DOING BUSINESS IN RUSSIA 2017

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1 DOING BUSINESS IN RUSSIA 2017

2 Editors: Africa: Ridha Hamzaoui, Emily Muyaa, Mei-June Soo Asia-Pacific: Mei-June Soo, Nina Umar, Ying Zhang Caribbean: Priscilla Lachman, Sandy van Thol Europe: Khadija Baggerman, Larisa Gerzova, Adrián Grant Hap, Marjolein Kinds, Ivana Kireta, Magdalena Olejnicka, Andreas Perdelwitz, Marnix Schellekens, Kristina Trouch, Ruxandra Vlasceanu Middle East: Ridha Hamzaoui, Mei-June Soo Latin America: Vanessa Arruda Ferreira, Maria Bocachica, Diana Calderon Manrique, Lydia Ogazón Juárez North America: John Rienstra, Julie Rogers-Glabush IBFD Visitors address: Rietlandpark DW Amsterdam The Netherlands Postal address: P.O. Box HE Amsterdam The Netherlands Tel.: IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: permissions@ibfd.org. Disclaimer This publication has been carefully compiled by IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on IBFD s part. In no event shall IBFD s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher.

3 DOING BUSINESS IN ARGENTINA RUSSIA JANUARY

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5 DOING BUSINESS IN RUSSIA 2017 INTRODUCTION This publication has been prepared by the International Bureau of Fiscal Documentation (IBFD) on behalf of BDO Member Firms and their clients and prospective clients. Its aim is to provide the essential background information on the taxation aspects of setting up and running a business in this country. It is of use to anyone who is thinking of establishing a business in this country as a separate entity, as a branch of a foreign company or as a subsidiary of an existing foreign company. It also covers the essential background tax information for individuals considering coming to work or live permanently in this country. This publication covers the most common forms of business entity and the taxation aspects of running or working for such a business. For individual taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some detail. We have endeavoured to include the most important issues, but it is not feasible to discuss every subject in comprehensive detail within this format. If you would like to know more, please contact the BDO Member Firm(s) with which you normally deal. Your adviser will be able to provide you with information on any further issues and on the impact of any legislation and developments subsequent to the date mentioned at the heading of each chapter. About BDO BDO is an international network of public accounting, tax and advisory firms which perform professional services under the name of BDO. The fee income of the member firms in the BDO network, including the members of their exclusive alliances, was US$7.6 billion in These firms have representation in 158 countries and territories, with over 67,700 people working out of 1,401 offices worldwide. BDO s brand promise is built upon our vision, to be the leader for exceptional client service always, and everywhere. When you choose to work with BDO you quickly discover why we re different from the rest. BDO offers a comprehensive collection of high quality tax services and assets designed to support exceptional performance, and all our tax engagements benefit from the hands-on involvement of experienced professionals, backed by world-class resources. We are agile enough to handle the biggest and the smallest names in the industries we serve, and our relationship-driven culture means that we can provide responsive and personalised advice to all our clients. We work hard to understand our clients businesses and ensure that we match both our service offering and our people to their complex individual needs. We believe that providing our clients with access to experienced professionals who are actively engaged in addressing their tax and business issues is the most reliable way to provide exceptional service, always with a strong focus on trust and transparency. Regardless of your location, size or international ambitions we can provide effective support as you expand into new areas of the world. In an ever-evolving economic environment, businesses need a global network that provides exceptional, bespoke service combined with local knowledge and expertise. BDO is uniquely positioned to serve this demand, providing effective support and a truly global integrated global footprint. 3

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7 DOING BUSINESS IN RUSSIA 2017 TABLE OF CONTENTS CORPORATE TAXATION... 9 ABBREVIATIONS... 9 INTRODUCTION CORPORATE INCOME TAX TYPE OF TAX SYSTEM TAXABLE PERSONS Residence TAXABLE INCOME General Exempt income Deductions Depreciation and amortization Reserves and provisions CAPITAL GAINS LOSSES Ordinary losses Capital losses RATES Income and capital gains Withholding taxes on domestic payments Dividends Interest Royalties INCENTIVES Accelerated depreciation Investment credit Special economic zones Free economic zones Other Skolkovo Innovation Centre ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings TRANSACTIONS BETWEEN RESIDENT COMPANIES GROUP TREATMENT INTERCOMPANY DIVIDENDS OTHER TAXES ON INCOME SIMPLIFIED TAX REGIME TAXES ON PAYROLL PAYROLL TAX SOCIAL SECURITY CONTRIBUTIONS TAXES ON CAPITAL NET WORTH TAX Corporate property tax REAL ESTATE TAX Land tax

