Doing Business in Russia

Your Roadmap to Successful Investments

Tax and Legal kpmg.ru 2 Doing Business in Russia

Moscow

Dear Reader, This brochure has been prepared to provide you with an economic overview of Russia and to introduce the tax and legal issues that are important when planning to do business in Russia. In particular, we provide here a discussion of the benefits of investing in the special economic zones, as well as review current trends in the wider economy concerning innovation and modernisation. Russian tax and civil legislation is constantly developing, meaning that sometimes there is no clear answer to what might be considered a simple question. In such circumstances, court cases and rulings are important sources for interpreting legislation. The exchange rate used in this report is the average official exchange rate of the Russian Central Bank in February 2019, which was USD 1: RUB 65,8105. Please note that this brochure is not intended to provide tax or legal advice for any specific person or situation. Readers are strongly advised to seek professional assistance from advisors with experience of doing business in Russia before undertaking any business ventures themselves.

About KPMG KPMG is one of the world’s biggest advisory, audit, and tax and legal firms. We are a global network of professional firms employing more than 207,000 outstanding professionals who work together to deliver value in 153 countries worldwide. KPMG has been working for 28 years in Russia and has more than 5,500 professionals working at 23 offices spread across 9 CIS countries. In recent years, KPMG in Russia and the CIS has been one of the fastest growing KPMG practices in the world. KPMG has been consistently rated the No.1 audit firm in Russia from 2009-2018 by Expert RA* and was named Transfer Pricing Firm of the year in Russia from 2014-2018 and Tax Advisory Firm of the year in 2014-2018 in Russia by International Tax Review magazine.

Moscow St. Petersburg Nizhny Novgorod Voronezh Kazan Perm Rostov-on-Don Ekaterinburg Kiev Lvov

Minsk

Yerevan Krasnoyarsk Ufa Tbilisi Novosibirsk Almaty Vladivostok Baku Atyrau Bishkek Tashkent Nur-Sultan

* RAEX (Expert Rating Agency), Largest Audit Organizations, in 2009–2018

Saint Petersburg

▌ Introduction to Russia 6 ▌Special tax regimes 31 Country snapshot 6 Unified tax on imputed income 31 Measures for encouraging innovation Simplified taxation system 32 and modernisation in the economy 6 Unified agricultural tax 32 —— Special Investment Contracts (SPIC) —— Regional Investment Projects (RIP) ▌General Comments on Transfer ▌Pricing 33 ▌Starting a Business in Russia 9 Legal structures for starting a business in Russia 9 —— Direct sales ▌CFC rules in Russia 37 —— Distributorship contract Corporate tax residency rules 38 —— Representative office or branch Beneficial ownership requirement 38 —— Russian subsidiary —— Join stock companies ▌Personal Income Tax 39 —— Limited liability companies Tax base 39 —— Economic partnership Other taxes payable by individuals 41 Foreign investment law 12 Other business issues 13 —— Licensing requirements ▌Financial Reporting 42 —— Land ownership Russian Accounting Principles 42 Statutory reporting requirements 43 ▌Company Law 14 Audit requirements 44 New industry accounting standards Liabilities 14 for non-credit financial organisations 44 Registration 14 Reorganisation 16 ▌Appendices 46 Appendix 1. ▌Labour Law 17 Chart of Withholding Tax Rates 46 Labour regulations 17 Appendix 2. Employment conditions 18 Fines for the most widespread tax Work permits for foreign nationals 22 and customs violations 52 Appendix 3. ▌Business Taxation 23 KPMG’s Tax & Legal Department 54 Tax system overview 23 Glossary of terms 55 Tax registration requirements 23 New approach to identifying unjustified tax benefit 24 —— Value Added Tax —— Profits tax —— Social Security Contributions —— Withholding income tax —— Property tax —— Other taxes

Country snapshot

Capital: Moscow

Area: 17 mln sq km

Population (1 Jan 2019): > 146.8 mln (Rosstat)

Cities with over 1 million citizens: 15

Number of regions: 87

President: Vladimir Putin

Prime Minister: Dmitry Medvedev

Currency: Rouble (RUB)

Measures for The SPIC investor is free to engage other private actors to undertake certain actions encouraging innovation required by the SPIC. The possibility of and modernisation in the having several participants on the private economy side of the SPIC provides flexibility and allows for different operational models to Special Investment Contracts be deployed in the investment project. (SPIC) On the public side – depending on the General provisions investment project and designated Special Investment Contracts (SPIC) benefits – a SPIC may be concluded with are a relatively new form of cooperation the Government of the Russian Federation between the Government of Russia / (a Federal SPIC), with the Government the governments of Russia’s Regions of a Russian Region and/or municipality and private investors. Under a SPIC, an (a Regional SPIC), or with both the investor undertakes to set up a new (or Government of the Russian Federation modernise an existing) production facility, and a Russian Region and/or municipality while the Russian Federation and/or that (a Multilateral SPIC). Russian Region undertakes to provide SPICs are concluded for the period of time certain tax and non-tax benefits. in which a project starts to earn operating Voronezh

Moscow

profits, plus 5 years; but not for more than Benefits for investors 3%) during the period in which the 10 years. regional profits tax incentive, SPIC investors potentially may be eligible introduced by Regional regulations, Investment projects in the following for the following key benefits: 1 applies. industries may be subject to SPICs: 1) tax incentives that may include machinery manufacturing and —— reduction to 0% of the profits tax due reductions in profits tax and property to the Regional budget, depending on automotive; metallurgy; oil processing tax rates, as well as local tax the region (but not beyond 2025). and petrochemicals; gas processing; incentives; —— exemption from, or reduced property charcoal, aviation and shipbuilding; 2) no increases in their tax burden, and, telecommunications, electric power, tax on, fixed assets generated within for certain regulations, guaranteed the investment project. electronic and radio electronics; regulatory stability; pharmaceuticals, medical and Some regions have introduced regional 3) “Single Supplier” status for biotechnology; forestry, pulp, paper and tax incentives for those signing a SPIC, investment projects of at least 3 including Moscow Region, Kaluga Region, wood processing; and certain agricultural billion roubles (USD45,450,000); industries (this list is not exhaustive). Leningrad Region, Nizhniy Novgorod 4) simplified procedures for obtaining Region, Perm Region, Sverdlovsk Region, SPICs are currently regulated by Federal the status of “Russian manufacturer”; and Chelyabinsk Region. The scope and Law No.488-FZ of 31.12.2014 “On the 5) simplified procedures for receiving criteria of the incentives differ from one Industrial Policy of the RF”, and by Decree land plots for the investment project; region to another. No. 708 of the Government of the RF 6) subsidies, etc. Current tax law establishes a number of of 16.07.2015 “On Special Investment Tax incentives requirements that need to be taken Contracts for Certain Industries” (amended as of 16.12.2017). Tax concessions may include profits tax into account for some SPIC projects. For and property tax incentives as follows: example, to obtain a profits tax benefit, at The regulatory framework for SPICs least 90% of the entity’s income should continues to develop, and further changes —— application of a 0% profits tax rate for taxes due to the Federal budget be generated by the investment project can be expected regarding eligible (instead of the normal rate of 2% or (this is difficult to achieve in modernisation industries, benefits provided, etc.

1 It may be possible to conclude a SPIC in oil processing, petrochemicals, gas processing, charcoal, electric power, and for certain agricultural industries from July 2018..

projects); or that tax incentives can only be Regional Investment Projects Russia’s Regions have authority to provide provided to projects that produce goods (RIP) specific tax incentives for investors (not services). implementing RIPs (e.g. reducing the The Russian Tax Code provides tax profits tax amount due to the Regional Regions are also entitled to provide incentives to those Russian organisations budget, or reducing the rate of property land tax, transport tax and regional levy that undertake Regional Investment tax). incentives. Projects (RIP). RIPs may include the The scope of incentives will also differ Obligations on investors creation of new production facilities or modernisation of existing production depending on the type of RIP: there are When concluding a SPIC, the investor facilities in Russia, and should meet RIPs where investors should first obtain takes on certain obligations, including the certain criteria. the status of being a RIP participant by following: being added to the Register of RIPs; and Tax incentives for investors —— For Federal SPICS: to invest at least there are RIPs with simplified application 750 million roubles (USD12,096). Tax incentives may include the following: procedures (no need to be added to any Regional authorities may introduce —— Reduced extraction tax over a 10-year Register). different thresholds for investments period. This incentive is available for Obligations on investors under their own specific Regional and projects being realised in certain Multilateral SPICs if the Region is one regions of East Siberia and the Far To qualify for a RIP and related tax of the parties; East. incentives, investors should fulfil certain obligations, including the following: —— That certain KPIs must be achieved —— Application of a 0% profits tax rate on within the SPIC’s term, such as profits tax due to the Federal budget —— Invest at least 50 million roubles production volumes, tax payable (instead of the normal rate of 2% or (USD806,000) during a 3-year period amounts, number of jobs created, 3%). The length of time the incentive (under certain conditions); or invest at etc.; can apply depends on the type of RIP least 500 million roubles —— That production of unique products and the Region in which the RIP is (USD8,065,000) during a 5-year period must begin; that the best realised. (under certain conditions). technologies must be introduced; etc. —— Exemption from or reduction to the —— At least 90% of the entity’s income There is a special application procedure profits tax due to a Regional budget should be generated by the RIP (this that requires SPIC investors to prepare (instead of the normal rate of 17% or is the profits tax incentive criterion). and submit documentation related to their 18%). The reduced profits tax rate —— The investor should not be resident in investment project. This documentation and the period over which this can be a Special Economic Zone, or part of a includes the SPIC application, a business applied depends on the type of RIP consolidated taxpayer group. plan, financial models, etc. and Region in which the RIP is —— The RIP should not be aimed at the implemented. As the regulatory framework surrounding extraction of oil or natural gas and/or —— Exemption from or reduction to the oil refining, the provision of related SPICs develops, so too interest from property tax on fixed assets used in / transportation services, the business in this tool is increasing. At related to the investment project. The production of excisable goods (except least 15 Federal SPICs have already been terms and conditions of the property for cars and motorcycles), or activities signed. Investors are companies with tax incentive are prescribed in the law for which the 0% profits tax rate is foreign and Russian-sourced capital from of each particular Region. applicable. various sectors, including the pharma, The scope of incentives depends on the The RIP is also a popular tool for automotive and equipment production Region where the RIP is being realised. investors. To get the maximum effect industries. In general, RIP incentives for certain from the incentives under the RIP, careful regions of East Siberia and the Far East structuring of the investment project is differ in comparison to the RIP incentives needed. provided in the rest of Russia. Additionally,

Legal structures for Copies of technological equipment that is not manufactured in Russia can be starting a business exempt from import VAT when imported in Russia into Russia. Investors often face the problem of Some goods imported into the EEU are deciding which legal structure they subject to non-tariff regulations (e.g. should choose for their business in certification, licensing, quotas, etc.). Russia. Below you can find guidance on Customs clearance fees generally establishing the following: depend on the value of the imported —— Businesses making direct sales goods, but cannot exceed RUB 30,000 —— Distributorship contract businesses (USD484). —— Representative offices or branches A ‘disposal charge’ is also payable on —— Russian subsidiaries imported vehicles – the rates of this charge can vary depending on the engine Direct sales power, vehicle weight and seating A foreign legal entity (FLE) that sells capacity. goods directly from abroad to customers Belarus, Kazakhstan, and Russia form located in the Eurasian Economic Union the Eurasian Economic Union, a union of Armenia, Belorussia, Kazakhstan, formed in 2014 by the signing of an Kyrgyzstan and Russia (hereinafter – the agreement. Since then, they have been EEU) would not be subject to Russian joined by Armenia and Kyrgyzstan. taxes and would not be required to These countries’ economies are now establish a presence in Russia via any more tightly integrated than they were corporate structures. The Russian under the Customs Union, and freedom customers are responsible for clearing of movement for goods, services, the imported goods through customs capital and labour is ensured, along with and for paying customs duties and taxes guaranteed equal treatment for legal (import VAT, excise duties), as well as entities. customs processing fees. In 2012, Russia joined the World Trade Import duty rates are set in the Unified Organization (WTO) and became a full Customs Tariff (UCT) of the EEU. member. As part of joining the WTO, Generally, these import duty rates vary Russia accepted certain commitments from 5% to 20% and apply to goods related to various sectors of the economy imported from countries that enjoy and international trade: ‘most favoured nation’ status. If goods —— Import duties on certain products are imported from developing/least were lowered, while import duties developed countries with most favoured on computers, components for nation status, then the customs rates manufacturing computers and can be reduced. Import VAT is payable hardware components had to have on the customs value of the imported been removed within three years; Nizhny Novgorod goods, and increases in proportion to the amount of the import customs duty.

