Letter #1 on intra-group services

In Letter No.ШЮ-4-13 / 12599 dated 6 August 2020 (Letter #1), the FTS listed the criteria assessing the legality of including expenses for intra-group services. The letter contains a practical approach to checking expenses for intra-group services that should be deductible for income tax purposes.

The letter highlights the main “tests” that are already applied by the Russian tax authorities in the framework of tax audits, specifically:

• Reality test: meaning that services were actually rendered as provided for by the Service Agreement (SA) and reflected in other documents that prove the relationship between the parties. In this case, the taxpayer should justify the need to involve a foreign company in the service.
• Utility test: the actions actually performed (services rendered) were useful to the recipient of the services; namely, an independent person would agree to pay for them.
• Test for duplication of services: it is necessary to demonstrate that there is no duplication of costs for identical services. At the same time, to assess this, the Russian tax authority can conduct a functional analysis, analysing the experience and competencies that a Russian taxpayer receives, and not limited to establishing the fact that the names of departments coincide or there are employees in positions with similar names.
• Test for documentary confirmation: the FTS, as an example, provides a list of documents and information to confirm expenses that are currently already requested from taxpayers as part of inspections and for pre-audit analyses (business correspondence and emails, telephone call details, minutes of meetings, timesheets, reports, etc.).
• Test of market price level: the letter emphasises the need to check the transparency and documentary support of the pricing mechanism. The FTS emphasises that checks of market prices are not the subject of on-site and chamber tax audits. At the same time, the price factor, the mechanism and the principle of its formation are an integral characteristic of the service itself. Therefore, attention should be paid to checking the availability of a transparent methodology for forming the cost of services. The price for intra-group services can be defined as “cost plus margin”, whilst using such a pricing model should not be considered a cost allocation for the group.

Letter #2 on intra-group services

In the second Letter No. ШЮ-4-13/1749@ dated 12 February 2021 (Letter #2), the FTS provided additional clarifications in respect of deducting expenses for shareholding activity incurred by Russian companies that purchase intra-group services.

The letter contains a list of practical examples of the functions of a shareholder within the strategic management of the group, as well as the planning and control of the group’s business, which are considered shareholder activities and cannot be recognised as the provision of services.

Letter #2 concludes that the expenses of Russian shareholders for shareholder activities (with the exception of the expenses listed directly in Article 270 of the Russian Tax Code) cannot be considered economically unjustified, meaning that they are tax deductible in general, provided they are properly documented.

Taxpayers have received guidelines regarding what kind of activity can be regarded as shareholder activity. It is important to note that, in the event the tax authority challenges the deductibility of said expenses on shareholder activity, said payments can be reclassified into income from a Russian source and be taxable at source under Article 310 of the Russian Tax Code (“The specifics of the calculation and payment of tax on income received by a foreign company from a Russian source, withheld by the tax agent”).

If you would like to know more about the legal conditions of including expenses for intra-group services by multinational companies to subsidiaries in Russia, please contact the experts of ALTHAUS Group, the exclusive representative of WTS Global in Russia.

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General tax registration rules

According to the Russian tax legislation a foreign legal entity that conducts business activities in Russia through a separate division (representative office, branch, construction sites and other places of business) for a period exceeding 30 days in a calendar year is required to register with the Russian Tax Authorities. If a foreign legal entity operates in more than one location, it should register separately in each of the locations that it is present in (real estate or construction site must also be registered separately).

We notice that there is also an exception from general rules. Starting from 1 January 2019 а foreign legal entity that provides services in electronic form specified in paragraph 1 of Article 174.2 of the Russian Tax Code, is subject to registration in the Russian Tax Authorities (so called “VAT registration”), if the place of sale is Russia. According to the paragraph 14 of the article 306 of the Russian Tax Code, such activity does not lead to a permanent establishment status, thus, it does not create a foreign company’s PE in Russia.

In general, foreign legal entities may be liable for taxation in the Russian Tax Authorities in the following cases:

• If they are recognized as Russian tax residents based on certain criteria;
• If their business activities create a foreign company’s PE in Russia;
• If they receive income from a source in Russia (not connected with the activities of a foreign company’s PE in Russia) that is subject to withholding tax.

The registration obligation of foreign legal entities does not depend whether the activity of the foreign legal entity is taxable or not in Russia. Thus, you need to keep in mind that if a foreign legal entity conducts business activities in Russia through a „separate division”, for a period exceeding 30 days in a calendar year, is required to register in the Russian Tax Authorities. Each case whether the activity of a foreign legal entity leads to a permanent establishment status or not should be analysed separately.