8 DOING BUSINESS IN RUSSIA 2017 TABLE OF CONTENTS 6. INTERNATIONAL ASPECTS RESIDENT COMPANIES Foreign income and capital gains Foreign losses Foreign capital Double taxation relief NON-RESIDENT COMPANIES Taxes on income and capital gains Taxes on capital Administration WITHHOLDING TAXES ON PAYMENTS TO NON-RESIDENT COMPANIES Dividends Interest Royalties Other Withholding tax rates chart ANTI-AVOIDANCE GENERAL TRANSFER PRICING THIN CAPITALIZATION CONTROLLED FOREIGN COMPANY OTHER ANTI-AVOIDANCE RULES Beneficial ownership concept Notification requirements VALUE ADDED TAX GENERAL TAXABLE PERSONS TAXABLE EVENTS TAXABLE AMOUNT RATES EXEMPTIONS NON-RESIDENTS MISCELLANEOUS TAXES CAPITAL DUTY TRANSFER TAX Immovable property Shares, bonds and other securities STAMP DUTY CUSTOMS DUTY EXCISE DUTY OTHER TAXES State duty Trade levy INDIVIDUAL TAXATION ABBREVIATIONS INTRODUCTION INDIVIDUAL INCOME TAX TAXABLE PERSONS TAXABLE INCOME General Exempt income EMPLOYMENT INCOME Salary

9 TABLE OF CONTENTS DOING BUSINESS IN RUSSIA Benefits in kind Pension income Directors remuneration BUSINESS AND PROFESSIONAL INCOME INVESTMENT INCOME CAPITAL GAINS PERSONAL DEDUCTIONS, ALLOWANCES AND CREDITS Deductions Allowances Credits LOSSES RATES Income and capital gains Withholding taxes ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings OTHER TAXES ON INCOME PATENT SYSTEM OF TAXATION SOCIAL SECURITY CONTRIBUTIONS TAXES ON CAPITAL NET WEALTH TAX REAL ESTATE TAX Real estate tax Land tax INHERITANCE AND GIFT TAXES TAXABLE PERSONS TAXABLE BASE PERSONAL ALLOWANCES RATES DOUBLE TAXATION RELIEF INTERNATIONAL ASPECTS RESIDENT INDIVIDUALS Foreign income and capital gains Foreign capital Double taxation relief EXPATRIATE INDIVIDUALS NON-RESIDENT INDIVIDUALS Taxes on income and capital gains Taxes on capital Inheritance and gift taxes Administration KEY FEATURES

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11 CORPORATE TAXATION DOING BUSINESS IN RUSSIA 2017 RUSSIA This chapter is based on information available up to 14 January Abbreviations Abbreviation English definition Russian definition CC RF Civil Code of the Russian Federation Гражданский Кодекс Российской Федерации Federal Law 212-FZ Federal law dated Федеральный закон от FZ On insurance contributions 212-ФЗ О страховых взносах в to the Pension Fund of the Russian Federation, Federal Social Insurance Fund of the Russian Federation, Federal Fund of compulsory medical insurance and territorial funds of compulsory medical insurance Пенсионный фонд Российской Федерации, Фонд социального страхования Российской Федерации, Федеральный фонд обязательного медицинского страхования и территориальные фонды обязательного медицинского страхования TC RF Introduction Tax Code of the Russian Federation Налоговый Кодекс Российской Федерации Corporate taxpayers are subject to taxes levied by the Russian Federation and its regions (republics, districts, territories, autonomous regions and autonomous districts) as well as by municipalities. In general, federal taxes are regulated by the Tax Code whereas regional and local taxes, in addition to the Tax Code, are regulated by the laws of the subjects of the Russian Federation and the normative legal acts of the representative bodies of local self-governments. The Tax Code sets out the structure of each tax (e.g. taxpayer, taxable base, maximum tax rates, tax exemptions and administrative matters). The separate regions and municipalities are, however, authorized to set their own rates, the procedure and the terms of payment of the tax within the framework provided by the Tax Code. Taxes levied at the federal level include, in particular, the corporate income tax and the value added tax. The main taxes levied at the regional level are the corporate property tax and the transport tax. Corporate taxpayers are also subject to a variety of municipal taxes, e.g. the land tax, and must make social security contributions in their capacity as employers. The currency is the Russian rouble (RUB). 1. Corporate Income Tax 1.1. Type of tax system The Russian corporate income tax system is a classical system, which means that corporate profits are taxed at the level of the company, and the distributed profits are taxed in the hands of the shareholders. However, the economic double taxation of dividends is partly eliminated by taxation at reduced rates, which takes place by way of a final withholding at source (see section ). Furthermore, intercorporate dividends received by a resident company and redistributed to Russian residents are not subject to tax either at source or in the hands of the recipient. Finally, dividends may qualify for a participation exemption (see section 2.2.). For non-resident shareholders, see sections and

