Taxation

Within the Russian Federation, taxes are levied at the federal, regional, and local levels. At the federal level, the current tax code imposes a tax on profits, a value added tax (VAT), a personal income tax as well as excise and other incidental taxes. At the regional level the principal taxes are the corporate property tax, a transport tax, and a tax on gambling. At the local level the principal taxes are levied on real estate and personal property.

1. The Corporate Profits Tax

Currently the highest rate for the corporate profits tax is 24% of the corporation's profit. Profit is defined in much the same way as in western tax codes as income less deductible expenses. Generally, all necessary and documented business expenses are deductible although certain types of expenses are subject to restrictions. Some advertising costs and expenses such as business entertainment may not be fully deductible.

Corporate dividends are taxed at the following rates:

• 9% on dividends paid out by Russian companies to Russian shareholders (both individuals and legal entities); and
• 15% on dividends paid out by Russian companies to foreign legal entities as well as on dividends received by Russian companies from foreign legal entities. Double taxation treaties can require a lower rate in some situations.

2. Value Added Tax ("VAT")

Familiar to Europeans but not well understood in the United States, the VAT is applied to the sale of goods and services within the Russian Federation. The VAT is also imposed on all goods imported into Russia. The current rate is 18% on the sale of most goods.

The VAT on imports must be paid by the importer. The VAT on all other transactions is collected from the seller and paid to the government by the seller. VAT tax collections must be remitted monthly quarterly depending on the company's turmover.

A 10% rate is applied to certain categories of goods, such as pharmaceuticals, medical equipment, and some food products and periodicals. Exported goods are effectively exempt as the rate applicable to them is zero.

Generally, VAT paid on acquired goods, work, and services may be offset against VAT collected from customers. The amount the seller must remit is the tax collected from the buyer less any VAT already paid by the seller on the same article. For example, a wholesaler pays 1,000 rubles to purchase a pair of shoes. The wholesaler then sells the shoes to a retailer who pays 1,500 rubles for them. The wholesaler will have paid a VAT of 180 rubles on its purchase. It must collect a VAT of 270 rubles on the sale to the retailer. The amount that the wholesaler must remit to the government is 270 less 180 or 90 rubles. Thus, n enterprise ends up transferring to the state only the difference between VAT paid and VAT collected.

3. Corporate Property Tax

The corporate property tax is governed by Chapter 30 of the Russian Tax code. It is assessed annually and collected quarterly. The rate is set by legislation enacted at the regional level but may not exceed 2.2%. Real property is exempt as are water rights and intangible property. All other physical assets owned by the taxpayer in Russia are subject to the tax which is calculated on their depreciated book value.

The transport tax is essentially an annual tax on motor vehicles used for transportation as opposed to production. Tractors, for example are exempt.

4. Unified Social Tax

The Unified Social Tax is levied on companies based upon wages paid. It is collected by the federal government and then distributed among the Pension Fund, the Social Security Fund, and the Mandatory Medical Insurance Fund. The rate varies regressively from 26% to 2% of an employee's salary. The lowest rate applies to that portion of an employee's annual salary that exceeds 600,000 rubles. The tax is paid on a monthly basis. Salaries paid to foreign expatriates working in the RF are subject to the unified social tax under the same general rules outlined above.

5. Personal Income Tax

"Russian tax residents," must pay personal income tax on all their income, irrespective of where it was earned. Residence in the Russian Federation for 183 days or more in any calendar year qualifies an individual as a Russian tax resident. Individuals who do not meet this residency test are subject to tax on any income received from Russian sources.

Russia's income tax is a flat tax. The basic rate for Russian tax residents is 13% on most kinds of income. The rate on dividends for Russian tax residents is 9%.

Higher rates are imposed on certain forms of income. A 35% rate applies to income from gambling, lottery prizes, and no-interest or low interest loans that are deemed to be a form of income. Low-interest and interest-free loans for new construction or purchase of a dwelling are excluded from the "deemed income" concept. Some insurance payments and "excessive" bank interest are also taxed at the higher rate. Income received by a non-resident from a Russian source is taxed at a 30% rate.

Tax returns are due on April 30th of each year and are filed by the employer rather than by the employee. The taxpayer must only file a tax return if he or she has received income from a source other than an employer who has withheld the tax and filed a return. In such cases, the taxpayer must declare the other income and remit the tax owed for that year by the same date.

Foreign individuals are required to file annual tax returns with the tax authorities by 30 April of the year following the reporting year only if they receive income from non-Russian sources, or income where no income tax was withheld at the source of payment.

Those foreign individuals who leave the country during a calendar year should file a tax declaration for the relevant taxable period no later than one month prior to leaving Russia.