New requirements for a foreign company’s PE in Russia

According to the latest amendments to the article 23 of the Russian Tax Code (Federal Law of 20.04.2021 N 100-FZ), starting from May 2021, all foreign companies, registered in Russia (except those foreign legal entities that are registered in Russia due to rendering electronic services) are obliged to report to the Russian Tax Authorities information about the participants of this foreign company (information about its founders, beneficiaries and managers).

It is necessary to disclose information about the indirect participation (if any) of an individual or a public company if the share of their direct or indirect participation exceeds 5%. The deadline for submitting information is 28 March of each financial year. Therefore, the transitional period stipulates that for the first time, foreign companies should submit information about their participants (founders, beneficiaries and managers) not later than 28 March 2022 (as of 31 December 2021).

We also notice that before entry into force of the new reduction of the art. 23 of the Russian Tax Code, only foreign legal entities owning the real estate objects, were required to report to the Russian Tax Authorities at the location of the real estate object information about their participants founders beneficiaries and managers).

The Russian Tax Code provides for the penalty in the amount of RUB 50,000  (roughly EUR 580) in case a foreign legal entity fails to report the information about its beneficiaries, founders and managers to the Russian Tax Authorities (p. 2.1 of the art. 129.1 of the Russian Tax Code). Thus, in order to be in line with the new Russian Tax Code’s requirements we recommend to take into account these new rules and report all the information to the Russian Tax Authorities according to the deadline.

If you would like to know more about the new requirements for a foreign company’s PE in Russia or receive further information about carrying out business activities in Russia, please contact the experts of ALTHAUS Group, the exclusive representative of WTS Global in Russia.

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“Look-through” approach

The planned amendments to the Russian Tax Code include a number of significant restrictions on applying the “look-through” approach:

• Dividends received by a company (Russian tax resident) under the “look-through” approach cannot be taxed at the 0% rate – the standard 13% income tax rate will be applied.

• The provision that an indirect participation of one company in another equates to a direct participation for the purpose of applying the “look-through” approach has been deleted. Given that the draft law cancels the possibility of applying a zero rate on dividends for Russian companies, it would seem logical to exclude this provision. However, we should not forget that the “look-through” approach was used not only by Russian but also by foreign holding companies, albeit in very limited cases. The exclusion of the provision on equating indirect participation with direct participation actually introduces additional restrictions on the application of the “look-through” approach by foreign holding companies.

It should be noted that the above rules only apply to the taxation of dividends, and the procedure for applying the “look-through” approach to other types of income (interest, royalties, etc.) remains unchanged.

Application of dividend exemption by foreign companies that are tax residents of the Russian Federation

The amendments to the Russian Tax Code would exclude the rule that – provided some conditions are met (including holding an investment for more than a year and at least 50%) – foreign companies that are tax residents of the Russian Federation can apply the 0% rate to dividends received if they have voluntarily recognised tax residency in the Russian Federation.

Although we can conclude from reading some of the remaining rules that this is technically possible, together with the above-mentioned cancellation of the “look-through” approach, it can be assumed that the intention is to prevent a situation where a Russian company transfers dividends to a foreign company without paying income tax, even if such a foreign company is a tax resident of the Russian Federation. Thus the above change creates serious uncertainty in the taxation of dividend income received by foreign companies that are tax residents of the Russian Federation.

It is important to monitor the further development of the draft law and the appearance of additional explanations.

Elimination of double taxation for individuals in respect of dividends from foreign public companies

According to the planned amendments to the Russian Tax Code an individual who is a tax resident of the Russian Federation can voluntarily recognise their dividend income from a Russian company that is paid through a foreign organisation, as well as reflect them in the personal income tax declaration (subject to a number of conditions).

At the same time, an individual who has reflected such dividends in their income will be able to reduce the amount of personal income tax on these incomes by the amount of tax withheld by a Russian company when transferring dividends to a foreign organisation.

Clarification of the five-year exemption for the sale of shares of Russian organisations

The amendments to the Russian Tax Code would also exclude the condition that the 0% rate could be applied for the sale / disposal of listed shares of Russian organisations if the share of real estate in the territory of the Russian Federation as part of the assets of such companies was less than 50%.

Current status of draft law on amendments to the Russian Tax Code

After the end of the current stage (public discussion), the draft law will be considered by the Government of the Russian Federation. We hope that when formulating the final text of the draft law, the ambiguities and contradictions contained in the current version will be eliminated.

If you would like to know more about the planned amendments to the Russian Tax Code or receive further information about the future status of the draft law, please contact the experts of ALTHAUS Group, the exclusive representative of WTS Global in Russia.