—— Foreign insurance companies will be can import goods only for their own participants are not considered as permitted to open branches in internal use, not for further resale. securities under Russian securities Russia after the transition period; In order to do business in Russia, ROs legislation. Shares in a JSC (Russian —— Technical regulations will be and branches should be accredited by abbreviation: “АО” or “ПАО”), on simplified and developed based on the Federal Tax Service of Russia, which the other hand, are considered to be securities and are subject to registration international standards; has been acting as the accreditation with the Central Bank of Russia’s —— A transition period is provided that agency since 1 January 2015. The Federal Tax Service accredits ROs and department governing admittance to allows investors in the Kaliningrad financial markets. A JSC can be either and Magadan special economic branches of all foreign companies, except for those of foreign banks and public (its shares are publicly traded) or zones to continue to receive tax foreign civil aviation companies (their non-public. breaks; ROs are accredited by the Central Bank Foreign companies often use LLCs to —— There will be a transition period of Russia and the Federal Aviation conduct their wholly-owned business lasting until 1 July 2018, during Service of Russia respectively). The in Russia. LLC law has many similar which current industrial assembly ROs and branches are accredited for an provisions to those in JSC law, though regulations will be in force; unlimited term. there are certain distinctions. —— Russia will guarantee a certain level Any FLE intending to open its RO or a Generally, only one participant (individual of transparency concerning branch in Russia must prepare certain or legal entity) is required to establish an foreign-trade legislation; documents and pay an accreditation LLC or JSC. However, a solely-owned —— State subsidies to the agricultural fee of RUB120,000 (USD1,900). The legal entity cannot establish another sector were to be USD9 billion per Federal Tax Service reviews applications LLC or JSC as a subsidiary (i.e. one that year in 2012. Subsequently, state for accreditation within 25-30 business would be 100% owned by the legal subsidies decrease yearly. days and issues a certificate with an entity). accreditation number assigned to the Distributorship contract RO or branch. At the same time, a tax Joint Stock Companies registration certificate is issued by the A JSC is a legal entity issuing shares FLEs have the right to conclude Federal Tax Service. After that, the to generate capital for its activities. A distributorship contracts with Russian FLE should obtain the statistics codes shareholder is not generally liable for the companies allowing the Russian assigned by the Federal State Statistics JSC’s obligations, and a shareholder’s companies to sell the FLEs’ goods in Service and register the RO or branch losses are limited to the size of their with the social security funds. Russia. If such an agreement is signed, shareholding. the FLE will not be taxed in Russia. The Bank accounts can be opened after Different classes of shares are available. Russian distributor shall be responsible the RO or branch have obtained their For each share of one particular class, for clearing the imported goods through accreditation and tax certificates, and the dividends and voting rights are their statistics registration certificate, customs and paying customs duties and equal. import VAT. Distributorship contracts but prior to their registration with the are seen as “vertical agreements” from social security funds. Both forms of joint stock company – public and non-public – can issue an antitrust law perspective and must In total it takes 6–8 weeks to set up an common or preferred shares and bonds. comply with antitrust regulations. RO or branch after all the necessary Both forms are subject to statutory documents have been submitted reporting requirements and regulatory to the appropriate accreditation Representative office or branch restrictions, but the requirements for agencies. Preparation of the package public disclosure are less rigorous for A FLE can choose to establish of documents needed for accreditation non-public JSCs. a presence in Russia through a involves their drafting, signing, representative office (RO) or branch. notarisation and, in many cases, legal Recent changes to Russian corporate Neither the RO nor the branch are formalisation outside Russia. This law introduce shareholder agreements considered as Russian legal entities, can add 6–8 weeks to the timings where the shareholders can determine instead being parts of the FLE, and mentioned above. voting obligations at the general therefore the foreign head office is shareholders meetings, price the sale The time required to open a bank responsible for the obligations and of shares, coordinate voting with other account depends on the requirements actions of the RO or branch. The RO can shareholders, and engage in other of the particular Russian bank chosen by only conduct “preparatory and auxiliary” actions related to management, the the FLE (usually 2–4 weeks). activities for the head office, whereas a activities, reorganisation and liquidation branch can conduct all of the activities of the JSC. usually conducted by the head office, Russian subsidiary including signing sales contracts. The The governing bodies of a JSC are the An FLE can establish a presence in general shareholders meeting, the board Russian customs authorities often try Russia by incorporating a Russian to identify the Russian buyers of goods of directors, and the executive body (can subsidiary. The most common legal be an individual or a group of persons). being imported, and can question the forms for companies in Russia are right of a FLE’s branch to declare goods the Limited Liability Company (LLC) The executive body manages the JSC’s for customs clearance. As a result, it can and Joint Stock Company (JSC). In an day-to-day activities and reports to be difficult for branches of FLEs to clear LLC (Russian abbreviation: “ООО”) the board of directors and the general goods through customs, i.e. branches participation units attributable to shareholders meeting.

The shareholders meeting, upon a Unlike JSCs, in LLCs the disposal of and expenses. Allocation of income and proposal from the board of directors participation units must be notarised expenses can be disproportionate to the or at its own discretion, can delegate by a Russian notary public. This is number of contributions made to the the powers of the executive body to done by collecting certain documents, share capital owned by the participants. a managing company or to a manager presenting them to the notary, and By unanimous decision, the participants (who should be registered as an drafting an agreement on the disposal of should elect among themselves a individual entrepreneur). If a FLE is participation units, etc. sole executive body (general director/ appointed as the managing company of president/other) for the partnership. the JSC, it must have a branch in Russia Economic partnership The sole executive body maintains a from which it performs its management This legal form is designed for register of participants with information functions over the Russian company. companies involved in innovative on each one, information on the size activities (including those providing of the participants’ stake in the share Limited Liability Company venture capital). A partnership can be capital, the contributions made to The provisions of LLC law are similar to formed by two or more participants, the share capital, and the size of the those of JSC law. with both individuals and companies partners’ ownership stakes held in the partnership. An LLC’s participants are not liable for participating in the partnership. The the LLC’s obligations, and any losses number of participants in an economic If the partnership’s property is the participants may experience are partnership cannot exceed 50, and, insufficient to satisfy the partnership’s limited to the size of their respective if they do, the partnership must be liabilities, and it becomes necessary participation units. reorganised into a JSC within a year. to impose a court-enforced collection order on the exclusive rights the Transfer of participation units to third The Articles of Association signed by partnership holds over the results of parties can be prohibited by the LLC’s all of the participants is the constitutive intellectual activities, then the liabilities charter. document of the partnership. When establishing the partnership, the of the partnership to its creditors can If the LLC charter provides such participants should also conclude a be satisfied on behalf of the partnership restrictions, a participant has the right partnership management agreement partially or in full by one, several (subject to withdraw from that LLC at any time, to govern the rights and obligations to the consent of all participants) or all requiring that the LLC (or the remaining of the participants, management of participants in the partnership. participants) give the withdrawing the partnership, and its activities, etc. The law on economic partnerships came participant a portion of the LLC’s net This agreement must be certified and into force on 1st July 2012. Since then, assets pro rata to the participation units kept by a notary. The share capital only a few economic partnerships have of the withdrawing participant. of the partnership is divided into the been established (registered) in Russia. LLC charters can limit the transfer of contributions made by the participants in Therefore, some of the practical aspects participation units or require that the the form of money, securities, property of conducting commercial activities consent of other participants or the rights or other rights with a monetary and managing economic partnerships consent of the LLC be obtained before value. remain unclear. transferring the units. The participants can manage the partnership and also allocate income

Kazan

Ekaterinburg

Foreign Investment law If requisition occurs, the value of the companies that carry out some other seized property must be reimbursed to activities, such as: Foreign investors enjoy a guaranty that the foreign investor or to the company —— Activities related to influencing with foreign participants/shareholders, their property rights to their investments hydro-meteorological and and if nationalisation takes place, the and to the profits they earn in Russia will geophysical processes and events; be respected. value of the nationalised property, along with incurred losses, must be —— Activities related to using causative Foreign investments are regulated both reimbursed. agents of infectious diseases (with at the federal and regional levels. some exceptions); The law also offers protection to foreign According to foreign investment investors from unfavourable changes —— Exploring subsoils and extracting law, the rights of foreign investors to to Russian legislation if the foreign mineral resources on land plots of conduct business in Russia and to investor holds 25% or more of a Russian federal significance; take profits gained in Russia cannot company’s share capital. be less favourable than the rights of —— Aerospace activities; Russian investors, though limitations This protection also covers priority —— Activities of natural monopolies or can apply to foreign investors to protect investment projects, regardless of the companies with a dominant position the foundations of the constitutional, foreign investor’s stake in the project’s in the Russian market; health, and human rights systems, as share capital. Foreign investors are —— Harvesting live aquatic resources; well as to defend the lawful interests of protected against: —— Activities related to the use of citizens and to ensure state defence and —— Newly adopted laws altering security. nuclear and radiation-emitting customs duties, federal tax rates, materials and radioactive waste; Foreign investors are generally subject and contributions to non-budget —— Activities related to the use of to the same treatment as Russian state funds (subject to certain encryption facilities and bugging investors. Licensing, notification and restrictions); equipment; permission requirements that may —— Amendments to current laws restrict business activities apply to both —— Military-technology activities, etc. resulting in an increase to the Russian and foreign legal entities. investor’s tax burden; Thus foreign states, international organisations, companies registered The law guarantees protection of the —— Any bans and limitations on foreign in off-shore territories and companies rights and interests of foreign investors. investment introduced in Russia. A foreign investor is entitled to recover controlled by all of the above cannot losses caused by an unlawful action Foreign investors are protected during enter into transactions that would or omission by the state authorities in the first seven years of an investment allow them to control Russian strategic accordance with Russian civil legislation. project’s payback period, starting from companies (e.g. they are barred from the date when the foreign investor purchasing more than 50% of the voting Property of a foreign investor or of a began funding the project. shares (participation units) in strategic company owned by foreign participants/ companies, or from participating in the shareholders cannot be seized to be Russian legislation limits the activities regulatory body of strategic companies, requisitioned or nationalised unless of non-Russian investors participating etc.). They are also blocked from this is stipulated in Russian federal or in companies that are of strategic value transactions that would result in them international law. to Russia (‘strategic companies’) and in acquiring, holding or using more than

25% of the book value of the property of Licensing requirements depend on the The Russian Land Code regulates the strategic companies. type of licensed activity. The decision lease and purchase of land. In practice, to grant or deny a licence is generally it is still quite difficult to obtain title Other non-Russian investors (non- made within 45 (forty-five) business to a land plot in Russia from the state Russian private companies, non-Russian days after the authorities have received or municipal authorities due to the individuals, or Russian companies an application. There can be shorter complicated public procedures involved, controlled by non-Russian companies processing periods in the regulations which can have special regional rules or individual(s)) can gain control over governing the licensing of certain or unique requirements for certain land strategic companies only after obtaining specific activities. categories (e.g. agricultural or forest approval from the relevant Russian state land). However, all owners of buildings authorities. Generally, licences for each type of have the exclusive right to purchase activity are issued for indefinite periods or lease the land plots underlying and Other business issues of time. The transfer of a licence surrounding their buildings. to another company or individual is Licensing requirements generally prohibited. Typically, land-lease contracts (sometimes with a right to purchase) Under the Administrative Offences Code Certain types of activities can be carried can be entered into for a maximum term of the Russian Federation, the licensing out in Russia only once special licences of 49 years. The leasing or acquiring authorities are entitled to suspend issued by the appropriate licensing of state property (apart from when licences if the licensee violates the agency have been obtained. Examples executing the aforementioned exclusive licensing requirements and conditions. of such activities are provided below: right) is likely to require the winning of —— encryption activities; Acting without an appropriate licence a tender/auction. If property is leased can lead to the imposition of significant or obtained without the obligatory —— production of medicines, aircraft, penalties, followed by a court order tendering procedures, then the civil and military weapons; requiring enforced liquidation. Penalties transaction may be invalidated. —— activities related to the storage and and other consequences depend on the Certain other restrictions also apply to demolition of chemical weapons; specific circumstances. owning land, e.g. foreign individuals or —— overseas and inland waterway For some activities, instead of receiving legal entities do not have the right to passenger and freight a licence, a company is required to own land adjacent to the state border transportation; become a member of a professional of the Russian Federation. In addition, —— activities related to highly explosive self-regulating organisation that sets special laws regulate transactions and hazardous objects; its own membership criteria (this, involving farmland. According to these for example, applies to engineering, —— activities related to narcotic and laws, foreign individuals, legal entities construction and valuation services). and stateless persons, as well as psychoactive drugs; Russian legal entities in which more —— educational activities, etc. Land ownership than 50% of the share capital is owned To obtain a licence, an applicant must by foreign individuals, legal entities Pursuant to the Constitution of the submit an application to the licensing or stateless persons, may only lease Russian Federation, land may be held in authorities. agricultural land. private, by the state, or be in municipal ownership.