12 DOING BUSINESS IN RUSSIA 2017 CORPORATE TAXATION 1.2. Taxable persons Corporate income tax is payable by (article 246 of the TC RF): legal entities incorporated under Russian law; non-resident legal entities carrying on a business through a Russian permanent establishment (see section ); and non-resident legal entities that derive income from sources situated in the Russian Federation (see section 6.3.). The main types of legal entities established under the legislation of the Russian Federation include (article 50 and sections 2-8 of the CC RF): public joint-stock companies; non-public joint-stock companies; limited liability companies (OOO); general partnerships; limited partnerships; industrial cooperatives; unitary enterprises (a unitary enterprise is a special form of legal entity, which is fully owned by the state or by a municipality); and peasant (farming) enterprises created in the form of a legal entity. General partnerships and limited partnerships are treated as separate taxpayers and taxed accordingly (article 246 of the TC RF). Because they lack legal personality, other partnerships (i.e. simple partnerships and silent partnerships) are transparent entities, and their income is taxed in the hands of the partners. From 1 September 2014, certain types of entities such as open joint-stock companies (OAO), closed joint-stock companies (ZAO) and additional liability companies are no longer available. Existing open joint-stock companies (OAO) are treated as public stock companies if they fit the public company criteria. Existing closed joint-stock companies (ZAO) are still regulated by the previous legislation provisions relating to ZAO until the first amendment of their articles of association. Existing additional liability companies are treated as limited liability companies. There is no obligation for the above companies to register themselves in a new legal form. Companies are expected to amend their names, articles of association, and other governing documents to comply with the new legislation, but there is no fixed deadline, and the changes should be implemented as soon as any other changes to the articles of association are made. This survey is restricted to stock companies and limited liability companies incorporated under Russian law and non-resident entities. For the purposes of this chapter, these entities are referred to as companies Residence From 1 January 2015, the following companies are treated as residents for the purposes of corporate income tax (article of the TC RF): Russian companies; 10

13 CORPORATE TAXATION DOING BUSINESS IN RUSSIA 2017 foreign companies considered to be Russian tax residents under an applicable tax treaty; and foreign companies that are effectively managed from Russia. Foreign entities are deemed as being effectively managed from Russia if at least one of the following criteria is met (article of the TC RF): the executive body of the company regularly performs its activities from Russia; or principal executive company officers perform their activities (including decision making and day-to-day operation) in Russia. Certain activities, such as preparation of the general meetings of participants or the board meetings, strategic planning and consolidation of financial statements do not determine tax residence based on the place of effective management. A foreign company that is considered a tax resident of Russia (under the above criteria) and a tax resident of another country is nevertheless treated as a tax resident of Russia if certain activities (i.e. the bookkeeping or management accounting, certain management activities or operational personnel management) are performed in Russia. In addition, a foreign company carrying out its activities through a separate subdivision (i.e. a branch or a representative office) in Russia may choose to be treated as a Russian tax resident (unless otherwise provided by an applicable tax treaty) if certain conditions are met Taxable income General In general, resident companies are taxed on their worldwide income, which is referred to as business profits (article 247 of the TC RF). Taxable business profits are the total income from a business, the alienation of assets and other income, decreased by business and other expenses (e.g. finance expenses). Profits are determined according to the rules in the tax legislation (accounting figures are not relevant). In general, the accrual method is used. However, a company may use the cash method if its turnover during the preceding four quarters does not exceed on average RUB 1 million for each quarter Exempt income The most important exemptions include (article 251 of the TC RF): tangible and intangible assets contributed to a share capital; assets donated to a resident company from its parent company, provided the parent company holds more than 50% of the capital of the receiving company; assets donated to a resident company by its (foreign) subsidiary, under certain conditions; assets received by a resident subsidiary from its parent company, under certain conditions; income from the exploitation of ships registered in the Russian International Registry of Ships in international traffic or from renting out such ships for such a purpose; bonus shares due to the increase of capital out of retained earnings. However, this rule does not cover participation rights in a limited liability company; 11

14 DOING BUSINESS IN RUSSIA 2017 CORPORATE TAXATION reimbursement of an agent s expenses by a principal provided such expenses are included in the agent s expenses under a commission contract or an agency agreement; funds and other property received under credit and loan agreements; tangible and intangible assets, works or services received as advance payments for the supply of goods (works, services), provided the accrual method is used by the taxpayer; dividends in relation to which the Russian company is the beneficial owner and from which the withholding tax has been already withheld by the tax agent, provided the relevant supporting documents confirming the withholding of the tax by the tax agent are in place; dividends received by a controlling company from the profits distributed by a CFC (if certain conditions are met); and exclusive rights on inventions, utility models, industrial patents, computer programmes, databases, gratuitous transfer of know-how developed under government contracts Deductions In general, companies may deduct all necessary expenses paid or accrued during the year in order to carry on a business aimed at profit-making (article 252 of the TC RF). Expenses are deductible if they are incurred to generate income, are economically justifiable and are substantiated by documentary proof. They are categorized as expenses related to the trade or business and overhead expenses. The former category consists of the cost of production, costs incurred for wages, amortization and other similar expenses. Other similar expenses, in particular, include expenses for maintenance and repair, costs of research and development, expenses related to exploitation activities and insurance premiums. Overhead expenses comprise such expenses as finance costs, payments for services related to keeping a register of the owners of securities, costs of depository services, expenses related to establishing bad debt reserves, court and arbitration fees, etc. Dividends paid by the company are not deductible. The deduction of certain expenses is subject to established ceilings (articles 255 and 264 of the TC RF). Such expenses include pension premiums or life annuities on behalf of the employees, which expenses are deductible up to 12% of the wages of the current year. Representation expenses are deductible up to 4% of the wage costs of the current year. The deduction of interest is subject to arm s length and thin capitalization tests (article 269 of the TC RF). From 1 January 2015, only deductibility of interest on debt obligations recognized as controlled transactions for transfer pricing purposes is subject to limitation. Based on new rules, the lender has the right to recognize interest calculated on the debt obligation at the actual rate as income if that rate exceeds the lowest value of the interval values established by the Tax Code, whereas the borrower has the right to recognize interest calculated on the debt obligation at the actual rate as an expense if that rate is lower than the highest value of the same range of interval values. For controlled transactions between Russian resident companies denominated in roubles, from 2016, the interest rate interval is set at 75% to 125% of the key rate of the Central Bank of Russia (CBR). For other controlled transactions denominated in roubles, the 12

