21 July 2017 Recent Developments of the Russian Tax System General overview Over the last few years Russia has made a number of significant changes to its tax legislation, bringing the national tax system a more aligned with OECD standards in tax legislation and administration and making the Russian Federation an attractive and predictable environment for doing business. These changes result in the convergence of the approach to taxation in Russia and in foreign states, so that the Russian tax system has become an integral part of global tax relations. Russia has significantly reworked its transfer pricing rules, introduced rules on controlled foreign companies, beneficial ownership concept and concept of tax residency based on effective management and control principle in line with OECD guidelines and BEPS initiative. The Government negotiated changes to a wide range of Double Tax Treaties (including ones with major European holding jurisdictions) in order to improve transparency and boost attractiveness of Russia as a jurisdiction for investments. At 20%, Russia s main profit tax rate remains one of the lowest among major economies. The government has introduced a number of tax incentives that can reduce the rate even further. Russian tax law is codified, with all tax rules set forth in a single basic document logically structured the Tax Code of the Russian Federation (hereinafter, the Tax Code ). The clarifying official positions of the Russian Federal Tax Service and the Ministry of Finance, as well as the court practice have also an important impact on development of the fiscal environment. From 2015 a moratorium on any increase in the tax burden on the economy is officially in action in the framework of the fiscal roadmap of the Russian Federation for 2016 2018 years, established by the Ministry of Finance of the Russian Federation. Tax accounting in Russia has become simpler in recent years: taxpayers communicate with the tax offices largely online at the reporting and payment stages. The Federal Tax Service of Russia (FTS) posts news items
of interest to taxpayers on its official website, provides clarifications of the law, and can even assist in verifying the reliability and trustworthiness of business partners. Taxation of foreign presences Tax incentives for investment activities in Russia Russian tax law offers various benefits and preferences that may apply if certain criteria are met, making the resulting tax savings perfectly legitimate. Over the last couple of years, special federal support measures and corresponding tax incentives have primarily been aimed at directing investment towards certain Russian regions. Moreover, regional authorities entitled under the Tax Code to grant tax preferences for regional investment and innovation projects. Under this regime, the corporate income tax (CIT) rate may be reduced significantly, or even brought down to zero for the first few years after the initial returns on an investment are realized. Investors may be eligible for certain tax breaks in Special Economic Zones and Advanced Development Zones, Green Field Projects. In fact, for certain taxpayers, depending on their specific line of business, the property tax and transport tax savings available under such regimes may be even greater than the potential CIT savings. Thus, investors may obtain significant tax incentives by concluding a special investment contract with the government (SPIC) a newly adopted instrument under which the investor pledges to invest at least 750 million RUB in developing industrial facilities in Russia. The SPIC is an agreement between the investor and the Russian Federation, in which the investor takes the obligation to set up, upgrade or develop industry in Russia or implement the best available technologies in return for certain state incentives and for a stable tax environment. SPIC can be concluded at the federal and/or regional/municipal level and irrespective of the location of the investor in Russia. The list of incentives in return is significant: profits tax rate: potential reduction to 0%; application of accelerated depreciation rates; property tax rate: potential reduction to 0%. The incentives apply for the period up to 10 years. All these rates are dependent on the respective regional legislation being enacted, and Russia s regions are actively developing and introducing the respective legislation to ensure investors can receive these benefits. The recognition of foreign companies as Russian tax residents A foreign legal entity (FLE) that conducts business activities in Russia through a separate division, a term that includes representative offices, branches, construction sites and other places of business 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 within 30 days of the commencement of such activities.
Although the taxation of a separate division of an FLE is similar to the taxation of a Russian legal entity, there are a number of differences that can make this an attractive form of doing business in Russia. Starting from 1 January 2015, a foreign organization may be recognized as a Russian tax resident if its place of effective management is in Russia. The place of effective management of the foreign company is deemed to be in Russia if at least one of the following conditions is met: executive body activities are regularly exercised in Russia; top management functions are exercised by key organization officials from Russia. A foreign company has the right to elect to become a Russian tax resident, provided it conducts activities through a PE in Russia. A notification should be filed with the Russian tax authorities following the procedure and format developed by the competent authorities. The Tax Code defines the term permanent establishment (PE) as a branch ( filial ), representative office, division, bureau, office, agency or any other separate fixed place of activity, through which a foreign company regularly engages in business activities in Russia. The term is used exclusively for tax purposes and does not affect the legal status of an entity. Recognition of a foreign organization as a Russian tax resident will result in taxation on the company s worldwide income in Russia and obligations to comply with other requirements and rules provided by the Russian tax legislation. Recognition of a foreign organization as a Russian tax resident and its compliance with the tax laws of the Russian Federation exclude the application to it of rules on taxation of foreign controlled companies (CFC). Foreign companies, that voluntarily recognized themselves as Russian residents can benefit from the 0% rate on dividend income. The first tax period for foreign companies, recognized themselves as a resident of the Russian Federation, starts from the 1 January of the year when the application was made either from the moment of filing to the end of the calendar year (according to the company s choice). If the foreign company is liquidated before the 1 January 2018, it will not be considered as a Russian tax resident. PEs and Russian legal entities use similar rules for determining taxable profits and for calculating taxes due. The rules on filing tax returns and maintaining tax registers are also similar. The only major difference between a foreign entity with a PE and a Russian legal entity relates to the monthly advance payment of profit tax. PEs are exempt from this requirement and are thus not obligated to remit profit tax on a monthly basis. Russia in International cooperation in tax sphere The Russian government has made a number of coordinated attempts to strengthen national legislation in the scope of the elaborated deoffshorisation policy and adopted several measures aimed at preventing profit shifting of Russian profits to preferential tax jurisdictions and at re-routing funds back to Russia.