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A complicated area of Russian tax law

The Russian beneficial ownership concept has already become one of the major mechanisms applied by the Russian tax authorities to counteract tax avoidance schemes, limit capital outflow and raise fiscal revenues in Russia. Following the well-established OECD approach, the Russian beneficial ownership concept mainly focuses on limiting access to treaty benefits for conduit companies, which only perform intermediary functions in a cash flow structure and do not conduct any operational activity. However, it should be noted that the Russian beneficial ownership concept is a rather complicated area of Russian tax law that has its own particular features developed in numerous court cases (most of them negative for taxpayers) over the past three years, and which has been clarified in several significant letters issued by the Russian Federal Tax Office and the Ministry of Finance.

Look-through approach

If the actual recipient of the passive, Russian-sourced income is not the beneficial owner, the Russian Tax Code prescribes the application of the “look-through approach”. This approach allows another person (company) to be designated as the beneficial owner in a cash flow structure to claim the treaty benefits according to the double taxation treaty (DTT) of the state of its tax residence.

In this case, a company distributing Russian-sourced income and acting as a tax agent has the following options when applying the “look-through approach”:

• If a beneficial owner is a tax resident of a state which is party to a DTT with Russia, the foreign recipient (indirect shareholder) can apply the treaty benefits if it is able to provide documentary confirmation of its beneficial ownership status;
• If a beneficial owner is a Russian tax resident, then a Russian tax agent could apply tax benefits under Russian legislation as if it were an internal distribution of income between Russian entities.

Recent amendments to the Russian beneficial ownership concept

At the end of 2018, Federal Law No 424-FZ introduced several amendments to the Russian beneficial ownership concept. The law is now in force, but some of the provisions are applied retroactively and cover tax periods starting from 2018.

The key amendments of the Law are aimed at simplifying the procedure for confirming beneficial owner status for certain categories of foreign recipients of Russian-sourced income, e.g. individuals, public companies listed on Russian or OECD countries’ stock exchanges, sovereign funds, direct subsidiaries of Russian and foreign states. To apply the simplified procedure, the listed recipients should provide a self-declaration of their beneficial ownership status along with a confirmation latter and documents confirming that they meet the aforementioned criteria.

Some technical amendments were introduced to the Russian Tax Code regarding the application of the “look-through approach”. Currently, applying the “look-through approach” is not only limited to dividends, it could also be applied for any passive income distributed from Russian sources, including, but not limited to, interest, royalty, rent income, etc.

In addition, another relevant amendment concerns the situation where several payments or dividend distributions are executed under a single arrangement. So it should be sufficient for the foreign recipient to provide one single confirmation for such groups of payments.

Some important issues still need clarification

Generally, the aforementioned amendments are mainly focused on clarifying and mitigating technical uncertainties in the Russian Tax Code, and simplifying several administrative and tax compliance procedures for particular cases, rather than introducing new planning tools or opportunities favourable for business.

Unfortunately, the new amendments do not clarify some more important issues relevant for business, e.g. there is still no clarification on the treatment of direct investments made by direct shareholders as investments made by the beneficial owner (indirect shareholder) under the “look-through approach”. Taking into account that a number of tax treaties with Russia contain investment provisions, this makes applying the “look-through approach” impractical as the beneficial owner will not be able to claim a reduced withholding tax rate (WHT) in Russia.

Therefore, due to the ongoing development of the beneficial ownership concept and the general worldwide trend of tax transparency expansion, foreign investments in Russia should be carefully structured taking into account uncertain issues related to applying the beneficial ownership concept and negative court practices, which affect not only companies receiving income from Russia and owing assets located in Russia, but also projects associated with foreign direct investment in Russia.

The corporate tax team of ALTHAUS Group, the exclusive representative of WTS Global in Russia, monitors the current beneficial ownership practice and provides clients with highly qualified and comprehensive tax advisory services on the application of the Russian beneficial ownership concept. The corporate tax team of ALTHAUS Group will gladly assist clients (international groups and holdings with Russian entities) with analyses of the beneficial ownership status of foreign recipients of Russian-sourced income, as well as tax consulting services to identify tax risks and provide relevant recommendations.

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The PJSC Togliattiazot case: a sign of developing transfer pricing court practices

The subject of the dispute in this case was the supply of chemicals from PJSC Togliattiazot, one of the largest producers of chemicals in Russia to the Swiss trading company Nitrochem Distribution AG in 2012 for a value of more than RUB 1 billion (roughly EUR 13 million).