15 CORPORATE TAXATION DOING BUSINESS IN RUSSIA 2017 interest rate interval is, also from 2016, set at 75% to 125% of the key rate of the CBR. Specific rate interval ranges are established for controlled transactions denominated in other currencies. Before 1 January 2015, in general, the amount of deductible interest payable to residents or non-residents could not deviate by more than 20% from the average interest rate paid on comparable loans in the same calendar quarter. Any excessive part of the interest was not deductible. Comparable loans were defined as loans issued in the same currency for the same time terms in comparable amounts against similar securities. Where no such comparable loans existed (or at the choice of a taxpayer), a taxpayer could apply the method whereby the maximum deductible amount of interest was equal to the rate of the CBR (from 1 January 2016, the refinancing rate of the CBR corresponds to the key rate currently equal to 11%) multiplied by 1.1 for debt obligations denominated in roubles, and 15% for loans denominated in foreign currency. However, for the period from 1 January 2011 until 31 December 2014, the maximum deductible amount of interest was equal to the rate of the CBR multiplied by 1.8 for debt obligations denominated in roubles, and by 0.8 for loans denominated in foreign currency. The deductibility of interest is also limited under thin capitalization rules when paid to non-residents (see section 7.3.) Depreciation and amortization Depreciation is compulsory and must be taken whether or not the company makes profits. The depreciation is calculated on a monthly basis. Depreciable assets are defined as tangible and intangible assets with a useful life exceeding 12 months and an historic cost exceeding RUB 100,000 (before 1 January 2016, RUB 40,000) that are owned by the taxpayer and used for carrying on a business. Assets with a lower cost are normally deductible in the year of acquisition. Land, natural resources, inventory, securities, futures and forward contracts, books and works of art are not depreciable. Assets that are transferred (received) under contracts for gratuitous use, which are unused for 3 months or more during the tax year, are not depreciable; the same applies to assets under reconstruction and modernization for longer than 12 months. Depreciable assets are pooled in ten groups according to their useful life (from 1 year to over 30 years) (article 258 of the TC RF). The depreciable base is the historic costs of the asset, i.e. the acquisition price, the related costs and costs incurred in putting the asset into use. For assets received gratuitously, the market value is used. A taxpayer may use either the straight-line method or the declining-balance (nonlinear) method of depreciation (article 259 of the TC RF). A taxpayer may change the depreciation method starting from the beginning of the tax year; the change is allowed only once in 5 years. However, for buildings with a useful life of more than 20 years, only the straight-line method is permitted. Intangible assets may be amortized irrespective of whether they are acquired or capitalized. They must, however, meet the general conditions for depreciable assets (see above). 13