The Russian tax environment is continuously evolving and adapting to changes, while adopting best practices and balancing the interests of the State with those of taxpayers. Recent key changes in Russian tax law have been largely aligned with OECD initiatives. As an example, the more expansive interpretation of the notion of beneficial ownership contained in many DTTs was adopted, the widespread use of this notion as a universal tool to fight tax evasion, the willingness to apply a restrained approach to the contents of current DTT, the expressed initiative to participate in the automatic financial information exchange. Applying the concept of the beneficial ownership Russia s deoffshorization legislation introduced a requirement for Russian tax residents, both individuals and legal entities, to notify the Russian tax authorities regarding participation in foreign companies and the foundation of foreign structures without corporate identity, as well as a requirement to submit notifications of controlled foreign companies. The Federal Law on February 15, 2016 32 introduced the amendments to the article 312 of the Russian Tax Code. The amendments contain the requirement for foreign companies to present to Russian taxpayers, acting as tax agents paying income to them, a proof of a factual right for such income for the purpose of applying lower tax rates provided for by the international agreements on avoidance of double taxation. The foreign companies shall also provide a confirmation of its tax residency in the country, which is a party to the double taxation agreement. From 2017 года the confirmation of a factual right to income has become an obligatory stage for obtaining lower tax rate according to the double taxation agreement by a tax agent. At the current moment, Russian legislation does not stipulate uniform format for confirming the status of beneficial owner of income that makes it a subject of a broad interpretation by tax authorities. However, the following criteria will serve as reference points for proving an independent business activity in a country, member of DTA: independence in carrying out business risks and determining the future economic fate of income; absence of instant and unconditional transfer of the income received in favor of a third party; professional staff availability and presence of other types of activities and income, other than those received under contracts with the Russian side. Tightening of Double taxation treaties (DTT) regulations Russia expressed its intention to limit the withdrawal of profits from the country and to coordinate the efforts to implement the OECD s plan to prevent base erosion and profit shifting. On June 7, 2017 Russia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) of 24 November 2016. The MLI will operate alongside existing bilateral double tax treaties while modifying the way in which those treaties are applied. The Convention is targeted at fulfillment of gaps in existing international tax rules by transposing results from the OECD BEPS Project into bilateral tax treaties worldwide.
Russia notified the OECD that it wishes 66 of its current double tax treaties (DTT), signed with other countries, to be covered by the MLI. The only exceptions are those agreements with countries that are not members of the OECD ad hoc group, which developed the MLI, and the agreements with Sweden and Japan. By signing the MLI, Russia has approved amendments to the preamble texts, establishing a general principle for all DTTs: DTTs may not be used for tax evasion purposes. The key changes to DTTs which the Russian Federation intends to introduce are the following: to prevent treaty abuse by adopting the Principle Purpose Test (PPT), used to determine whether a transaction is genuine or is concluded solely to obtain a tax benefit, an additional rule for dividend transfer transactions, an additional provision affecting capital gains from the alienation of shares and on the interest of entities that derive more than 50% of their value from immovable property and additional rules for mutual agreement procedures. The first amendments to the Russian tax treaties are expected to come into effect in the beginning of 2019. Accession to the Multilateral Competent Authority Agreement for Country-by- Country Reporting a step to integrating CRS standards to the Russian regulatory system Russia is making rapid success on the path towards greater transparency and better quality of information and has taken another step in the scope of its deoffshorization policy by signing on May 2016 the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (MCCA CbCR) that allows automatic exchange of country-by-country reports among signatories. Signing the agreement is a prerequisite step for Russia s joining the automatic exchange of CbC reports with other countries. Joining the MCCA CbCR will enable the Russian Federal Tax Service (FTS) to obtain from foreign tax authorities, that expressed their willingness to exchange financial information with Russia, CbC reports containing information on the allocation of revenues and profits and other data which is necessary for assessing risks related to base erosion and profit shifting. The FTS will also be required to provide annually CbC reports of the Russian headquartered groups to the tax authorities of partner jurisdictions. The elaboration of legal and technical basis for the automatic exchange of tax information is planned to be realized from 2018. Russian tax authorities possess a progressive system of data protection, enabling safe storage and dissemination of financial information. Freytak & Sons. Law office is a Russian full-service law firm, providing a complex legal support to Russian and foreign companies in their business activity in the Russian Federation. The law firm s experts have longstanding experience in consulting their clients on various questions of taxation and elaborating the most appropriate tax model depending on the client s type of business.