The dispute focused on two issues:

• Recognition of the transaction as controlled due to the level of interdependency between parties in the transaction

• Application of a specific transfer pricing method for determining market prices in the transaction

Recognition of the transaction as controlled due to the level of interdependency between parties in the transaction

Pursuant to the Russian Tax Code, cross-border transactions are recognized as controlled if the counterparties in the transaction are interdependent (if there is a direct or indirect capital participation between them of at least 25%).

Despite, according to official data, the level of participation between PJSC Togliattiazot and Nitrochem Distribution AG being less than 25%, the Russian tax authorities have managed to establish interdependency of the parties in the transaction through “a complex scheme of nominal ownership, trust management and custody of shares”.

The court initially supported the tax authorities and established interdependency of the two companies on the basis of paragraph 7 of Art. 105.1 of the Russian Tax Code (“on other grounds”).

Application of a specific transfer pricing method for determining market prices in the transaction

In order to confirm the market level of prices in the transaction, PJSC Togliattiazot submitted transfer pricing documentation on the analyzed export transactions to the Russian tax authorities. The transfer pricing documentation was prepared using the transactional net margin method (TNMM).

The approach of PJSC Togliattiazot to calculating the market range was challenged by the Russian tax authorities for the following reasons:

• As far as it is possible to use the comparable uncontrolled price (CUP) method in this case, the use of other methods (including TMNN) are not correct from a Russian tax legislation perspective.
• The results of the benchmark analysis (list of comparable companies) do not meet the criteria for comparable companies stated in the Russian Tax Code.

The court supported the tax authorities’ approach regarding the need to apply the CUP method to this transaction, and agreed with the tax authorities on the results of the analysis carried out under the TNMM method.

Why is it important?

The PJSC Togliattiazot case and the court’s decision shows a significant development of the transfer pricing court practices in Russia. The Russian Tax authorities may recognize the interdependency of companies “on other grounds”, even if the counterparties do not meet the criteria for interdependency specified in the Russian Tax Code. It shows that the Russian tax authorities continue to insist on the use of the CUP method to determine the market range of prices in controlled transactions (if applicable) and that they pay special attention to the quality of information and calculations provided by taxpayers in transfer pricing documentation.

If you would like to know more about the transfer pricing court practices or other taxation issues in Russia, please visit the homepage of Althaus Group, the exclusive representative of WTS Global in Russia.

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Registration requirements

A foreign company can register in a SAR and enjoy the proposed tax benefits if it complies with the following criteria:

• The foreign company’s incorporation date is before 1 January 2018;
• The controlling persons of such company assumed their positions before 1 January 2017;
• The incorporation jurisdiction is a country that is a member of the Financial Action Task Force on Money Laundering (FATF) or the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL);
• Real business activity is transacted in several countries including Russia through a branch or subsidiary company;
• The company should be ready to invest at least RUB 50 million (roughly EUR 650,000) in the Russian economy within six months of registration in Russia.

Registration procedure for future SAR residents

To be registered in a SAR, a foreign company should submit their application to the management company of the corresponding SAR, documents confirming the company’s compliance with the requirements established by law, as well as other documents required by law.

The management company of the Russky SAR is the Far East Development Corporation. Currently there is no management company for the SAR in the Kaliningrad region, but its main functions are handled by the Ministry of Economic Development of the Russian Federation.

The following documents should be submitted to the tax authorities at the place of registration within 15 working days of the registration by the management company:

• financial statements for the previous year
• positive audit report
• information on controlling persons

Information about controlling persons

The information on controlling persons that should be submitted to the tax authorities in the case of foreign controlling persons is as follows:

• full name of company / individual
• registration number in place of incorporation / domicile
• tax identification number in place of incorporation / domicile, or similar number
• address in place of incorporation / domicile
• share in international company
• disclosure of indirect ownership

For Russian controlling persons, the list is the following:

• full name of company or individual
• Basic State Registration Number (OGRN) (only for legal entities)
• taxpayer identification number (INN) and tax reason code (KPP) (only for legal entities)
• share in international company
• disclosure of indirect ownership

The following individuals should be recognised as controlling persons of international companies:

• Legal entities or individuals whose share in the company is at least 15% (share of an individual includes shares of their spouses and minor children);
• A legal entity or an individual could be considered controlling persons regardless of their share in the international company if they can influence decisions of such companies for their own benefit or for the benefit of their spouses and minor children;
• Foreign companies registered in a Russian SAR will receive special status as an “international holding company” (hereinafter IHC).

Tax benefits for SAR residents, which come into force on 1 January 2019

Dividends received by an IHC are subject to corporate income tax at a rate of 0%. An IHC should own at least 15% of the shares in the divided-paying company for one year or more to receive such benefits.