Liabilities In most cases when a foreign firm is involved, the documents proving the (i) Parent liabilities company’s incorporation have originated In general, a shareholder’s liability is outside Russia. These documents should limited to the amount of capital that the be legalised (by attaching an apostille, or shareholder invested in the company, via a Russian consulate), translated into including as-yet unpaid amounts. Russian and notarised. This process can significantly lengthen the registration However, in the event of bankruptcy, period. the company’s creditors have the right to hold the “parent” liable for the debts It is possible to buy a newly established of its bankrupt subsidiary if the actions company, but this should only be done of the parent caused the subsidiary’s with due care. In establishing these insolvency. new companies, there have often been violations of official incorporation The parent company is also liable for procedures during the registration any deals of its subsidiary that were process, and sometimes mandatory concluded under instructions issued by documents are missing. These missing the parent company or with its approval. steps often only become apparent (ii) ‘Controller’ liabilities when a change to the company’s The term “controller” is broadly defined constituent documents is required and and its definition includes control of a the registration authorities reject the company not only via ownership, but also change due to earlier violations in the via contractual or other relationships that incorporation process. Resolving these allow a person / entity, including a parent issues later can be more time consuming company, to take decisions on behalf of and costly than undertaking the standard the company, or otherwise influence the company registration route. There are company’s activities. also other inherent risks in acquiring ‘off- the-shelf’ companies, such as potential liabilities (e.g. tax liabilities) that could Registration have been accrued in the past when Registration of a legal entity by the the company was used for undisclosed appropriate authorities takes three purposes. business days from the moment In all cases, any change in the company’s documents are filed. ownership must be registered, and this Registration of a JSC requires six can take as much time as forming a new additional weeks, in which its shares company. are registered with the Department of It only takes one participant (individual or Corporate Relations at the Central Bank legal entity) to establish an LLC and/or Ufa of Russia. a JSC. However, LLCs and JSCs cannot

be established by another solely-owned Payment of charter capital Establishment costs (LLC, JSC) legal entity. For an LLC, 100% of the charter capital A shareholder (participant) in an LLC or The maximum number of participants in should be paid within 4 (four) months JSC must pay a state registration fee of an LLC is limited to 50. If exceeded, the from the date of its state registration. RUB4,000 (approximately USD65) prior LLC should be reorganised into a JSC or For a JSC, 50% of the charter capital to or at the moment the constituent a production cooperative within one year. must be paid within 3 (three) months documents are filed with the registration The number of shareholders in a JSC is from the date of its state registration, and authority for the company’s incorporation. not limited by law. the balance must be paid in full within the In addition, when registering a JSC’s year following state registration. issue of shares, there is a registration Charter capital fee of 0.2% of the nominal value of The minimum charter capital for an Bank accounts the issued shares (up to RUB200,000 LLC and non-public JSC is RUB10,000 (approximately USD3,226)). Rouble and foreign currency accounts (approximately USD161). For a public can be opened after the company’s There are additional fees for translating JSC it is RUB100,000 (approximately registration, though they must and notarising the documents. USD1,613). meet certain government and bank Professional fees for collecting the requirements. documents, drafting the constituent documents of the Russian subsidiary,

Perm

and for then submitting the documents, Debt-to-equity conversion the company are transferred to that range from USD7,000 to USD9,000 for an commission. If the company under In Russian corporate law, converting LLC and from USD13,000 to USD16,000 liquidation does not have sufficient debt into equity is an option available to for a JSC (fees depend on the location assets to discharge its liabilities, both LLCs and JSCs, excluding credit (city) of the company to be incorporated). insolvency procedures may be applied. organisations (banks). The time limit for liquidating an LLC An LLC’s debt can be converted into Net assets position cannot exceed 12 months, though this equity in two cases. In the first, the If an LLC’s or JSC’s net assets on its limit can be prolonged for a maximum of LLC owes debt to a participant, and the balance sheet fall below its charter capital 6 months by a court decision. participant exchanges the debt for an at the end of the financial year (with the additional participatory interest in the exception of the first and second financial Insolvency charter capital of the LLC. In the second, years), the company must, within 6 the LLC is indebted to a third party, and Bankruptcy law protects the creditors of months after the end of the financial year: the third party can exchange the debt for companies and outlines the procedures 1) Reduce its charter capital to an participatory interest equal to the amount to be followed in the event of bankruptcy. amount that does not exceed its net owed. Bankruptcy is understood as the inability assets (but not lower than the to satisfy all pecuniary claims made Shareholders are permitted to off- statutory minimum amount of charter by creditors, or the inability to meet set their monetary claims against the capital), or and execute pecuniary obligations company by purchasing additional shares 2) Take the decision to voluntarily as recognised by a court. A company in the JSC only if the shares are issued liquidate itself. is considered insolvent and can via a closed subscription. For a JSC, if the value of the net assets consequently be declared bankrupt by falls below its charter capital by more Liquidation a court if it fails to meet its pecuniary than 25% at the end of 3, 6, 9 or 12 obligations for the 3 (three) consecutive months of the year following the second A company can be liquidated by: months after its obligations are due. reporting year, or in each subsequent —— A decision made at a general Bankruptcy proceedings can be initiated reporting year (when, at the end of shareholders/participants meeting. if the debt owed to the company is the year, the value of net assets is less Reasons can include expiration of the at least RUB300,000 (approximately term/achievement of the goal for than the charter capital), the company USD4,839). must publish 2 announcements (one which the company was established; per month) in mass media outlets that —— A court decision, if the company its net assets have decreased. In such committed a material violation of Reorganisation a situation creditors can demand early certain laws; Various forms of reorganisation (mergers, repayment of their obligations by the —— A court decision, if the company consolidations, split-ups, spin-offs and company. does not submit tax reporting and transformations) are envisaged in the has not had any operations via its If, for the same period as indicated Civil Code for JSCs and LLCs. It is also bank accounts during the previous 12 above, the net assets of an LLC or a JSC possible to reorganise companies via months. fall below the minimum charter capital a combination of different forms of required by law, the company is subject Liquidation procedures include reorganisation. to being liquidated. If the shareholders termination of employment and other Reorganisation entails a number of steps, or participants do not take the decision contracts, formation of a liquidation which include the conducting of a tax to voluntarily liquidate the company, the commission, notifying creditors via audit of the company by the Russian government authorities are entitled to file liquidation announcements in the mass tax authorities, notifying the company’s a petition in court for forced liquidation, media, settling the claims of creditors, creditors (who are entitled to request and creditors may demand early distributing the remaining assets among that the company’s obligations be termination or fulfillment of obligations the shareholders/participants, closing prematurely terminated or accelerated), and compensation for losses. In practice, bank accounts, and deregistering the etc. This means the reorganisation forced liquidation is rare if the company company with the state authorities. process requires considerable time and meets its obligations (including taxes). Once a liquidation commission has effort. been appointed, all rights to manage

Labour regulations —— Mutual consultation on employment issues; Relations between employers and —— Participation of employees in the employees are primarily regulated management of the company; by the Labour Code of the Russian —— Involvement of all parties in Federation (the Labour Code) and by negotiations / disputes before things other legal acts and employer-specific go to court. regulations such as collective/industry- specific agreements, internal policies, Collective agreements decrees and acts adopted by employers, A collective agreement can be concluded as well as employer agreements with between an employer and its employees. their staff (if any agreements exist) and The law does not require a collective direct employment contracts with actual agreement if neither party requests it. employees. If a collective agreement is signed, then Russian labour legislation provides a trade union usually represents the employees with rights and benefits, employees. The employer is represented and governs the types of employment by the general director or his/her contracts that can exist along with authorised representative(s). the terms under which they can be concluded, amended and terminated. The law allows the parties to define the content of any collective agreement Importantly, the Labour Code provides independently; however, the contents that no employment contract can must not make any conditions worse stipulate conditions that are worse than than the minimum standards provided the minimum provisions provided for for by the Labour Code. The collective under Russian labour legislation. agreement is subject to registration with Social partnerships the appropriate State Labour Office. The Labour Code establishes a set of Role of trade unions principles providing for social partnership According to the Labour Code, an in labour relationships. employer is obliged to consider the Social partnership is defined as opinion of a trade union(s) (if such a union the system of relations between exists) on certain matters. In Russia, employees, employers, the state and trade unions are more typically formed local authorities, aimed at regulating and at company level rather than at industry balancing the interests of the employees level and employers in their labour relations. The following areas of interest, among others, are regulated: —— Negotiation of collective agreements; Vladivostok

Employment conditions —— An employer does not have the right leave allowance, paid by his/her to require that an employee performs employer and the Social Insurance Employee guarantees functions beyond those set out in Fund, based on the employee’s his/her employment contract, unless salary. This allowance is between Russian labour legislation provides business circumstances require 60% and 100% of the employee’s certain guarantees for employees, in otherwise, in which case the salary, depending on length of particular: employer has the right to transfer the service. However, for 2019, this —— Standard working hours are not to employee to a position in a different cannot be more than RUB 2,150.68 exceed 40 hours per week. line of work for a period not (USD33) per day. Employers may pay exceeding one month. An employee temporary disability benefits at a —— Overtime is permitted for some can be assigned to a job requiring higher rate at the employer’s employee categories in specific lower qualifications only subject to expense. circumstances, subject to certain the employee’s written consent. If —— Legislation also provides wages conditions being fulfilled. In general, the employer needs additional work overtime should not exceed four covering time spent travelling on performing by the employee, then behalf of work, for performance of hours in two successive days or 120 the employee needs to provide his or hours per year. Overtime is payable the functions of a trade union officer, her written consent and the relevant for appearing in court, for going to at the following rates: no less than paperwork needs to be completed. 1.5 times the normal salary rate per vote, and for fulfilling other state or hour for the first two hours, and no —— Employees are entitled to 14 paid social duties. less than twice the normal rate for non-working days of public holidays —— In certain situations, legislation subsequent hours and for work on and annual leave of at least 28 provides severance pay. calendar days. For some categories weekends and non-working days. —— Women are entitled to maternity of employee, the minimum annual Employees additionally have the right leave for 70 calendar days (84 days in paid leave established by legislation to demand additional days off as case of multiple birth) prior to can exceed 28 calendar days. compensation for overtime. childbirth and 70 calendar days (86 —— An employee is entitled to a sick days if there were complications with