16 DOING BUSINESS IN RUSSIA 2017 CORPORATE TAXATION Reserves and provisions The Tax Code permits the formation of certain reserves for future or unsure expenses, e.g. guarantee reserves, bad debts reserves and reserves for future research and development expenses (articles 266, 267, , 324 and 324,1 of the TC RF). Provisions for bad debts and guarantee reserves are deductible for tax purposes. Provisions for bad debts are deductible at the end of each reporting period (see section ) according to the period of maturity: Maturity period (days) Write-off (%) Up to Over From 1 January 2017, the amount of the reserve may not, however, exceed the greater of 10% of the sales revenue of the previous tax period or 10% of the sales revenue of the current reporting period (before 1 January 2017, the amount of the reserve was limited to 10% of the sales revenue of the current reporting period). The taxpayer is not allowed to claim the reserve in the case of guaranteed or secured receivables. Corporate taxpayers may make an allocation to a warranty reserve, provided that the relevant sales contract contains a warranty obligation for the taxpayer. The amount of the reserve may not exceed the percentage of the actual guarantee costs in relation to the sales revenue calculated over the period of the preceding 3 years. In the case of a first-time establishment, the amount of the deduction is limited to the expected guarantee expenses. The law provides for adjustments at the end of each reporting period. Taxpayers are also allowed to form provisions for research and development costs. The research and development reserve can be created for a specific research and development programme for a maximum period of 2 years. The maximum amount of the reserve for the reporting or taxable period (see section ) is calculated as the company s sales income multiplied by 3% less expenses incurred by the taxpayer in connection with the formation of the funds in support of scientific and innovation activities (such expenses may not exceed 1.5% of the trade and business income) Capital gains There is no separate capital gains tax in Russia. Capital gains are taxable as normal business income (article 249 of the TC RF). From 1 January 2015, both income and expenses on transactions with listed securities and derivatives are included in the general taxable base. For non-listed securities, income and expenses on transactions with non-listed securities and derivatives should be accounted for separately (for capital losses, see section ). Income from transactions with listed securities cannot be reduced by expenses or losses from the transactions with non-listed securities and derivatives. Income from the alienation of shares in Russian companies, held for an uninterrupted period of longer than 5 years, is taxed at the rate of 0% if one of the following conditions is satisfied (article of the TC RF): (1) the shares are non-listed securities during the whole holding period; (2) the shares are listed securities and during the whole holding period relate to the high-technology (innovation) economy sector; 14

17 CORPORATE TAXATION DOING BUSINESS IN RUSSIA 2017 (3) the shares are non-listed at the moment of their acquisition, and are listed and relate to the high-technology (innovation) economy sector at the moment of their alienation; or (4) the shares represent share capital of Russian companies, the assets of which consist, directly or indirectly, for no more than 50% of immovable property located in Russian territory (except for those shares which fall within the scope of (2) above) Losses Ordinary losses From 1 January 2017, losses realized in relation to tax periods starting from 1 January 2007 may be carried forward indefinitely (before 2017, this was limited to 10 years) (article 283 of the TC RF). In the case of a reorganization, the legal successor may claim a loss carry-forward of the company that ceased to exist. In certain cases, a loss cannot be carried forward if, during the period in which that loss was incurred, the taxpayer was subject to corporate income tax at a rate of 0%. This may for example be the case when the loss was realized by a company performing educational and medical activities (which are subject to 0% corporate income tax), by the Central Bank of Russia or by companies which have the status of a project participant performing research activities in the Skolkovo Innovation Centre. In tax periods from 1 January 2017 until 31 December 2020, the set-off of ordinary losses may reduce the tax base in those periods by no more than 50% Capital losses As a general rule, capital losses from the alienation of depreciable assets and inventory are fully deductible (article 265 of the TC RF). However, losses from the alienation of depreciable assets (including intangible property) are deductible in equal instalments over the remaining useful life of the asset, which is calculated as the difference between its useful life and the period of use prior to the alienation. Capital losses from the assignment of receivables are generally deductible. With effect from 1 January 2015, capital losses resulting from the alienation of listed securities are included in the general taxable base. Losses resulting from non-listed securities are accounted separately. Generally, general losses may be deducted from the profits resulting from transactions with non-listed securities (but not vice versa). However, professional participants on the security market, market operators, stock exchanges, managing companies and clearing organizations acting as a central counterparty have the right to deduct losses from the transactions with non-listed securities and derivatives from their general taxable base. Losses from the alienation of shares in Russian companies which are taxed at the rate of 0% as described in section 1.4. cannot be carried forward. 15

18 DOING BUSINESS IN RUSSIA 2017 CORPORATE TAXATION 1.6. Rates Income and capital gains Corporate income tax is levied at a general rate of 20% (article 284 of the TC RF). From 1 January 2017, 3% of this rate is paid to the federal budget and 17% to the regional budgets (previously, the federal portion was 2%). The regions may reduce their share to 13.5% for some categories of taxpayers (for 2017 to 2020, this limit is reduced to 12.5%). Capital gains are included in ordinary business profits and taxed accordingly. Companies carrying on educational and (or) medical activity are subject to 0% corporate income tax provided certain conditions established by the Tax Code are met including, inter alia, possession of a specified state licence and satisfying criteria relating to the source of their income and the number of employees. Companies taxed under the simplified tax regime (see section 3.1.) are subject to different rates Withholding taxes on domestic payments Dividends Unless the participation exemption (see section 2.2.) applies, gross dividends and other profit distributions by resident companies to other resident companies are subject to a 13% withholding tax (9% before 1 January 2015) (article 284 of the TC RF). This tax is final, and the dividends are not included in the recipient s taxable base for corporate income tax. The taxable base for withholding tax is reduced by the amount of dividends received by the distributing company from other companies and/or distributed to non-residents. Thus, distributed profits are subject to tax only once, and are exempt from tax in the case of any redistribution to resident shareholders. Withholding tax on the distribution to non-residents is calculated separately (see section ) Interest In general, interest income is included in the taxable base for corporate income tax and taxed at the general rate of corporate income tax (see section ). However, interest on state and municipal securities is subject to a final 15% withholding tax; the interest is not included in the corporate income taxable base (articles 284 of the TC RF). No withholding tax is, however, levied on interest from state or municipal securities issued prior to 20 January 1997 and from certain other securities issued by the state for the purpose of safeguarding foreign currency reserves. Interest on mortgage bonds and long-term (at least 3 years) municipal bonds issued prior to 1 January 2007 is taxable at a 9% withholding tax rate (article 284 of the TC RF). For withholding tax on interest paid to non-residents, see section Royalties There is no withholding tax on royalty payments to resident companies. For withholding tax on royalties paid to non-residents, see section