Dividends that IHCs pay to foreign individuals and legal entities until 1 January 2029 are subject to withholding tax at a rate of 5%. IHCs should be recognised by the Russian tax authorities as public companies to receive such benefit. A company should be recognised as a public company if its shares are listed and/or are permitted for trading in one or more licensed stock exchanges in Russia, or stock exchanges that are included in the list of foreign financial brokers. The list of foreign financial brokers is provided in Direction № 4393-U of the Russian Central Bank dated 30 May 2017.

An IHC’s gains from the disposal of shares in foreign and Russian companies are subject to tax at a rate of 5% if the following conditions are met:

• Shares were owned by the IHC for 365 days and amount to at least 15%;
• Assets of company shares disposed of directly or indirectly consist of immovable property located in Russia up to no more than 50% on the last day of the expired reporting period;
• Shares were not acquired by the IHC as a result of mergers and acquisitions within 365 calendar days before and after the registration as an international company.

An IHC may not take into account the profit of its controlled companies as part of its CIT tax base for the periods before 1 January 2029.

Currency control

The package of amendments includes some changes to the Russian currency control rules established in Federal Law № 173-FZ dated 10 December 2003. According to the adopted amendments, SAR members are not recognised as residents for Russian currency control purposes. Therefore they have the right to perform currency transactions without any restrictions.

The WTS Russia team could help you identify the possible benefits and opportunities for your business structure from redomiciling an existing holding company to a Russian SAR. WTS Russia could also help you prepare the documents you need to apply for registration in a Russian SAR, and assist with the registration procedure.

RELATED ARTICLES:

The increase of the general VAT rate in Russia from 18% to 20%

Specific features of Russian VAT on digital services

New law on CbC Reporting in Russia

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On 1 January 2019, Federal Law No. 303-FZ of 3 August 2018 should come into force, providing of an increase of the basic VAT rate in Russia from 18% to 20%. The VAT rate applied by Russian tax agents (estimated tax rate) will increase from 15,25% (18/118) to 16,67% (20/120). The reduced VAT rate in Russia for certain groups of goods should be preserved at 10%. The reduced VAT tax agent rate (estimated tax rate) should remain at 9,09% (10/110). The reduced VAT rates are applied to social goods (services), food, children goods, periodicals and books related to education, science and culture, as well as to medicines and medical products. Also, the new law does not imply changes to the existing VAT benefits.

The increase of the VAT rate in Russia entails an increase in the tax burden on both Russian and foreign entities.

Under the Russian tax law foreign entities are liable to pay VAT in the following cases:

The sale of goods and services in the Russian Federation through a permanent establishment (PE)

Foreign entities performing business activities in Russia through a permanent establishment are required to obtain Russian tax ID and pay VAT itself to the Russian budget according to general Russian VAT rules and applying general tax rates (18%, 20% since January 1, 2019, and 10%).

The sale of specific work and services in Russia without a PE if Russia is recognized as the territory of the sale

The sale of the following work and services is subject to Russian VAT:

1.Work and services directly related with the real estate located in Russia including construction, installation, repair, restoration, landscaping, rental services;

2. Work and services are directly related with the movable property including air and water vessels, located in Russia. Such work and services include, in particular, installation, assembly works, repair and maintenance;

3. Services in the sphere of culture, art, education (training), physical culture, tourism, recreation and sports actually provided in the territory of the Russian Federation;

4. Specific work and services if the customer is located in Russia
The following work and services are recognized as sold on the Russian territory if the customer is located in Russia:

• Provision of patents, licenses, trademarks, copyrights or other similar rights;
• Development of computer programs and databases, their adaptation and modification;
• Provision of consulting, legal, accounting, auditing, engineering, advertising, marketing services, information processing services;
• Secondment services (if employees work in the place of activity of the customer);
• Lease of movable property (with some exceptions);
• Provision of services of the agent attracting the person (an entity or an individual) for provision of the abovementioned services.

The amount of VAT from the foreign company income received from provision of the services mentioned in (1) – (4) should be withheld by the Russian customer as a tax agent.

5. Digital services provided to Russian customers (entities, self-employed entrepreneurs and individuals)

• Russian tax law contains a wide range of digital services provided through the Internet sale of which is subject to Russian VAT (ex. provision of using rights for software, advertising services etc.).
• Foreign providers of digital services should be registered on the special Internet-portal of Russian tax authorities and receive tax ID.
• If the customer is a Russian entity or self-employed entrepreneur, such customer withholds VAT from price paid for received services.
• If the customer is a Russian individual the foreign company (provider of digital services) should pay VAT itself through a special Internet – portal of Russian tax authorities. If the payment for digital services is proceeded by an intermediary between the individual (customer) and the provider of digital services, such intermediary acts as a tax agent and withholds VAT.