Moscow

the birth, and 110 for the birth of Employers are required to sign individual —— When the director of a company or twins, triplets, etc.) after childbirth. written employment contracts with each company branch commits a single —— Maternity leave is granted along with of their employees. After the contract is violation of their employment social insurance benefits, which are signed, a respective order admitting the responsibilities; paid in amounts defined by statutory employee into work within the company —— When an employee with financial legislation. Regardless of her period should be issued by the general director. responsibilities commits an act which of employment with a specific breaches the trust of the company. The grounds for terminating employment company, a woman is also entitled to under Russian employment legislation Russian law states that employment annual paid vacation, which can be include, inter alia: contracts cannot be terminated by the taken either before or immediately employer, inter alia, with the following after maternity leave, as well as leave —— Mutual agreement, reached by both types of employee: until the child’s third birthday. During parties; her maternity leave and until the child —— Expiration of the employment —— Pregnant women or women with reaches one-and-a-half years of age, contract’s length; children under the age of three; the woman is paid a social insurance —— Cancellation of the employment —— Single women with children under 14 allowance. Fathers, grandparents and contract by the employer (as or disabled children under 18. other relatives are entitled to baby discussed below) or the employee; Where employees are less than 18 years care leave only under certain of age, an employment contract can circumstances. —— Refusal by the employee to continue working due to a change in the be terminated only with the approval —— Employees have the right to organise ownership / management or control of the State Labour Inspectorate and trade unions and participate in the of the employer, or due to the Commission on Minors. management of the company. employer undergoing restructuring; It can prove difficult to terminate an —— Generally, trade unions represent the —— Refusal of the employee to continue employment contract on the grounds interests of the employees in their working following relocation by the that the employee is not suitable for dealings with the employer, ensure employer. that the terms of collective the position unless there are clear job agreements are being complied with, In general, an employee has the right requirements with demonstrable failings and participate in resolving labour to terminate a contract by giving two by the employee. Courts generally rule in disputes in accordance with statutory weeks advance written notice to the favour of the employee when considering legislation. employer, unless an earlier termination cases of alleged wrongful dismissal. date is mutually agreed upon. A fixed In practice, companies seek, where Employment contracts term employment contract can be possible, to secure the employee’s The Labour Code states that an terminated by an employee if he/she is voluntary resignation. employment contract should contain injured or disabled and unable to perform “essential” conditions (e.g. place of the required work, or if management Labour book violates employment legislation / the work, starting date, position, working Russian labour legislation requires hours, salary and benefits, etc.) and collective agreement / the employment contract, or if the employee has other that a labour book be kept for each “additional” conditions (e.g. trial period, employee who has worked for at least confidentiality, etc.). good grounds for doing so. In some limited circumstances, the employee has five days at a company, if this work is Employment contracts can be concluded the right to terminate an employment the employee’s main employment. This for: contract without prior notice. is a fundamentally important document —— An indefinite term; or in which the employment history of In a limited number of cases, the each individual is recorded over his/her —— A fixed term not exceeding five employer has the right to terminate a lifetime. This labour book indicates the years. contract. These include: grounds for termination of employment Fixed term contracts are only allowed —— Staff reductions; contracts and records rewards and when employment relationships cannot —— When an employee has submitted achievements at work, the work be established for an indefinite term and false documents when hired; performed by an employee, transfers to specific conditions have been satisfied. another place of permanent work, etc. In particular, fixed term contracts are —— When an employee fails to fulfill their permitted, inter alia, for the following work duties on a regular basis Every entry into the labour book without any good reason for why types of employees: is attested by the signature of the they cannot; is absent without any authorised representative of the —— Directors, deputy directors, chief good explanation; is inebriated at employer and by the employer’s official accountants; work; discloses state, commercial or stamp. —— Employees working in companies the employer’s internal confidential created for a specific project; information; steals from the Employee Trial Periods —— Part-time workers (having more than employer; fails to comply with labour Trial periods (typically up to a maximum one job); protection requirements, resulting in significant damages; of three months) are permitted to assess —— Individuals in full-time education.

the suitability of employees for a position. motivated by self-interest, then the Certain categories of employees are not general director can be fined up to RUB subject to trial periods (e.g. pregnant 120,000 (USD1,818), or fined by an women, minors, transferees). The trial amount equal to his/her wage or income period can be extended to six months from other sources for a period of up to for directors, deputy directors, chief one year. The general director may also accountants, deputy chief accountants be disqualified from occupying certain and directors of branches, representative positions or engaging in certain activities offices or other divisions. for a period of up to one year, or subject to forced labour for a term of up to two Salary years, or even imprisoned for a term of up The Labour Code guarantees timely to one year. salary payments to employees as More stringent criminal liability applies follows: if the salary payments are delayed in full The employer must pay salary every half for more than two months, or if salary month, and salary must be paid within is paid at an amount below the Federal 15 calendar days upon termination minimum salary level (RUB 11,280 of a payroll period. Thus the time gap (USD171) as of 1 January 2019). between salary payment dates must be For the purposes of calculating taxes, ~15/16 calendar days. If salary payment levies, penalties, liabilities under civil is delayed by more than 15 days, the transactions, etc., the relevant minimum employee has the right to notify the statutory monthly salary of RUB 100 employer and stop working. If this (USD2) is applied. happens, the employer is obliged to pay for each idle day at the employee’s Currency and form of salary average salary (calculated based on the payment actual salary accrued and the actual time Direct salary payment to employees in worked for the past 12 months). Russia in a foreign currency is prohibited. The employer must also pay interest on In Russia, salaries are normally paid in each day of delayed salary payment. The Russian Roubles. However, if a collective amount must be no less than 1/150th of agreement or employment contract is the key rate of the Bank of Russia. signed (upon the written request of an Administrative fines can be levied on employee), a worker can be remunerated employers (USD455 to USD758) and in other forms as long as they do their responsible officers (USD152 to not contradict Russian legislation or USD303) for delayed salary payments. international treaties to which Russia is If the employer and (or) responsible party. The percentage of remuneration officer has already been penalised for made in non-monetary form cannot delayed salary payments, then the exceed 20% of an employee’s total following administrative sanctions can salary. be levied: for the responsible officer: a fine of USD303 to USD455 or prohibition from holding executive positions for a period of 1 to 3 years; for the employer: a fine of USD758 to USD1,515. If salary payments are delayed for more than two months (three months in cases when there has been a partial delay in salary payment), criminal liability applies. The Criminal Code provides that, if it can be proven that employees were paid less than half of the salary payable to them due to the personal motives of the general director, or due to actions

Severance payments The Labour Code requires severance pay to be at least two-week’s average earnings when an employment contract Kazan is terminated for the following reasons: —— An employee is drafted or enlisted into military or, alternatively, civil service; —— An employee refuses to be transferred to work in another location should the enterprise, institution or organisation relocate; —— An employee is unable to work; a fact confirmed by provision of a medical certificate issued in accordance with legislation; —— An employee refuses to continue working due to a unilateral change in the labour agreement’s conditions made by the employer (such changes are only possible in exceptional circumstances); —— An employee who previously held the position is being reinstated after a period of leave (i.e. maternity leave comes to an end); —— An employee refuses to find a new job, should the relevant medical authorities prescribe this course of action for the employee, or if the employer is not able to offer relevant work. If an enterprise, institution, or organisation is dissolved, or if there need to be staffing cuts, then a one-off payment of monthly average earnings is required. Additional payments are required if the dismissed employee is unable to find work, but no more than two months’ worth of payments (three months subject to specific conditions).

Work permits for foreign It should be noted regarding work —— Extended stay for business trips permits that each year, by 15 July, outside the region / regions for which nationals companies must report the number of the HQS Individual Permit was As a general rule, foreign nationals foreign employees they anticipate to obtained are allowed, as compared to working in Russia are required to have a engage in the next calendar year. This the standard Individual Permit; work permit. There are a few exceptions procedure effectively constitutes a quota —— Migration registration procedures do to this rule mainly related to certain CIS application system. If the employer does not need to be performed when nationals and other foreign nationals not comply with this and does not receive stays in Russia are less than 90 days; who possess residency permits. Work notification that they have an approved —— The amount of mandatory social permits are not always required for the quota, the employer will have any work security contributions made by the employees of suppliers or manufacturers permit applications rejected next year. Russian employer on behalf of its HQS employees is insignificant. of equipment imported into Russia for A company that fails to file a quota the purpose of installing, supervising application or whose application was Migration registration procedure the installation of, or servicing the denied or partially approved has the right equipment. to use a list of quota-exempt positions Migration registration is the process of when applying for a work permit, but only notifying the immigration authorities Standard Work Permit if the application meets all of the quota of a foreign citizen’s whereabouts. The The standard work permit application exemption requirements. hosting party is responsible for carrying process is quite a lengthy and out registration. The hosting party is burdensome procedure consisting of Work permit applications for either the hotel or the employer (visa several stages. Each stage involves the Highly Qualified Specialists sponsor), or a landlord, if the foreign submission of applications together with (HQS) national is not staying in a hotel. an extensive list of documents. This process should be completed within A HQS is a highly-skilled professional seven business days of arrival every The stages include: who is a foreign employee with work time a foreign national arrives in Russia experience and skills or achievements —— Registration with the local or travels to another region (changes employment authorities; in a certain area commanding a monthly location) within Russia for more than salary generally not less than RUB —— Submission of an application to the seven business days. Employment Service stating that 167,000 (USD2,694). HQS professionals and their family there are vacancies in the company Obtaining Individual Permits for foreign members are exempt from registration for which only the employment of nationals to work as a HQS has the procedures if they arrive and stay in foreign citizens will satisfy. The following benefits: Authorities must reach a conclusion Russia for a period that does not exceed —— The Russian employer does not need that this is correct. In order to make a 90 days, and are exempt for 30 days if to obtain a Corporate Permit or conclusion, the authorities may send they travel to another region in Russia. approval from the Employment to the applicant potential candidate Service; If HQS professionals and their family Russian citizens for interview; —— The quota system does not apply to members stay in Russia for more than —— Submission of an application for a HQS professionals; 90 days (or 30 days if traveling to another corporate permit from the region), they are required to be registered —— The Individual Permit can be issued immigration authorities to engage at the place of stay. foreign labour; for a term of up to three years; —— Submission of an application to the —— A HQS professional has the right to immigration authorities for each obtain a multiple-entry work visa for a expatriate’s individual work permit. term of up to three years; The individual permit is issued for a —— The procedure to obtain work period of up to one year. In a separate permits for HQS professionals takes process, but based on the work permit, about fourteen business days from a work visa must be obtained. Its the moment a complete package of documents is submitted; procurement also involves several stages in which a specified set of documents —— An income tax rate of 13% applies to must be submitted to the immigration the salary paid to an HQS under their authorities. Russian employment contract, irrespective of their tax residence status in Russia;

Tax system overview local or regional authorities are allowed to establish the following taxation aspects: Russian tax legislation comprises the Tax Code of the Russian Federation —— Tax concessions; (hereinafter, the “Tax Code”) and laws —— Tax rates (within limits established by arising from it. the Tax Code); Taxes and levies are imposed in Russia at —— Procedures and deadlines for tax three levels: Federal, regional and local. payments. Federal taxes and levies are those The tax system outlined above results established by the Tax Code and paid in different tax burdens for taxpayers throughout the Russian Federation. registered in different regions. As of 1 January 2019, the following Federal taxes and levies are effective: Tax registration —— Value-Added Tax (VAT); requirements —— Excise; There is no need for any separate —— Personal Income Tax (PIT); tax registration in order to pay VAT —— Profit tax; or profits tax, as taxpayers need only —— Mineral extraction tax; obtain one single tax ID number for all taxes. However, taxpayers have to —— Water tax; obtain supplementary tax registration ID —— Levies on the consumption of natural numbers (‘KPP’) from the tax authorities and biological resources; for the places where their separate —— State duties and registration fees. subdivisions are located. Regional taxes and levies are those A separate subdivision is a subdivision established by the Tax Code and by located somewhere else other than the specific regional tax laws effective in the head office (e.g. in another city). regions of the Russian Federation and only A separate subdivision means that paid in those specific regions. Regional stationary working places have been taxes include property tax, gambling tax created for periods of longer than one and transport tax. month. Local taxes and levies are those Foreign Legal Entities (FLEs) have to introduced by the Tax Code and by the register with the local tax authorities regulations of municipal authorities, within 30 calendar days from the date and which are paid only in that particular their business activities commence in the municipal area. Local taxes consist of land Russian Federation tax, personal property tax and trade tax. Local (or regional) legislative bodies only have the right to introduce the taxes and levies delegated to their authority by the Tax Code. When deciding on tax rates, Moscow

