility for the calculation and payment of corporate income tax, the payment of fines and penalties, as well as reporting to the tax authorities the appropriate tax return per person belongs to the responsible party of the consolidated group of taxpayers. Nevertheless, these rules do not allow relief for losses of foreign subsidiaries.
4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits?
There is no difference in the tax rate, which is generally 20%. However, a subject of the Russian Federation can reduce this tax rate to 16.5%.
4.7 Are companies subject to any other national taxes (excluding those dealt with in "Transaction Taxes") - e.g. tax on the occupation of property?
Other national taxes are of a special character and are not applied by default to companies; among them are excise duties, state duty, subsoil extraction tax, water tax, and duties for the use of natural biological resources.
4.8 Are there any local taxes not dealt with in answers to other questions?
There are other local taxes among which the most important are corporate property tax, transport tax, land tax and gambling tax.
5 Capital Gains
5.1 Is there a special set of rules for taxing capital gains and losses?
Corporate profit tax rules do cover the taxation of capital gains and losses. Mentioned rules apply to the profit-making assets of the investor. The capital gain appears when the assets are sold at a higher price in comparison to the one at which they were acquired. Also, if those assets earn interest, that will also be considered a capital gain.
5.2 If so, is the rate of tax imposed upon capital gains different from the rate imposed upon business profits?
No, general rules apply.
5.3 Is there a participation exemption for capital gains?
There are some exemptions from the general rule, for example the shares and quoted shares in high-technology Russian companies acquired after the 1st of January 2011 and held for more than 5 years are exempted from capital gains.
5.4 Is there any special relief for reinvestment?
No, there is no special relief for reinvestment.
5.5 Does Russia impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares?
No, this is not imposed in Russia.
6 Local Branch or Subsidiary?
6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary?
A subsidiary is a separate legal entity and is personally liable for its own taxation. The mother company is not taxable by special taxes upon the formation of a subsidiary.
6.2 Are there any other significant taxes or fees that would be incurred by a locally formed subsidiary but not by a branch of a non-resident company?
As a separate legal entity, a subsidiary formed under Russian law will be obliged to pay all national and local taxes deriving from its activities in Russia and abroad.
6.3 How would the taxable profits of a local branch be determined in its jurisdiction?
VAT shall be charged in the same way as for Russian companies and corporate profit tax is levied according to the general rule: the tax is based on the total revenue of the branch minus the total expenses of the branch.
6.4 Would such a branch be subject to a branch profits tax (or other tax limited to branches of non-resident companies)?
In Russia there is no special branch profits tax. The branch would be taxed under the general rules based on the branch's activities in Russia.
6.5 Would a branch benefit from double tax relief in its jurisdiction?
No, it would not benefit.
6.6 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch?
The branch shall pay all taxes before remittance of profits to the company abroad.
7 Overseas Profits
7.1 Does Russia tax profits earned in overseas branches?
Under the general rule of art. 311 of the Tax Code, Russia taxes global income but taxes paid by an overseas branch are credited in an amount no larger than tax to be paid in Russia.
7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company?
Yes. The taxation of dividends is based on the application of tax rates of 9% (general rule) and 0% (particular cases).
7.3 Does Russia have “controlled foreign company” rules and, if so, when do these apply?
No, Russia does not have “controlled foreign company” rules.
8 Taxation of Real Estate
8.1 Are non-residents taxed on the disposal of real estate in Russia?
Foreign companies are recognised as real estate tax payers in Russia when they own land and real estate without exemptions.
8.2 Does Russia impose tax on the transfer of an indirect interest in real estate located in Russia and, if so, what constitutes an indirect interest?
All transactions involving real estate where the property is transferred shall be taxed, and the same goes for cases where real estate is “packed” and sold, for example indirectly as an LLC stocks transaction.
8.3 Does Russia have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent?
No, Russia does not have a special tax regime for Real Estate Investment Trusts (REITs).
9.1 Does Russia have a general anti-avoidance or anti-abuse rule?
Yes, transfer pricing and thin capitalisation rules are regarded as general anti-avoidance rules in Russia.
9.2 Is there a requirement to make special disclosure of avoidance schemes?
If a company is subject to transfer pricing control then it is obliged to make appropriate disclosures.