Conclusion

Russian tax law contains many cases when foreign companies performing business directly with Russian customers or through intermediaries should be recognized as taxpayers of Russian VAT. Underpayment of Russian taxes (including VAT) might lead to penalties and fines. We recommend to revise your business relationships with Russian partners to identify possible VAT risks at the Russian level.

WTS Russia team has wide and comprehensive experience on indirect tax consulting services and is glad to solve complicated VAT issues for you and your clients. If you have specific questions about the new VAT rate in Russia please do not hesitate to contact the WTS experts in Russia!

RELATED ARTICLES:

Specific features of Russian VAT on digital services

New law on CbC Reporting in Russia

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Anyone going to do business in Russia or managing to establish a Russian subsidiary in the form of a limited liability company (LLC) is surely interested in the details of registering a legal entity in Russia.

In this article we will give you a useful support guide through business in Russia. We will show you the 5 necessary steps and 8 required documents for registering a legal entity in Russia.

Step 1: Documents for registEring a legal entity in Russia

The documents required for a company registration are as follows:

1.Registration application prepared according to template R-11001

The registration application template R-11001 was published in order № ММВ-7-6/25@ of the Russian Federal Tax Service (FTS) (only available in Russian).

2.Decision (minutes) of establishment issued by founder / founders

The decision (minutes) should contain the following information:

• personal information about founders;
• decision on establishment of legal entity in Russia confirmed by all participants;
• information about the form of the legal entity’s incorporation;
• approval of articles of association;
• registered address;
• approved amount of authorised capital, amount and nominal value of shares, procedure and deadline for payment of these shares;
• appointment of general manager.

The minutes should also indicate the results of the voting conducted for each of the approval points.

3.Founders’ agreement (in case of several founders)

The agreement on the establishment should contain all the basic information about the legal entity in Russia – name, address, articles of association, amount of authorised capital, etc. Also, the agreement must specify the rights and responsibilities of the founders.

4.Company’s articles of association

The company’s articles of association are the main, mandatory document. In addition to the basic information, the articles of association must contain a description of the company’s purposes, corporate structure and its management bodies. Also, the articles of association specify the procedure for carrying out production and economic activities and any reorganisation procedure.

5.Approved letter of registered address

The approved letter of registered address is a document which confirms that the owner of the premises will provide a separate location for the legal entity in Russia. This document is not required by law, but its absence can impact on the decision to register the company. The letter must contain actual contact information about the premises owner.

6.Notification of transition to special taxation regime (if applicable)

A tax regime may be chosen before submitting the registration documents package. If any special tax regime is chosen, the corresponding notification should be attached to the package. The notification on the transition to the special tax regime was approved by the Russian Federal Tax Service in Order № ММВ-7-3/829@ (only available in Russian).

7.Result of assessment by independent appraiser on property contribution to authorised capital (in case of non-cash contribution)

The minimum amount of authorised capital must be RUB 10,000 / EUR 140 (Art. 26 of the Civil Code of the Russian Federation). The capital must be contributed within four months of the registration. If the authorised capital comprises property or property rights, then an independent appraiser’s report regarding such assets is required.

8.Document confirming payment of stamp duty

All the documents, statements and notifications must be filled in very carefully. If the FTS rejects the registration, the founders must submit all the documents again and repeat the stamp duty payment.

Step 2: Payment of stamp duty

The stamp duty for a legal-entity registration amounts to RUB 4,000 (EUR 55). If there are several founders, the amount of stamp duty should be divided in equal shares between all founders, regardless of their participation in the company. After payment of the stamp duty you should obtain a receipt of the payment, which should be attached to the registration documents.

Step 3: Submission of documents

There are 3 options for submitting documents for a legal-entity registration:

• submission of documents by hand to the FTS Office,
• submission of documents by post to the FTS Office,
• submission of documents online using the public and municipal services website

In Moscow, documents may only be submitted to FTS Office №46. In other regions, documents must be submitted to the competent FTS Office for the company’s legal address. Registration by the state is carried out within 5 working days of the submission date. The certificate of incorporation and other documents may be uplifted from the FTS Office or received in electronic form by email.

Step 4: Company stamp 

After receiving the company registration documents, a company stamp should be made. A company stamp can be made by any commercial company providing such services.

Step 5: Opening of bank account

After receiving a company stamp the founder/founders should open a bank account at any Russian bank, at the discretion of the founder/founders.