New approach to Effective as of 1 January 2019, it is now capital amounts to more than 50% prohibited to create new consolidated (with the exception of transferors identifying unjustified tax taxpayer groups. Any agreements on incorporated in one of the countries benefit the creation of consolidated groups of on a list (of offshore zones) issued by taxpayers registered by the tax authorities the Ministry of Finance); In July 2017, a new article – number 54.1 in 2018 will be considered unregistered —— The individual owns more than 50% – was introduced into the Tax Code. The and not apply. Existing consolidated of the recipient company; provisions of this article apply to field tax taxpayer groups may retain their status —— The property received (except for audits starting after 19 August 2017. until the agreement creating them as a funds) is not disposed of within one consolidated group of taxpayers expires, The core principle set by art. 54.1 of the year from the date of receipt. Russian Tax Code is that the taxpayer only but no later than 1 January 2023. In has the right to reduce the tax base and addition, throughout the effective term of Since the start of 2018, the list of non- (or) the payable tax amount if: their existence, these consolidated groups taxable income related to transferal will be required to notify the regional tax transactions between shareholders 1) a transaction was actually performed; authorities in advance of forecast profits and companies has been condensed, 2) the taxpayer is not trying to avoid the tax remittances from members of their excluding the following transactions: payment of taxes; consolidated group to regional budgets —— receipt of property, property rights or 3) the transactions (operations) were in each current and subsequent financial non-property rights from a executed by the parties specified in year. At present, 16 consolidated groups shareholder in order to increase net the respective agreements (or their of taxpayers consisting of more than assets; subcontractors, if subcontracting is 400 companies have been registered. —— receipt of debt forgiveness by a allowed in their contracts) A moratorium on the creation of new shareholder. The article’s provisions provide an consolidated taxpayer groups came into exhaustive list of the circumstances that effect in 2014-2017. Deductible expenses only together can be treated as proof that Tax rates From 1 January 2018, companies have unjustified tax benefit has been received: The maximum profits tax rate is 20%, been able to offset more costs for —— supporting documents are signed by comprising 3% (till 2020) paid to the professional training and assessing the inappropriate people or people not Federal budget and 17% (till 2020) to the qualifications of workers. This training bearing responsibility; regional budget. The regional profits tax must be in accordance with an agreement —— counterparties have violated tax laws; rate can be reduced to 12.5% (till 2020) at signed with Russian educational and the discretion of the regional authorities. scientific organisations or foreign —— the taxpayer could have gained the educational organisations that have been same financial result by instead Effective from 1 January 2019, regions licensed to conduct educational activities. performing other, legitimate will not be able to set reduced profits tax Companies are also allowed to reduce transactions. rates. This measure has been dictated their taxable base by classifying as training Detecting and proving that taxpayers have by the need to reduce regional budget expenses those costs incurred when gained unjustified tax benefits in their deficits by increasing tax revenues. Now, implementing the training programmes. various operations will be a key focus of the tax rate may only be reduced for In order to receive this tax benefit, at least future tax audits. The tax authorities are certain categories of taxpayers if this is one graduate of the training programme developing new approaches to analysing expressly stipulated by the RF Tax Code; must sign a labour contract with the and confirming that unjustified tax for example, for the residents of special company for a period of at least one year benefits have been gained. economic zones and participants of within three months following completion regional investment projects. Reduced of the training. This new tax benefit will Profits tax tax rates set in the laws of the constituent remain in effect until 31 December 2022. entities of the Russian Federation before Tax base 1 January 2018 can apply until 1 January Tax losses can be carried forward without Taxable profit is calculated as income 2023. The regions will have the right to any time limits, but utilised on no more minus the expenses recorded in the tax increase these rates for the 2019-2022 tax than 50% of the profits tax base in any accounts. periods. respective period. This provision covers losses incurred since 1 January 2007, but Income is generally determined on an Certain types of income are taxed via will apply only during the transition period accrual basis. Application of a cash basis a withholding mechanism at flat rates from 1st January 2017 to 31st December is allowed only if average sales proceeds stipulated by the Tax Code (see the 2020. for four consecutive quarters are less than section ‘Withholding Income Tax’, p. 31). Tax accounting RUB 1,000,000, excluding VAT per quarter Tax concessions (USD 15,150). The Tax Code requires taxpayers Non-taxable income Expenses are deductible if they are (including permanent establishments) to incurred to generate income, are Gratuitous receipt of assets from a parent maintain separate accounts for profits tax economically justified, and are properly company, a subsidiary or an individual purposes. Tax accounting rules differ from documented. There are some expenses should not be treated as taxable income if: Russian statutory accounting principles specifically mentioned in the Tax Code —— The recipient’s or transferor’s (e.g. with regard to depreciation, that are also treated as non-deductible. ownership in the other party’s share recognition of interest expenses, etc.)

Russian thin capitalisation rules Under Russian tax legislation, the activities FLEs having no PE in Russia are subject From 1 January 2017, loans from any of a FLE give rise to a PE: to withholding tax on income sourced foreign entity will come under the thin 1) if a FLE has a place of business in in Russia (for details, see the section capitalisation rules if that particular foreign Russia (branch, office, bureau or “Withholding Income Tax” below, p.31). entity (individual or company) has a direct other independent subdivision), and Filing and payment or indirect participatory interest of more the FLE conducts business activities Taxpayers (except PEs and certain other than 25% in both the Russian borrower in Russia on a regular basis. In taxpayers) are allowed to file profits tax and the foreign lender, or if the direct particular, a construction site located returns either monthly or quarterly. PEs participation interest of each preceding in Russia, under certain should file profits tax returns quarterly. An person in each subsequent company circumstances, can be considered annual return is due by 28 March of the amounts to more than 50%. On the other the PE of the FLE performing the year following the reporting year. hand, loans from some Russian related construction activities. Taxpayers (except PEs) pay monthly parties and independent banks should 2) if a FLE acts in Russia through a advance payments on profits tax. PEs not be treated as controlled indebtedness dependent agent. A dependent pay quarterly advance payments. Final if they meet certain conditions. These agent is understood in Russian payments are due on 28 March of the year amendments to Russian thin capitalisation legislation, as well as under the following the reporting year. rules also include changes to the applicable double tax treaty (if any), calculation approach and to exception as a company or individual which, on Filing and payment rules on the recognition of controlled debt. the basis of contractual relations with Insurance contributions are payable on a Investment deductions a principal, has and habitually monthly basis. exercises the right to conclude An investment deduction mechanism has contracts and negotiate the essential Generally, those making payments should been introduced into the Tax Code. From terms of contracts in the name of the file various reports with the Pension 2018, taxpayers will choose between principal or to bind the principal’s Fund and the Social Insurance Fund on a using the standard method of depreciation participation into a business activity quarterly basis. for their fixed assets and deducting (except for activities which are of an investment expenditures directly from tax Value Added Tax auxiliary or preparatory nature, such due (within a set limit). Value Added Tax (VAT) is an indirect tax – as marketing). The legislation grants Russia’s constituent the burden of which is carried by the end- Generally, this approach to calculating customer – that must be calculated and regions the right to introduce this profits tax for the permanent deduction, with the regions deciding paid to the Russian federal budget by the establishments of FLEs is similar to the supplier. whether they want to exercise that right. approaches established for Russian legal In addition, the regions determine the entities, with certain exceptions. fixed asset (and taxpayer) categories that are or are not eligible for the deduction. This tax regime is only applicable to newly commissioned (or modernised) assets with a useful life of 3 to 20 years (e.g. buildings, machinery, transport). This deduction applies to expenditures Krasnoyarsk such as acquisition, erection, reconstruction, modernisation, refitting, and the technical upgrading of a company’s fixed assets. The investment tax deduction does not reduce the taxable base, but rather the amount of corporate profit tax. This is then transferred to the federal and regional budgets. The company / autonomous division must state directly / account on its balance sheet and in its policies that it intends to use the tax deduction as opposed to applying accelerated depreciation. Taxation of Foreign Legal Entities (FLEs) For FLEs whose activities in the Russian Federation give rise to permanent establishments (PE), profits tax on their income, minus expenses attributable to the Russian PE, is due.

Taxable Supplies —— certain services are considered as Recovery of VAT Generally, VAT should be charged rendered in Russia if the service Generally, Russian taxpayers are entitled by taxpayers (companies, individual recipient’s place of business is to claim for recovery input VAT related entrepreneurs, importers) on the following Russia. This exception relates, in to purchased goods, work, or services, transactions: particular, to consulting, marketing, property rights, VAT paid under the “tax and engineering services; the agent” mechanism, and VAT paid when —— The sale of goods, work, and transfer and provision of patents, services, provided that the sales importing goods into Russia, provided licences, trademarks, copyrights or that: take place on the territory of the other similar rights; and services to Russian Federation, including the develop software and databases; —— the goods, work, services and free-of-charge supply of goods and property rights are acquired in order —— transportation and freight forwarding the transfer of property rights; to carry out VAT-able transactions in services are considered as rendered Russia; —— The transfer of goods, work, and in Russia if certain conditions are services for the taxpayer’s own met; —— the goods, works, services and needs if the expenses incurred are property rights are booked in the —— some services are deemed as non-deductible when it comes to taxpayer’s accounts and the rendered in Russia if they are profits tax (including depreciation taxpayer has the respective primary actually rendered on Russian charges); documents; territory. This exception relates in —— Construction and assembly work particular to education (training) —— the taxpayer has VAT invoices carried out by the taxpayer for its services. prepared in accordance with the own purposes; requirements provided by the Tax Agent Mechanism —— The import of goods into Russia and Russian Tax Code (documents to other territories under Russian If foreign companies that are not confirming payment of VAT for jurisdiction. registered with the Russian tax authorities cases involving the recovery of supply goods, work or services in Russia, import VAT and payment of VAT Place of Supply Rules and these supplies are deemed to have under the “tax agent” mechanism). The Russian Tax Code stipulates specific taken place in Russia in accordance ‘place of supply’ rules that determine with the ‘place of supply’ rule, the buyer whether goods, work or services are (tax-registered in Russia) is required to supplied in Russia and thus whether they calculate the amount of Russian VAT, are subject to Russian VAT. withhold this VAT from the amount of fee Goods are deemed to be supplied on payable to the foreign supplier, and remit Russian territory for VAT purposes if: that VAT to the Russian federal budget on behalf of the foreign company (the “tax —— the goods at the beginning of their agent” mechanism). shipment or transportation are located in Russia or on other VAT Base territories under Russian jurisdiction; VAT should be calculated and paid upon —— the goods at the moment of their receipt of prepayments and/or on the total sale are located in Russia or on transaction price at the moment goods other territories under Russian are shipped, when work is performed, jurisdiction, and are not transported / services are rendered or property rights shipped. Notably, the shipment or are transferred. If the moment of payment transportation of hydrocarbons or differs from the moment that shipping hydrocarbon products from the takes place, VAT should be accounted at territory of the Russian continental the earlier of the two dates. If the date the shelf is considered as supply on taxable base is calculated is the date of Russian territory. prepayment, then the taxpayer is obliged to calculate the taxable base again at Generally, work is / services are deemed the moment of shipment. VAT paid with to be supplied in Russia if the supplier of respect to prepayments can subsequently the work / services has a place of business be claimed for recovery after shipment. in Russia (the default ‘place of supply’ rule). However, there is a definitive list of When VAT is calculated by the tax exceptions to the default ‘place of supply’ agent, the obligation to withhold VAT rule in the Russian Tax Code relating by the tax agent occurs at the moment to certain types of work / services, in consideration is paid to the foreign seller particular: (who is not registered with the Russian tax authorities). —— services directly connected with movable / immovable property located in Russia are considered as rendered in Russia;

