Brief Overview of Taxes on Income and Transactions
Corporate Income Tax
Corporate Income tax is the major tax on business income (nalog na pibyl' organizacij, CIT). Dividend distributions are taxed by way of 'withholding'. Legal entities registered under Russian laws are liable to tax on their worldwide income. Foreign legal entities are subject to taxes only on income derived from business activities of a permanent establishment (branch) within Russia and on certain particular Russian-source income. All types of income are included in gross income.
Unless specifically exempted from taxation all income composed of the following is taxable:
- profits from the sale of goods and the supply of services which is calculated as the difference between sales revenues, excluding VAT, and directly and indirectly related expenses
- revenue in kind from the sale of goods or the supply of services; or from property rights which must be accounted for on the basis of their fair market price in conformity with transfer pricing rules as established by the Tax Code
- profits from non-sales transactions comprise lease payments, dividends received from other companies, interest on bonds, royalties, compensation received for losses, less any non-sales expenses
From 2002 the accrual method generally applies.
All documented and economically justified expenses are deductible unless specifically disallowed for deduction by the Tax Code. Branch offices of foreign legal entities may deduct related expenses incurred by their Headquarters if allowed by the relevant international treaty on double tax avoidance (DTT).
Tax payment and reporting may either be monthly or quarterly as the taxpayer wishes.
Withholding Tax and Tax Agent Obligations
A resident company paying dividends (to any company) and interest, royalties and similar (to a foreign company without presence in Russia) is required to withhold tax at source. DTTs generally establish lower withholding tax rates.
Withholding tax is reported by the tax-withholding agents together with Corporate Income tax.
Individual Income Tax
Individuals, irrespective of citizenship, should pay Russian individual income tax on:
- worldwide income if the individual is a Russian tax resident, i.e. who spends 183 or more days in Russia in the calendar year
- income for work in Russia or from Russian property and investment if the individual is a tax non-resident, i.e. who spends fewer than 183 days in Russia in a calendar year.
Individual income tax of 13% is applied to most types of income of Russian tax residents with the following exceptions:
- interest income above the allowed limits (9% for foreign and 13% for Russian currency) - 35%
- material gain on interest free or low interest loans (interest levels are similar to the above) and arising from receiving benefits in-kind at below market rate or free - 35%
- dividend income - 9%
Non-residents should pay tax on all types of income at 30% tax rate.
Russian individual income tax provides Russian tax residents with exemptions resulting from the acquisition and sale of real estate and other property. There are also professional deductions related to the creation of intellectual property or to the provision of non-employee services.
Individual income tax is withheld at source and if withholding is impossible paid by the individual upon submitted declaration. Declarations should be submitted by April 30th and should refer to the previous tax year ending July 15th.
There is no family taxation.
In general, revenue originating from the supply of goods, works and services in the territory of the Russian Federation and from the import of goods is subject to VAT unless specifically exempted by the Tax Code. Russia applies the destination principle, i.e.:
- VAT is imposed in Russia if the products or services are consumed or used in Russia
- exemptions are granted for exported goods or services used outside Russia
- VAT is imposed on imports or services used in Russia
The taxpayer may be exempted from VAT upon application, provided that the turnover for the preceding 3 months did not exceed RUR 1 million.
The amount of VAT payable is the difference between the VAT due on the supply of goods, works or services and the amount of input tax incurred. The deductible input VAT is the VAT payable to other taxpayers according to invoices for goods, works or services actually received and related to the taxable transactions of the taxpayer, including transactions liable to VAT at the zero rate. The amount of the deduction also covers VAT paid on imported goods and on capital assets at the date on which the assets are capitalized. Input VAT offset or refund rules are complex and in most cases require thorough financial planning and contract structuring.
A VAT deduction is not available for transactions exempted from VAT and for transactions performed by a VAT non-taxable person. In these cases, the VAT paid is classed as a business expense.
If the amount of deductible input tax exceeds the amount of VAT payable on outputs, the excess may be used to offset other tax liabilities of a taxpayer in a consecutive period of 3 months. On the expiry of this period, the excess may be refunded at the request of the taxpayer. The application must be processed within 2 weeks of submitting the necessary documents. The same time limit applies to the subsequent refund payment.
The taxable amount for imports is determined in the same manner as for customs duties and must be increased by any excise taxes payable and customs fees. In the absence of a customs border, the tax base is defined as the sum of the purchase price of the goods plus any excise taxes due.
The export of goods and certain services from the customs territory of Russia is zero-rated by virtue of the destination principle, regardless of the state of destination. The same principle applies to re-exported goods and the goods exported following the completion of services pursuant to a contract under which the previously imported goods have been improved, processed or converted.
The zero-rating of exports is subject to certain documentation requirements, i.e. a taxpayer must submit the relevant documents to the tax authorities.
VAT is paid and reported monthly.