If you would like to know more about the registration of a legal entity in Russia, please visit the homepage of Althaus Group, the exclusive representative of WTS Global in Russia.

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RELATED ARTICLES:

Specific features of Russian VAT on digital services

New law on CbC Reporting in Russia

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Since January 2017 a non-Russian company which provides digital services to Russian individuals (not registered as self-employed) is liable to pay VAT on its income as a Russian VAT taxpayer. If the services are provided to a Russian entity or a self-employed entrepreneur, the VAT is withheld by such buyers. Here we show you the details of the Russian VAT rules. 

Federal Law № 244-FZ dated 3 July 2016 (hereinafter 244-FZ) came into force in January 2017. According to this law, sales of digital services to Russian entities and individuals (including individuals not registered as self-employed) are recognised as being performed on the territory of the Russian Federation, and are subject to Russian VAT. The amount of tax should be calculated at a rate of 15.25% on the income received for services provided.

A Russian individual (buyer of digital services) should be recognised as Russian if they meet at least one of the following criteria:

• Russia is recognised as the individual’s place of abode;
• the bank account used to pay for services is attributed to a Russian bank;
• the buyer’s IP address is registered in the Russian Federation;
• the international telephone code of the buyer’s telephone number used to buy services is attributed to Russia.

Description of digital services 

According to the 244-FZ, the following services are recognised as digital and subject to VAT in Russia:

• provision of usage rights for software (including games) and databases via the internet;
• online advertising services;
• provision of services allowing consumers to buy goods or services directly from a seller over the internet (including online sales: stores, retailing and auctions);
• website support, granting access to websites for other network users and enabling modifications;
• storage and processing of information, if the provider of the information has online access to such information;
• real-time provision of computing performance;
• provision of domain names and hosting services;
• administration of information systems and websites;
• web search services;
• provision of usage rights to electronic books, information and educational materials, images, music and video via the internet;
• searching and providing information about potential buyers;
• provision of access to internet search engines;
• maintenance of statistics on websites.

The following services should not be considered digital services:

• sales of goods and services where goods and services ordered online are supplied (performed, rendered) without using the internet;
• sale or transfer rights to use of software (including games) and databases by using physical media;
• consulting services provided by email;
• provision of access to the internet.

Specific features of Russian VAT rules 

Russian VAT rules for digital services cover different options for providing digital services. Services can be provided to Russian individuals not registered as self-employed as follows: 

• Direct provision of digital services, collecting income directly from buyers. The digital services provider is recognised as a Russian VAT taxpayer. The amount of VAT on digital service income is calculated at a rate of 15.25% and transferred to the Russian budget.

• Using Russian and non-Russian intermediaries for the provision of digital services to Russian individuals and collecting the income from such services based on an agent, commission or other similar agreement. A Russian / non-Russian intermediary which acts based on an agent, commission or other similar agreement, and takes part directly in transactions with Russian individuals, will be deemed a tax agent and will be liable to calculate and collect VAT at a rate of 15.25% from the income received from a buyer of digital services. If the transactions regarding digital services are performed through more than one Russian / non-Russian intermediary, the Russian / non-Russian entity taking part directly in transactions with the Russian individuals will be deemed a tax agent, regardless of any special agreement with the digital services provider. Such intermediary will be liable to calculate and collect VAT at a rate of 15.25% from the income received from the buyer of digital services.

Providing digital services to Russian entities and self-employed entrepreneurs is another option. If a non-Russian entity provides digital services to Russian entities and self-employed entrepreneurs, such buyers of digital services are considered tax agents and are liable to calculate and withhold VAT at a rate of 15.25% from the income transferred to the digital services provider.

Tax compliance requirements 

According to the 244-FZ, non-Russian digital service providers and non-Russian intermediaries recognised as VAT tax agents have to adhere to the following tax compliance requirements:

• complete registration on the website of the Russian tax authorities within 30 calendar days after initiating the provision of digital services, and receive a personal online account which should be used to communicate with the Russian tax authorities, submitting tax documents and exchanging other information;

• submit VAT tax returns by using personal online account within 25 days of the end of the VAT tax period (3 months). The same deadlines apply for tax payments;

• fill in special registries with information about each sale of digital services. The registry form that should be used was published in the Order of the Russian Tax Service as of 29.08.2017 № ММВ-7-15/693@.

Responsibility for violations of new Russian VAT rules 

A non-Russian digital service provider or a non-Russian intermediary will lose its access to the personal online account for 12 months if at least one of the following violations occurs:

• submission of false information to the tax authorities in the registration claim;
• failure to comply with Russian tax authority requirement to pay VAT, penalties and fines within 12 months;
• failure to comply with the Russian tax authority requirement to submit documents within 3 months;
• violation of deadlines for submitting VAT tax returns within 6 months.