19 CORPORATE TAXATION DOING BUSINESS IN RUSSIA Incentives Accelerated depreciation A deduction equal to 10% (30% for depreciation groups 3 to 7; see section ) of the acquisition costs of fixed assets or cost of modernization, reconstruction or repair of equipment is available in the year of acquisition (article 258 of the TC RF). Industrially organized agricultural businesses, e.g. poultry plants, cattle-breeding complexes, fur farms and greenhouses, as well as taxpayers having a status of an industrial, touristic and recreational special economic zone or a status of a participant of a free economic zone, are entitled to apply a special coefficient, up to 2, to the general depreciation rate calculated under the provisions of the Tax Code. In the case of leased fixed assets (financial leasing), the general depreciation rate may be increased up to threefold (except for assets included in depreciation groups 1, 2 and 3; see section ). With effect from 1 January 2014, the special coefficient of accelerated depreciation (up to 2) pertaining to assets operating in harsh environments no longer applies. Only assets recorded in the books before 1 January 2014 may continue to apply this coefficient Investment credit An investment tax credit is granted to companies which fulfil one of the following requirements (articles 66 and 67 of the TC RF): (1) the company conducts research, development or evaluation studies, or carries out modernization of its production facilities for the purpose of creating jobs for disabled persons, protecting the environment from industrial pollution or increasing energy-effectiveness of a production process; (2) the company s business involves developing new equipment, new or improved technology or creating new kinds of raw and other materials; (3) the company s business contributes significantly to the socio-economic development of a region or provides highly valuable services to its population; (4) the company executes a state defence order; or (5) the company invests in the creation of the certain energy-efficient objects. In the case of (1) and (5), the credit amounts to 100% of the value of the equipment acquired and used for the qualifying purposes. In the case of (2), (3) and (4), the amount of the credit is fixed by an agreement between the appropriate regional authority and the company concerned. In general, the investment credit may be granted for a period of 1 to 5 years Special economic zones Companies operating in an industrial or tourism and recreational special economic zone (SEZ) are entitled to accelerated depreciation at double rates (article of the TC RF). For companies that are residents of SEZs, the reduced corporate income tax rate (not more than 13.5%;see section ) can be established by the regions, provided separate records are held for income (and expenses) received from the activity in the territory of an SEZ and income (and expenses) received from the activity outside the territory of an SEZ. The corporate income tax rate payable to the federal budget is 0% 17

20 DOING BUSINESS IN RUSSIA 2017 CORPORATE TAXATION until 2018 (for companies resident in technology development SEZs), and until 2023 for companies resident in tourism and recreational SEZs, provided the activity in the territory of an SEZ is accounted separately. For companies operating in an innovation SEZ, the rates of social security contributions (see section 4.2.) are reduced for as follows (article 58 of the Federal Law 212-FZ): contributions to the State Pension Fund: 8% for , 13% rate in 2018 and 20% in 2019; contributions to the Social Security Fund: 2% for and 2.9% for ; and contributions to the Federal Medical Insurance Fund: 4% for and 5.1% for Residents in any SEZ are exempt from corporate property tax in respect of assets used in these SEZs for the first 10 years and from land tax (see sections and , respectively) for the first 5 years from the moment of recording these assets on their balance sheets. Additional incentives may be introduced in particular SEZs. For example, qualifying companies making investments in the Kaliningrad region SEZ (in particular, under an obligation to make an investment in amount of RUB 150 million or more) are exempt from corporate income tax and corporate property tax for the first 6 years of the investment project and will pay these taxes at rates reduced by 50% during the following 6 years Free economic zones Companies operating in free economic zones (FEZs) (currently, the territories of the Republic of Crimea and the City of Federal Significance Sevastopol) are subject to a 0% corporate income tax payable to the federal budget for the first 10 years starting from the year of receipt of their first profit (article 284 of the TC RF). The reduced corporate income tax rate (not more than 13.5%, see section ) can be established by the regions for the companies operating in an FEZ. The above tax rates are applicable provided income (expenses) from the activity carried out in an FEZ is accounted separately from other activities of the taxpayer. Residents of FEZs are exempt from corporate property tax in respect of assets used in these FEZs and land tax for the first 10 years from the moment of recording these assets on their balance sheets Other Qualifying export-oriented information technology companies may write off directly the expenses for computer hardware in the year of acquisition (instead of the normal depreciation rules; see section ) (article 259 of the TC RF). The taxpayer is entitled to deduct expenditures on the acquisition of tools, appliances, instruments, devices, laboratory equipment, special clothing and other personal and collective protective equipment as stated in the legislation of the Russian Federation, and other assets which are not amortizable assets, within more than one reporting period, taking into consideration the useful life of such property and other economic characteristics. 18