Under certain conditions, it is also possible The taxpayer is obliged to register its services shipped, performed and rendered for taxpayers who made prepayments issued VAT invoices in its sales book and from 1 January 2019. to suppliers to recover the VAT amount its received VAT invoices in its purchase A reduced VAT rate of 10% applies to the included in the prepayment amount. book in all cases when the respective sale of certain types of medical goods, When the taxpayer carries out both transaction is subject to VAT in accordance books and periodicals, foods and children’s VAT-able and non-VAT-able activities with the Russian VAT law. In some cases, goods (in accordance with a list of goods and/or a 0% VAT rate applies to certain taxpayers are not required to issue VAT provided by the Government of the transactions, then in certain cases the invoices, in particular if they perform Russian Federation). taxpayer should account for supplies transactions that are VAT exempt. If supplies are provided to buyers that do The sale of certain types of goods, and the respective amount of input work and services is subject to a zero- VAT separately. Recovery of VAT in not pay VAT or that are exempted from the obligation to pay VAT, it is permissible – percent VAT rate. The zero percent VAT these cases is subject to specific rules rate applies, inter alia, to: export sales; (proportional recovery, a requirement to upon the mutual consent of both parties – for VAT invoices not to be issued. international transportation services collect additional supporting documents, and related freight forwarding services; etc.). When the value of goods, work or transportation and the rendering of certain VAT Invoice services has been changed (in particular, services related to the transportation of when changes have taken place to oil, oil products, natural gas and electricity A VAT invoice is a special VAT document the price or amount of goods, work needed for VAT recovery. The structure power outside Russia; certain types of air or services), the seller should issue a transportation; certain services rendered of this document is established by the corrected VAT invoice and the parties Russian Government. The VAT invoice at river and sea ports; and certain services should correct their VAT obligations in the rendered by Russian railway carriers in differs from a commercial invoice and way prescribed by Russian VAT law. can be issued either as a hard copy or in relation to the international transportation electronic format (if electronic document VAT Rates of goods. exchange with the counterparty is agreed, Effective 1 January 2019, the standard To apply a zero-percent VAT rate, the it must be conducted in accordance with VAT rate increased from 18% to 20%. supplier should collect the necessary specific legal requirements). The 20% rate applies to goods, work and supporting documents within the established time limit and submit a VAT return with the supporting documents to the Russian tax authorities. Generally, sales of goods, works or services on Russian territory are taxable at a VAT rate of 20%. A VAT rate of 10% or 0% applies in certain cases. Exemptions Certain activity types are exempt from VAT, in particular: —— Leasing premises located in Russia to foreign individuals and foreign entities accredited in Russia (if there are reciprocity rules applying in the respective foreign jurisdiction); —— Selling residential real estate, certain medical goods, medical services, foods produced by school cafeterias, public conveyance services on specific types of transport, ceremonial services, supply of religious goods, educational services rendered by licensed nonprofit educational institutions, certain services in the sphere of art and culture, etc.; —— Repair and technical maintenance services rendered free of additional Nizhny Novgorod charge within the warranty period of the goods (including the value of spare parts related to these goods);

—— Banking operations and insurance Registration with the tax authority Electronic service suppliers must submit services; REPO operations; is required even if the e-services are special VAT returns for the electronic —— The transfer of certain types of exempt from VAT (for example, rights to services they have provided. intellectual property (IP) rights or the use computer programs under licence Taxpayers submit VAT returns on a transfer of rights allowing for IP to agreements). A foreign company quarterly basis and pay the VAT in three be used on the basis of a licence providing e-services must submit its tax equal monthly installments. agreement; registration application before 15 February 2019. —— surety (guarantee) services provided Social Security Contributions by a taxpayer other than a bank. Until 2019, only foreign companies Social security contributions are paid in The Russian Tax Code provides for certain providing e-services to individuals had to Russia in the form of mandatory insurance types of VAT exemption, in particular pay their own VAT and register with the tax contributions for a state pension, social exemptions related to financial and social authorities. If a foreign company provided and medical insurance for each employee welfare services. e-services to Russian organisations or (personified contributions), and mandatory individual entrepreneurs, then the Russian Eurasian Economic Union social insurance contributions against buyers were to act as tax agents and occupational accidents and diseases The legislation of the Eurasian Economic pay the respective VAT. From 1 January (general, non-individualised contributions). Union between Russia, Belarus, 2019, Russian companies acquiring Kazakhstan, Armenia and Kyrgyzstan (the e-services from foreign companies must Insurance contributions are levied on EEU) creates a single customs territory stop paying VAT as tax agents. However, companies, individual entrepreneurs between the member states. EEU Russian companies will retain their right and individuals making payments to legislation establishes special VAT rules to a VAT deduction on e-services if they other individuals as part of employment on transactions between entities in the meet the eligibility criteria for a specific relations and under civil contracts for the different member states of the EEU. The deduction. However, to be able to deduct provision of services or the performance export of goods from one member state VAT, Russian companies need to ensure of work, and under other specific types to another is subject to a zero-percent VAT that they have the necessary documents, of contract. Contributions are also levied rate. correctly prepared in compliance with on self-employed individuals, including the new requirements (in particular, a individual entrepreneurs, notaries and Application of the zero-percent VAT rate contract and payment and/or settlement lawyers. No mandatory contributions are by a taxpayer must be supported by documents containing the amount of VAT, payable by employees. possession and provision of the relevant TIN and KPP (Tax Registration Reason documents, including documents Payments subject to personified Code) paid by the foreign provider of the showing the taxpayer’s application to contributions and rates e-services). import the goods and that the import VAT Insurance contributions are payable on has been paid. The documents should VAT payable to the Russian state remuneration and other payments to be stamped by the tax authority of the budget individuals working under employment member state into which the goods were VAT payable to the Russian state budget and civil contracts. Some forms of imported. is generally calculated as the difference compensation are exempt from insurance The import of goods from one member between the amount of output VAT on contributions, including business state to another is subject to import VAT supplies subject to VAT and the amount trip expenses, temporary disability in the other member state. A taxpayer is of input VAT incurred on purchases (plus allowances, employee dismissal expenses obliged to submit a separate VAT return the amount of VAT to be reinstated to the (excluding compensation for unused paid with respect to the import of goods from budget in special cases) in a respective tax vacation days), professional development the other EEU country. period. expenses, and some others. New VAT rules for e-services Any excess of input VAT over output VAT For 2019, personified contributions are can be refunded to the taxpayer from the payable at the rates provided in the table Effective as of 1 January 2019, the rules state budget upon submission of a special below subject to an annual remuneration for applying VAT to foreign companies that application. Generally, VAT refunds can threshold established for contributions provide e-services have changed. Now, only be made after the tax authorities to pensions and social insurance. The regardless of whether a foreign company have performed a ‘desk tax audit’ and threshold is subject to annual revision by provides e-services to individuals or confirmed the legitimacy of the VAT the Russian government. organisations, the foreign company must refund. register with the tax authorities, file VAT Employers operating hazardous and returns and pay its own VAT. VAT Payment and Filing dangerous places of work are required to pay additional pension contributions. E-services are services rendered through VAT returns should be submitted quarterly The rate of the additional contribution information and telecommunication in electronic form by no later than the varies from 0% to 8%, depending on how networks, including the internet, in twenty-fifth day of the month following working conditions are assessed during a an automated way using information the quarter that has ended. Generally, one special assessment procedure. technology. The RF Tax Code contains a third of the amount of VAT due should be list of services classified as e-services. paid by the twenty-fifth day of each of the If the employer has not carried out an three consecutive months following the assessment of its working conditions, the reporting quarter. additional contribution may be payable at

the rate of 9% or 6%, depending on the Filing and payment —— 13% on dividends received by an RLE from an RLE or Foreign Legal type of employer. Insurance contributions are payable on a Entity (except for FLEs incorporated A foreign national’s contributions are paid monthly basis. in the countries on the Ministry of in full on the remuneration they earn in Generally, those making payments Finance’s list. Russia based on their Russian permanent should file various reports on a quarterly —— 15% on dividends payable to a FLE or temporary residence permit. and annual basis. A related reporting on by an RLE. An employer of foreign nationals who employees is due on a monthly basis. are staying temporarily in Russia on a Generally, Foreign Legal Entities which visa must pay personal pension and Withholding Income Tax do not have a Permanent Establishment in Russia are subject to 20% withholding social insurance contributions (unless the A FLE in receipt of income sourced in employee is an HQS). The rate of social income tax on major Russian-sourced Russia which is not attributable to its income, such as interest, royalties, insurance contributions is 1.8% rather Russian PE (e.g. rent, royalties, interest than 2.9%. income from leasing and rental and dividends, freight income, etc.) is operations, etc. No individual contributions are payable for subject to withholding income tax at HQS. source. Freight income is taxed at 10%. Personal contribution concessions Income derived from the business Taxpayers are allowed to apply the reduced tax rate or tax exemption Reduced insurance contribution rates activities of the FLE in Russia (e.g. nonrecurring consultancy services) which stipulated in double tax treaties concluded apply to agricultural producers, businesses between the Russian Federation and in technology and innovation special do not give rise to a PE are exempt from withholding income tax. the country in which the beneficiary economic zones, taxpayers applying is resident. However, in order to apply the simplified tax regime (for certain There is no withholding tax on the the aforementioned benefits, certain activity types), legal entities employing repatriation of profits from a local Russian conditions should be met. disabled individuals (provided that certain representative office or from the branch conditions are met), and IT companies, of a FLE to the head office. However, the For a list of double tax treaties and the among others. proceeds from liquidation are subject to withholding tax rates applicable under taxation at source. these treaties, see Appendix 1: “Chart of Mandatory social insurance against Withholding Tax Rates”, p.62. occupational accidents and diseases Tax rates When applying the respective provisions Apart from the aforementioned Withholding income tax rates vary of a double tax treaty, a FLE should individualised contributions, employers depending on the type of taxable income. confirm that it is resident in a country that are required to pay mandatory social Tax rates for dividend income are: is party to a double tax treaty with the insurance contributions against Russian Federation by supplying a tax —— 0% on dividends payable to a occupational accidents and diseases. certificate issued by the relevant foreign Russian legal entity (RLE) if this RLE These contributions are payable on authorities, as well as providing the has owned at least 50% of the the total payroll at a flat rate that varies respective tax agent with confirmation shares in the dividend payer for 365 depending on the risk category that the that it is the actual beneficiary of the consecutive days, providing that the employing company belongs to, income received. Moreover, the Russian dividend payer is not resident in an entity paying income to the FLE must in accordance with the Russian Social off-shore country (e.g. the British have at its disposal (before payment) Insurance Fund’s assessment. The Virgin Islands, Guernsey, Jersey, or confirmation that the FLE has the actual minimum rate is 0.2% of payroll; the any other state on a list compiled by right to receive the income. maximum rate is 8.5%. Generally, the Ministry of Finance of the office activity is subject to insurance Russian Federation). In the absence of a proper certificate and contributions against injuries and confirmation, tax should be withheld and professional illness at a rate of 0.2%. remitted to the budget at the standard rate. Rates on Rates on Filing and payment Type of insurance Annual threshold remuneration remuneration up contribution per employee in excess of the Income tax should be withheld from the to the threshold threshold income payable to the FLE and remitted to the state budget on the date when payment is made to the FLE. RUB 1,150,000 Pension insurance 22% 10% (USD 17,423) A Russian Legal Entity (or FLE with a PE in Russia) should also file a withholding RUB 865,000 income tax calculation. Social insurance 2.9% — (USD 13,105)

Medical insurance n/a 5.1% 5.1%

Property tax Tax concessions The regional authorities are allowed to offer tax incentives and allowances for Property tax is levied on those properties The Tax Code provides a number of certain categories of taxpayer. listed on a taxpayer’s balance sheet as property tax concessions. In particular, fixed assets (except for land plots). companies are exempt from property The terms for the submission of transport tax on assets classified as federal tax payments and the filing of advance Tax base highways intended for public use and on calculations are established by the Generally, the tax base is the net book assets constituting an integral, technical authorities of the region where the vehicle value of the average annual fixed component of these highways. A list of is registered. However, the final annual assets according to Russian statutory these assets has been compiled by the payment and annual tax return is due no accounting. For a number of property Government of the Russian Federation. earlier than 1 February of the following types (administrative and business Property tax paid by a Russian legal entity year. centres; nonresidential premises to be on property located outside of Russia Land tax used / actually used as offices or for can be offset when paying property tax trading and catering; a FLE’s immovable Land tax is calculated based on the in Russia. To carry out this offsetting, property that does not have PE status in cadastral value of land plots according to the taxpayer should submit a document Russia, or is not being used in the PE’s Russian Federation legislation applicable confirming the payment of property tax operations in Russia; residential premises to the region where the land plot is abroad. not accounted for as a fixed asset on located. the balance sheet), the tax base is the Filing and payment The Tax Code provides that land tax cadastral value of the specific facility. The regional authorities set the terms for rates for land designated for agricultural Effective from 1 January 2019, movable advance and final property tax payments. purposes and housing must not be higher property will be removed from the Property tax calculations are filed than 0.3%, and no higher than 1.5% of corporate property tax base. Property is quarterly. The annual property tax return the cadastral value of the land plot for land qualified as being real estate entered in should be filed by 30 March of the year used for any other purposes. The regional the Unified State Register of Immovable following the reporting year. authorities can decrease this rate and Property. also offer tax incentives or allowances to certain taxpayer categories. FLEs having no PE in Russia are subject to Other taxes property tax only on immovable property Transport tax Advance payments are due quarterly, with located in Russia. the final tax payment due no earlier than 1 Foreign legal entities and Russian legal February of the following year. Tax rate entities should both pay transport tax if Water tax The maximum tax rate is 2.2%. they own registered transport vehicles. Taxable vehicles include automobiles, Water tax is payable by companies that Lower tax rates are established for assets motorcycles, scooters, buses, airplanes, consume water for special and clearly- classified as public railways, pipelines helicopters, merchant vessels, yachts, indicated business purposes. and power lines, and assets constituting sailing boats, boats, snowmobiles, etc. an integral, technical component of the Tax rates differ for the various types of The tax base is calculated based on the above. A list of these types of assets has water consumption and are set in RUB per engine volume, gross tonnage or type of been compiled by the Government of the 1000 cubic metres of water consumed. vehicle. Russian Federation. Water tax returns are filed quarterly, with The tax rates are established by the Tax The regional authorities can reduce the payments also being made quarterly. Code and range from RUB 0 to RUB 200 property tax rate to zero percent. (USD 0.00–3.0) per unit of horsepower With respect to immovable property (for and can increase or decrease by up to ten which the tax base is the cadastral value), times, depending on the region. the tax rate cannot exceed 2%.