Penalty for failure to register on the website of the Russian tax authority:

• violation of registration deadlines – 10,000 roubles (roughly EUR 140);
• conducting business without registration – 10% of income received, but no less than 40,000 roubles (roughly EUR 570).

Penalty for the failure to submit a VAT tax return: 5% of the unpaid amount of the tax according to the unfiled tax return for each complete or incomplete month starting from the deadline. However, the fine may not exceed 30% of the unpaid amount of the tax and be no less than 1,000 roubles (roughly EUR 14).

Failure to comply with the VAT payment liability leads to a penalty amounting to 20% of the unpaid tax amount.

If you would like to know more about the Russian VAT rules, please visit the homepage of Althaus Group, the exclusive representative of WTS Global in Russia.

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On 27 November 2017 the country’s parliament adopted a new law on transfer pricing issues in Russia in connection with the implementation of international exchange of information and documentation on international groups of companies. It took effect on the day of its publication and applies to fiscal years starting in 2017.

Russian transfer pricing legislation is essentially based on OECD principles, with certain important deviations. The key deviations are as follows:

• Ownership criterion regarding the definition of subsidiaries: more than 25% (direct or indirect) in Russia and more than 50% according to OECD common requirements.
• Benchmarking studies: rules for the benchmarking analysis are similar to the OECD recommendations but have some differences (for example, loss-making companies and companies with negative net assets are not admissible for comparability purposes).
• Information Sources: in Russia two-tier hierarchy is provided. Official information sources of authorized state authorities – price agencies and Official publications.
• Intra-group services: there is no simplified approach such as, for example, a 5% mark-up for low value-added intra-group services. It is necessary to conduct a full analysis on these types of transactions.
• Transactions with intangible assets: there is no special guidance on these types of transactions.
• Safe harbours: according to Article 269 of the Russian Tax Code there is a price range for interest expenses for different currencies.
• Advance Pricing Agreements (APAs): available only to high taxpayers. Not available for permanent establishments.
• Downward adjustments: only valid if you increase the tax base.

Three-tier documentation: a new element of transfer pricing in Russia

On 27 November 2017, the Russian State Duma adopted a new law (Federal Law No. 340-FZ) that requires the provision of three-tier transfer pricing documentation and also introduces provisions on the automatic exchange of CbCRs. The law came in force on the day of its publication on the official website of legal information. The periods starting from 1 January 2017 are subject to the new law, but the previous tax law rules for preparation of reports on controlled transactions and transfer pricing documentation remain in force.

According to this law, organisations that are members of MNEs with a consolidated revenue of over 50 billion roubles (approx. EUR 700 million) should provide for three-tier reporting to tax authorities (Country-by-Country Reports (CbCR), global and national documentation). Tax authorities automatically exchange the CbC Reports of such MNEs.

In accordance with such requirements, the three-tier documentation is in line with the OECD approach. But the submission of such documentation does not exclude the obligation of the taxpayer to prepare national transfer pricing documentation in accordance with local requirements. In addition, taxpayers who are members of the MNE are required to submit the notification of participation in the MNE to the tax authority.

Automatic exchange of CbCRs

Also, the new law provides for the rules of participation of a foreign tax authority, if it is stipulated by an international Treaty of the Russian Federation, in exercising tax control in the Russian Federation (tax audit, tax monitoring), which can be carried out with the participation of such body upon its request in accordance with Russian tax code and the provisions of international treaties of the Russian Federation.

At the same time, the new law provides for the order of automatic exchange of financial information with foreign countries (territories) for tax purposes, specifically the automatic exchange of CbCRs. Terms such as “financial information”, “financial services”, “financial assets” are defined.

The new law on CbC Reporting in Russia also describes the limitations of the use of the information contained in the CbCRs.

If you would like to know more about the transfer pricing and CbC Reporting in Russia, please visit the homepage of Althaus Group, the exclusive representative of WTS Global in Russia.

WTS Klient Hungary is a member of the WTS Global transfer pricing consulting team. As a member of this team we endeavour to find solutions to seemingly impossible problems with the help of personal contacts, regular training and consultations, and relying on the WTS Global central TP team. Should you have questions we are happy to assist you:

 

András Szadai
senior manager
Tel: +3618810624
andras.szadai@wtsklient.hu

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RELATED PUBLICATION:

WTS Global Transfer Pricing Newsletter #3/2017

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