21 CORPORATE TAXATION DOING BUSINESS IN RUSSIA 2017 Income from the sale of the property obtained without consideration can be reduced by the market value of the property recorded in the taxpayer s accounts at the moment of the receipt of the property free of charge Skolkovo Innovation Centre The Skolkovo Innovation Centre is aimed at attracting research and development activity in a number of specific technical fields. Companies who participate in this Centre may benefit from a 10-year (article of the TC RF): profits tax exemption; VAT exemption; and reduced social contributions rate of 14% up to a cap of RUB 300 million Administration Taxable period The tax year is the calendar year (article 285 of the TC RF). Taxable income is income derived during the calendar year. The reporting periods are the first quarter, half year and 9 months of a year. The taxpayer may, however, elect to calculate and to report taxable income on a monthly basis Tax returns and assessment In general, annual income tax returns must be filed no later than 28 March of the year following the tax year (article 289 of the TC RF). In addition, the taxpayer is obliged to file a simplified tax return for each reporting period (i.e. quarter, half year and 9 months). A taxpayer may choose to report income on a cumulative monthly basis (i.e. report the income of the first month, the first 2 months, the first 3 months, etc.). Irrespective of the reporting period chosen, the deadline for the tax return is the 28th of the month following the reporting period. The same deadline applies to withholding agents with respect to the withholding tax on items of income (see sections and ) paid to residents and non-residents, and with respect to the corporate income tax on other taxable income paid to non-residents. From 1 January 2016, withholding agents are required to submit to the tax authorities quarterly interim tax returns on the tax withheld from income paid to individuals. Such interim withholding tax returns must be submitted no later than the last day of the month following the reporting period, while annual withholding tax returns must be submitted no later than 1 April of the year following the tax year in which the income was paid. The tax authorities have the right to suspend tax agents bank accounts if they fail to submit withholding tax returns to the tax authorities within 10 days after the deadline. The corporate income tax return for the consolidated group of taxpayers should be filed by the member responsible to the tax authority with which the agreement on the consolidated group of taxpayers was registered. Other members of a consolidated group of taxpayers do not file corporate income tax returns unless they receive income which is not included in the consolidated taxable base of the group. Tax returns can be filed electronically. 19

22 DOING BUSINESS IN RUSSIA 2017 CORPORATE TAXATION From 1 July 2015, taxpayers may use electronic personal accounts. The personal account of a taxpayer is a platform available on the website of the Federal Tax Service that the taxpayer can use to realize his rights and obligations, including filing tax returns and submitting required documents as well as filing claims to the higher tax authorities Payment of tax The corporate income tax is calculated in a self-assessment procedure on a currently adjusted basis for each reporting period (see section ). The taxable income of a reporting period is the cumulative amount of income since the beginning of the year; the tax liability is then computed as the corporate income tax on the cumulative income, reduced by the payments for the preceding quarters of the tax year. A corporate taxpayer is obliged to make monthly advance payments equal to one third of the tax liability of the preceding quarter (article 286 of the TC RF). Advance payments for the first quarter of the current tax year are based on the tax liability of the last quarter of the preceding year. The taxpayer may elect to calculate and report the taxable income and to pay the final corporate income tax owed on a monthly (actually earned) basis, provided that the local tax office has been informed before 31 December of the preceding year. In such case, amounts of the advance payments must be calculated on a cumulative total from the beginning of the tax period up to the end of the relevant month. If the average turnover calculated on a quarterly basis does not exceed RUB 15 million (before 1 January 2016, RUB 10 million) in each of the four preceding quarters, or the taxpayer is a non-resident legal entity operating through a permanent establishment in Russia, the taxpayer is released from the obligation to make monthly advance payments. In such a case, corporate income tax is paid on a quarterly basis. Newly incorporated entities have the possibility to pay quarterly advance payments, provided their turnover does not exceed RUB 5 million per month (before 1 January 2016, RUB 1 million) or RUB 15 million per quarter (before 1 January 2016, RUB 3 million). For withholding taxes levied on dividends and interest derived from state and municipal securities, the tax withheld must be paid to the local tax office no later than the next day after the date of the income payment. From 1 January 2009, the Minister of Finance has the power to postpone a payment of federal taxes for up to 5 years if the amount of federal tax liability exceeds RUB 10 billion and its recovery may cause a negative social-economic effect. Monthly advance payments should be paid no later than the 28th of the month following the reporting month. Annual corporate income tax must be paid no later than 28 March of the year following the tax year (article 287 of the TC RF) Rulings Currently, there is no advance rulings system in Russia. However, the taxpayer is entitled to receive free information from the local tax authorities on taxes, legislation, and other provisions as well as written explanations from the tax authorities on the application of the tax legislation. Such information, which should be given within 2 months after the request, is not binding on the taxpayers or the tax authorities. 20