The Tax Code also provides special tax Payers of the unified imputed income tax regimes under which a taxpayer is entitled are exempt from the following taxes (on to pay one single tax instead of numerous those operations subject to this tax): different taxes. —— Profits tax; This regime can be applied if certain —— VAT (except for VAT payable on requirements are satisfied. Special tax imports); regimes include simplified tax, unified —— Property tax (except for tax payable agricultural tax, tax on imputed income based on cadastral value). and special rules on production sharing agreements. Unified imputed income tax is levied on a taxpayer’s imputed income. Imputed income is determined as the base return Unified tax on imputed rate from business activities during the period multiplied by physical (the area income of land employed, number of vehicles The local tax authorities allow certain or number of staff) and other adjusting taxpayers to apply a unified tax on imputed factors. income if the taxpayers are engaged in: Imputed income tax is paid at a rate —— Domestic consumer services; of 15%. The municipal authorities can —— Veterinary services; decrease this rate to anything within a range from 7.5% to 15%, depending on —— Vehicle maintenance, repair and the taxpayer’s category and the type of washing; imputed activities. —— The leasing of car parking places The unified imputed income tax that is and car parking services; payable can be reduced (to 50% of the —— Passenger and cargo transportation initial tax accrual) by deducting insurance services (certain restrictions apply); contributions for mandatory pensions —— Retail trade and catering (certain insurance, medical insurance and social restrictions apply); insurance for temporary disability or —— Certain kinds of advertising; maternity leave. It can also be reduced for mandatory social insurance against —— Accommodation provision services occupational accidents and diseases, as (certain restrictions apply). well as temporary disability payments Unified imputed income tax is applicable to employees for the first 3 days of if the taxpayer satisfies the following temporary disability paid by the employer, criteria: and for voluntary insurance payments —— The average number of annual staff under insurance contracts covering the is equal to or lower than 100; employer’s expenses. —— Other legal entities have contributed Tax returns and payments are due less than 25% to the taxpayer’s quarterly. share capital. The unified imputed income tax is not Nizhny Novgorod applied at the same time as the simplified tax or unified agricultural tax.

Simplified taxation —— Banks, insurance companies, Unified agricultural tax pension funds, investment funds, system parties to production sharing Agricultural producers are allowed to apply the unified agricultural tax. This tax The simplified tax system replaces profits agreements, payers of unified replaces profits tax, VAT (except for VAT tax, VAT (except for VAT payable on agricultural tax, etc.; payable on imports) and property tax. imports) and property tax (except for tax —— Entities in which other legal entities based on the cadastral value). have participation shares exceeding The unified agricultural tax is levied on income minus deductible expenses. A company can apply the simplified 25%. tax system if it satisfies the following The simplified tax rate can be: Income is calculated in accordance with criteria in the first nine months of the year —— 6% on revenues. The regional general profits tax rules. Expenses are preceding its planned adoption of the authorities can decrease this rate to deductible only if they are referred to in simplified tax system: anything within a range from 1% to the authorised list, economically justifiable and properly documented. —— The company’s revenue for 9 6%, depending on the taxpayer’s months does not exceed RUB category; or Unified agricultural tax is paid at a rate 112,500,000 (USD 1,814,525)2, —— 15% on profits (revenues minus of 6%. though this limit is subject to annual deductible expenses). The regional Advance payment is due after the first indexation; authorities can decrease this rate to six months, with final payment and —— The net book value of fixed assets anything within a range from 5% to completion of the tax return due by does not exceed RUB 150,000,000 15%, depending on the taxpayer’s 31 March of the following year. (USD 2,419,367)3; category. —— The average annual number of staff Taxpayers must make quarterly advance does not exceed 100. payments, making the annual final The following entities cannot apply the payment by 31 March of the following simplified tax system: calendar year. Advance tax estimates and annual tax returns are due within the —— Russian legal entities with branches; same timeframes as their corresponding —— Foreign legal entities and payments. representative offices (branches) of FLEs;

Novosibirsk

2 Actual exchange rate of the Central Bank of the Russian Federation as of 1 May 2018 (RUB 62,9997) 3 Actual exchange rate of the Central Bank of the Russian Federation as of 1 May 2018 (RUB 61,9997)

A transfer price is a price subject to —— at least one of the parties to a monitoring by the tax authorities. The transaction is a resident of Skolkovo Russian tax authorities have the power to Research Center; monitor prices to ensure that they reflect —— at least one of the parties to a market realities and have not been fixed to transaction applies the investment reduce tax burdens in Russia. tax deduction for profits tax Current Russian transfer pricing purposes. (hereinafter, “TP”) rules have been Prior to the introduction of these effective since 2012, and are based on amendments, all domestic transactions OECD TP Guidelines. However, there are exceeding RUB 1 billion (USD15,150,138) some differences. were subject to control without any TP control applies to transactions exceptions. The amendments apply between related parties (hereinafter, to transactions in which the income “Controlled Transactions”). is recognised from 1 January 2019, irrespective of the contract date. From 1 January 2019, the majority of Russian domestic transactions will be Also effective from 1 January 2019, cross- exempt from transfer pricing control. border transactions are now recognised However, domestic transactions will be as controlled transactions if the annual subject to control if the amount of income income exceeds RUB 60 million from a transaction exceeds RUB 1 billion (USD909,000). (USD15,150,138) and one of the following At present no threshold amount has conditions is met: been established on the amount of —— the companies involved applied income from foreign related-party trade different profits tax rates (for transactions for recognising them as example, companies resident in controlled transactions, though the Priority Development Areas or the threshold amount has been established Free Port of Vladivostok, or at RUB 60 million (USD909,000) for participants in regional investment other transactions that can be equated to projects can apply different rates); related-parted transactions (transactions with goods traded on international —— one of the parties to a transaction exchanges, transactions with offshore pays the mineral extraction tax at ad companies). valorem rates; —— at least one of the parties to a Despite the positive impact from the transaction applies a special tax reduction to the administrative burden, regime (e.g. the unified tax on we cannot rule out the risk that the imputed income, or the unified tax authorities will try to challenge agricultural tax); transactions on the basis of there being an unsubstantiated tax benefit (article 54.1 of —— one of the parties to a transaction is the Tax Code of the Russian Federation). exempt from profits tax; Additionally, taxpayers will lose their —— one of the parties to a transaction is opportunity to make corresponding an operator or a holder of a licence adjustments only possible in controlled Perm to develop a new offshore field; transactions. We advise firms to perform

advance checks on the strength of their is no parent company / subsidiary with specified. Understandably, the volume of companies’ positions in intra-group ownership of more than 25%. data in the notification can be significant. transactions, looking at whether the A local study is required if the tested It should be filed in XML-format with the transactions demonstrate performance for party is the Russian company. Foreign Russian tax authorities. real business purposes. comparables are acceptable if the foreign Russia also has TP documentation There are five TP methods (similar to party is the one tested. Generally, the requirements. The Russian tax authorities those in the OECD), and of these, the CUP study should be based on the financial are entitled to request TP documentation and resale minus method takes priority. statements of comparables for the three during TP audits, and taxpayers must Russian TP legislation also allows for the preceding years. provide the documentation within 30 use of appraisal reports to support prices Before 20 May of the year following the working days. The TP documentation for in one-off transactions when no other reporting year, all Russian taxpayers are Russia should be prepared annually and methods can be applied. There are no obliged to inform the tax authorities of meet certain local requirements. special safe harbours in tax law except for any transactions they performed which Penalties for non-submission or interest on intra-group loans. were subject to TP control under Russian omissions/mistakes in Controlled There are specific requirements regarding tax law. The notification on a controlled Transaction notifications are not significant the selection of comparables for transaction must include disclosure of (RUB 5,000 (USD76)). The penalty for benchmarking studies, such as ensuring detailed information about each operation not applying arm’s length prices is 40% that the activities are comparable, that within that controlled transaction. For (20% during the 2014–2016 transition net assets are positive, that there are instance, for a buy-sell transaction, the period) of the tax underpaid in Russia. positive operating profits, and that there price, quantity, place of dispatch, and However, this penalty does not apply if place of delivery for every item must be a taxpayer provides TP documentation

the reporting year. The penalty for non-provision of the notification is RUB 50,000 (USD758) (applicable from 2020). —— Master file (global documentation): the tax authorities may request the Master file after 12 months have passed from the last day of the reporting fiscal period. Taxpayers should provide the Master file in Russian within 3 months after receiving a request. The penalty for non-provision (provision of non- accurate data) is RUB 100,000 (USD1,515) (applicable from 2020). —— Local file (national documentation): to be submitted upon the Federal Tax Service’s request within 30 working days from the date on which a request is received (requests may be issued from 1 June of the year following the reporting year in respect of transactions with foreign members of multinational groups). Failure to submit within the deadline leads to a fine of RUB 100,000 (USD1,515) and application of penalties of 40%. These rules apply to the financial years starting from 2017 (except for the Local file, which applies to periods starting Ekaterinburg from 2018). Taxpayers have the right to voluntarily file notifications and country-by- country reports for the 2016 financial year. For TP audits, the Federal Tax Service focuses on reviewing prices in cross- border transactions. TP audits for 2012– 2015 mainly covered export transactions supporting the arm’s length level of its the EUR 750 million threshold in BEPS 13. with oil products, non-ferrous metals and prices. In addition to these penalties, late These requirements took effect in 2017, fertilizers. The number of TP audits was payment interest is also assessed on TP while new Local file requirements for limited (up to 33), but in certain cases the adjustments. MNE groups apply from 2018. The new tax adjustments applied were material. regulation requires Russian taxpayers that Both unilateral and bilateral Advanced It is expected that, over the next few are part of MNE groups to provide: Pricing Agreements (hereinafter, “APA”) years, the Federal Tax Service will start are legally possible, but use of APAs has —— A country-by-country report: these to more actively audit the operations of so far not been extensive. At present, must be filed by the parent company multinational companies doing business the Russian tax authorities are reducing or by an authorised member of the in Russia. the number of new APAs they approve, group within 12 months after the Two court cases on the application of though this practice may change in future. end of the reporting period. The TP rules effective from 2012 have been Notably, it is expected that in 2018 the penalty for non-provision (or the published. In one, the tax authorities Russian Ministry of Finance will issue the provision of inaccurate data) of the proved that the prices of a Russian procedure for concluding bilateral APAs. country-by-country report is RUB oil company engaging in oil export 100,000 (USD1,515) (applicable from In December 2017, Russia passed into transactions were lower than the arm’s 2020). law a three-tiered approach for TP length level based on comparing prices documentation in accordance with OECD —— Notification on participation in a with price quotations published by Platts. BEPS Action Plan 13. This approach “large” multinational group: this The second case has not finished, though applies to multinational enterprise groups must be filed by Russian taxpayers recent court decisions favour the tax (MNE groups) with consolidated income that are part of “large” multinational authorities, stating that, in transactions on of or exceeding RUB 50 billion, close to groups 8 months after the end of the export of mineral fertilizers, the arm’s

length level of prices should be analysed, Three-tier transfer pricing using quotations published by Argus documentation Media. A requirement to prepare three-tier In addition, local teams from the Russian transfer pricing documentation for the tax authorities are also reviewing prices in financial years from 2017 onwards has intra-group transactions. They may assess been introduced into the RTC. This means additional taxes if they see taxpayers those entities in multinational groups of receiving unjustified tax benefits. Practice companies (MNCs) with a total income shows that the likelihood of being (revenue) over 50 billion Russian roubles questioned by the local tax authorities (USD757,500,008) in their consolidated about intra-group pricing is high. financial statements for the previous financial year must submit three-tier documentation to the tax authorities, including a Master file, Local file, and Country-by-Country (CbC) report, as well as a notification that they are part of an MNC.