23 CORPORATE TAXATION DOING BUSINESS IN RUSSIA 2017 From 1 January 2012, advance pricing agreements (APAs) may be requested from the tax authorities concerning the pricing of future transactions between associated enterprises (see section 7.2.). 2. Transactions between Resident Companies 2.1. Group treatment From 1 January 2012, consolidation of a group of taxpayers is possible (chapter 3.1 of the TC RF). The regime is optional and applies only to Russian companies (i.e. no crossborder consolidation is allowed). To form a group, the consolidating companies must sign a Tax Consolidation Agreement. This agreement details, inter alia, the members of the group, the consolidation period (a minimum of five corporate income tax periods applies; a minimum of two periods applied before 1 January 2016) and the member responsible for consolidated filing and payment of the taxes. In order to form a group, certain conditions have to be met. The most important are: a participation of at least 90% (directly or indirectly) in the capital of another company; the total amount of VAT, excises, corporate income tax and mineral extraction tax is at least RUB 10 billion; the combined turnover of the group members is at least RUB 100 billion; and the combined value of the assets is at least RUB 300 billion. The consolidated profit is determined on the basis of all income and expenses of the members of the group. Income of the group members that is taxed at source is not included in the consolidated profit. Generally, a consolidated group of taxpayers shall be considered as created from the first day of the tax period following the calendar year in which the tax authority registered the agreement on the creation of the consolidated group of taxpayers. Pre-consolidation losses of group members are not deductible from the consolidated income. Losses incurred by the group cannot be used by a member of the group after leaving the consolidated group of taxpayers. Under a number of circumstances the group ceases to exist. The most notable of these are: the expiration of the consolidation period specified in the Tax Consolidation Agreement; the termination of the Tax Consolidation Agreement; non-compliance of the responsible member of the group with the condition for being a member of a consolidated group of taxpayers; a court decision declaring the Tax Consolidation Agreement void; and reorganization, liquidation or bankruptcy of the responsible member of the consolidated group of taxpayers. Penalties with respect to the consolidated group of taxpayers have been introduced. If a member of a consolidated group provides inaccurate information to the responsible member of the consolidated group which leads to underpayment of tax, a penalty of 20% of underpaid tax is imposed (40% in the case of a deliberate act). 21

24 DOING BUSINESS IN RUSSIA 2017 CORPORATE TAXATION A moratorium on application of the consolidated group of taxpayers applies until 2018, i.e., agreements on creation of the consolidated group of taxpayers as well as amendments to these agreements will not be registered by the tax authorities in 2016 and Also, agreements registered in 2014 and 2015 will be considered as not registered Intercompany dividends The term dividends includes after-tax profit distributions made by any resident legal entity to shareholders in proportion to their shares. (In addition, distributions by nonresident legal entities qualify as dividends if they are defined as dividends under the relevant foreign law; for foreign dividends, see section ). As a rule, domestic dividends are subject to withholding tax (see section ). This tax is final, and the dividends are not included in the recipient s taxable base for corporate income tax. If the amount of the distribution contains dividends that the distributing company has received from a resident or non-resident company, such dividends are not subject to withholding tax at the time of redistribution. Dividends received by resident companies from other resident companies are exempt from both withholding tax and corporate income tax (participation exemption) if (article 284 of the TC RF): the recipient company holds a minimum participation of 50% of the capital in the distributing company; and the participation has been held continuously for at least 365 days. From 1 January 2015, there are two additional conditions which should be met in order to apply the above participation exemption (article 312 of the TC RF): if a resident company holds through a foreign intermediary company another resident company, the participation exemption only applies if the (first-mentioned) resident company owns at least 50% of the capital in the foreign intermediary company from the moment of distribution until the end of that tax period; and the amount of dividends distributed to the Russian company should represent at least 50% of the total amount of distributed dividends. From 1 January 2011, the condition of the value of the participation of RUB 500 million is removed from the Tax Code. This amendment applies to retained earnings derived starting from Foreign dividends may qualify for the participation exemption unless the distributing company is resident in a country or territory that is a listed low-tax jurisdiction and/or does not exchange information with Russia. 3. Other Taxes on Income 3.1. Simplified tax regime Legal entities and individual entrepreneurs may opt, under certain conditions, for the simplified tax regime if, by the 9-month reporting period of the tax year in which the legal entity or the individual entrepreneurs files an application for transition to the simplified system of taxation, its turnover (exclusive of VAT) does not exceed RUB million (RUB 45 million before 1 January 2017) (article of the TC RF). This 22