Novosibirsk

A controlled foreign company (CFC) is: year for which the financial —— a FLE (not a tax resident of the statements are prepared is not less Russian Federation), or than 75% of the weighted-average CIT (Corporate Income Tax) rate in —— a foreign structure that does not Russia. This exemption only applies involve the establishment of a to CFCs resident in treaty-protected formal legal entity (fund, partnership, jurisdictions, provided that these trust, or other form of collective jurisdictions exchange tax investment vehicle and/or trust information with Russia (as management), or determined by the Russian tax —— a FLE with capital that does not authorities). consist of shares/participation units The undistributed profits of CFCs are (foundation units) controlled by a subject to: Russian tax resident company or individual. —— Corporate profits tax at 20% if the controlling person / entity is a CFC rules are applied to: Russian-resident company, or —— FLEs in which a Russian tax resident —— Personal income tax at 13% if the effectively owns at least 25% of the controlling person / entity is a capital, and Russian-resident individual. —— FLEs in which a Russian tax resident If the annual profit of a CFC is less than effectively owns at least 10% of the the “de minimis” threshold, a CFC’s capital, if Russian tax residents undistributed profit will not be taxable in cumulatively own at least 50% of Russia (the threshold is RUB10 million the capital; (USD151,500)). —— FLEs controlled by Russian tax Taxes on CFC profits, such as foreign residents, i.e. they exercise a corporate income tax and withholding tax decisive influence on decisions levied at source, are creditable against the regarding distribution of the FLE’s Russian CFC tax. profits irrespective of the legal grounds for that control. Some additional amendments entered CFC rules provide a number of into force on 27 December 2018: exemptions from CFC taxation. If an —— in addition to participation through exemption applies, then the profits of public Russian companies, a person that particular CFC are not subject to tax, is not recognised as the controlling though the controlling person / entity is person of a foreign entity if that not relieved from its reporting obligations. person’s minority interest in the These exemptions, inter alia, include the foreign company is exercised following: through direct or indirect —— Foreign companies treated as an participation in listed foreign active foreign company, active companies. holding / or active sub-holding —— when determining an active foreign Vladivostok company; or company’s share of income —— Foreign companies for which the (including holding and sub-holding effective tax rate at the end of the companies), and also of companies engaged in mineral extraction, the

income specified in clause 3 of The additional criteria should be applied if recipients are allowed to apply DTT article 309.1 of the RF Tax Code is one of the abovementioned main criteria benefits (reduced WHT rates) only if the not to be taken into account (except is simultaneously fulfilled both in Russia recipients are beneficial owners of the for income from the sale/disposal of and a foreign country. In particular, a respective Russian-sourced income. participation interests in the entity’s FLE should be considered a Russian tax The Tax Code defines a beneficial owner charter capital). resident if one of the following conditions as: —— provisions regarding the submission is met: —— a person who has the right to of CFC notifications have been 1) the company’s financial accounting independently use and/or dispose of clarified – notifications must also be or management accounting is the income by virtue of: submitted when a CFC incurs performed in Russia; losses. —— participation (direct or indirect) in the 2) the company’s documents are company, generated and processed in Russia; —— control over the company, or Corporate tax residency 3) the HR function at an operational —— other circumstances, or rules level is performed in Russia. FLEs cannot be recognised as Russian —— a person in whose interest another A foreign company can be recognised as tax resident if they carry out business person has the power to dispose of tax resident in Russia if it is managed in activities abroad using qualified personnel the income. Russia. and assets outside Russia (provided that With effect from 1 January 2017, foreign Russia will be acknowledged as the place their business is conducted in a double recipients applying for DTT benefits are of management if at least one of the tax treaty-protected country). Some obliged to provide the Russian payer with following is true for the FLE: exceptions apply to FLEs engaged in documentation confirming their beneficial specific listed activities. ownership status, otherwise no DTT —— The company’s executive benefits will be applied. bodyregularly takes decisions or FLEs which shift their tax residency to carries out other activities in Russia Russia become subject to unlimited tax In addition, the Tax Code provides a so- (on a scale significantly greater than liability in Russia, i.e. their worldwide called “look-through” approach, in any other jurisdiction); income becomes subject to Russian i.e. the right to apply (under certain corporate profits tax. —— Senior management personnel circumstances) a reduced withholding tax perform steering management of rate under the treaty with the beneficial the company mainly in Russia. owner’s jurisdiction, even if another Beneficial ownership person is the immediate recipient of While not specifically defined, the term income. “steering management” is understood to requirement include taking decisions or other actions Generally, the Russian companies paying with respect to the company’s day-to-day passive income (inter alia, dividends, operations. interest, royalties, lease income) to foreign

Rostov-on-Don

An Individual’s Personal Income Tax (PIT) Tax base liabilities in Russia depend on several factors, including the taxpayer’s tax Taxable income includes income residency status. An individual is generally received in cash, in kind and in the form of deemed income. Profits of Controlled considered a Russian tax resident if he/ Foreign Companies (CFC) may also she is physically present in Russia for be subject to tax in the hands of tax a period of 183 days or more during a resident individuals. period of 12 consecutive months. Short- term travel (less than 6 months) outside Income in kind is assessed based on the Russia’s borders for medical treatment market price of the goods received or or educational activities in certain cases services provided. does not qualify as an interruption to the Deemed income generally arises when individual’s presence in Russia. Specific an individual: rules apply to certain categories of —— Has an outstanding loan received taxpayers. from an organisation or an individual The day of arrival and day of departure entrepreneur and the interest rate for should be included as days in Russia its use is lower than 2/3rds of the key when calculating the number of days a rate of the Central Bank of Russia on person has been present in Russia when loans in Russian roubles, or 9% per determining an individual’s tax residency annum on loans in other currencies, status. and if at least one of the following conditions is met: If a company makes a salary payment locally in Russia, the company should —— The lender and the borrower are determine the individual’s tax residency considered related parties or are status on each date of payment in order in an employment relationship; to apply the appropriate tax rate for —— The saving on interest payments withholding. Residency is determined on is financial assistance or conside- the basis of the 183-day period within the ration paid to an organisation or 12-month period immediately preceding an individual entrepreneur for the date the income was paid. goods/work/services provided by that taxpayer. Consequently, the tax withheld may not be the amount of tax ultimately due. —— Acquires from related parties goods or services at favourable prices (at Final tax liabilities are determined based non-market rates). on the individual’s tax residency status for the reporting calendar year. This status —— Acquires securities and financial is determined based on the ‘183-day instruments at a price below the presence test’ in the reporting calendar market level. year. The undistributed profits of a CFC (special rules apply) in a particular Tax residents are generally subject to financial year are taxable unless: PIT on all their income, irrespective of the country in which it arises, whereas —— The profits are exempt from taxationin non-residents are subject to PIT only on Russia (special rules apply), or Voronezh income sourced in Russia. —— The profits for the reporting year do not exceed the threshold established by law.

Tax rates —— Contributions to voluntary medical deductions of up to 20% of the income insurance for the taxpayer and his/ derived from business activities. A 13% PIT rate applies generally to all types of income received by a tax her spouse, parents and children; Professional deductions can also be resident except for certain types of —— Contributions to a private pension granted to individuals who receive fund for the benefit of the taxpayer, non-employment income (e.g. deemed income under a civil-law service or work his/her spouse, parents and any income resulting from the use of loans agreement. The deductions are based disabled children; in certain conditions is taxable at the rate on documented expenditures related to of 35%). —— Additional insurance contributions to the performance of services under these the cumulative part of the state agreements. A 30% PIT rate applies generally to all pension. types of income received by a tax non- Individuals who receive author’s fees or resident, except for specific types of The above deductions cannot exceed fees for the creation, execution or other income including: RUB120,000 (USD1,818) in one calendar use of specific intellectual property can year per taxpayer (except expenses for apply for professional tax deductions that —— 15% applicable to dividend income certain expensive medical treatments amount to their documented expenses from Russian companies; on a specific list approved by the or for a fixed amount if the documents —— 13% applicable to the Russian Russian Government, deductible by the supporting the expenses are unavailable employment income of foreign actual expense amounts; and except (from 20% to 40%, depending on the type employees with the status of Highly for expenses for the education of the of intellectual property). Qualified Specialist, and to certain taxpayer’s children, deductible within a Individuals who provide services or other specific categories of taxpayers. limit of RUB50,000 (USD758) per child). perform work under relevant civil- law Tax deductions Property-related tax deductions contracts may claim an expenses deduction (supported by documentation) Standard tax deductions Property related tax deductions are available, inter alia, on expenses related to directly related to their provision of Standard monthly tax deductions of the purchase of (construction of) dwellings services / performance of work. RUB3,000 and RUB5,000 (USD46 to 76) and on land plots for the construction Investment tax deductions can be granted to certain categories of of a dwelling (or along with a dwelling Certain deductions are available with individual taxpayer (such as disabled war place) in Russia (up to RUB2,000,000 veterans, handicapped persons, etc). regard to investments / financial (USD32,258)). Interest on the loans used results from the sale of specific types If a taxpayer is eligible for multiple tax to pay for the above mentioned purchases of securities via individual investment deductions, the higher deduction applies. / constructions may also be claimed accounts opened in Russia. as a deduction (up to RUB3 million In addition, a standard tax deduction of (USD48,387)). Filing and payment RUB1,400 (USD21) per child, per month, can be granted to a parent of up to two On the sale of residential property and Generally, individual entrepreneurs, children, and RUB3,000 (USD46) for land plots that have been owned for Russian legal entities, representative each additional child (the deduction is less than three or five years (depending offices and branches of foreign legal RUB12,000 (USD182) per child for those on certain factors), a deduction up to entities registered in Russia, and which who are disabled) up to the age of 18, or RUB1,000,000 (USD16,129) or by the make payments to individuals, are all for a child who is a full-time undergraduate amount of documented actual expenses considered as tax agents. They are student up to the age of 24. The tax for the acquisition can be claimed. On required to withhold PIT from income they deduction is doubled for one parent if the sale of other property owned for less pay to individuals and then remit that PIT the other parent agrees to refuse the than 3 or 5 years (depending on certain to the Russian financial authorities. deduction or if the parent is divorced. factors), a deduction of up to RUB250,000 If PIT was not withheld by a tax agent, (USD4,032), or by the amount of the These tax deductions are available only that agent must notify the tax authorities actual documented expenses for the if cumulative annual income does not and the individuals who received the acquisition, may be claimed. exceed RUB350,000 (USD5,302). income that tax was not withheld. The Income from the sale of property that onus then falls on the individuals to Social tax deductions has been owned by the seller for three or pay the outstanding PIT based on a tax Social tax deductions are available on five years (depending on certain factors) assessment issued by the tax authorities donations given to specific charities or more is tax-exempt, provided that the (by 1 December of the year following the which qualify against government criteria, seller is a Russian tax resident in the year reporting year). In other cases where an though only on up to 25% of the income of sale. individual has received income taxable received in the tax period. in Russia, but which has not had tax Professional tax deductions withheld, the individual must file a PIT Social deductions are also available on: Professional tax deductions can be declaration and pay the outstanding tax —— Expenses incurred by the taxpayer granted to individuals conducting after a self-assessment. Generally, the PIT on the education of him/herself and registered entrepreneurial activity. declaration should be filed no later than each of his/her children; These deductions apply to documented, the 30th April of the year following the —— Expenses for medical treatment and business-related expenses. If business reporting year in which the taxable income medicines for the taxpayer and his/ related expenses are undocumented, a was received, with the tax being paid by her spouse, parents, children; sole proprietor can apply professional tax 15th July of that year. Specific rules may

apply to non-Russian citizens who depart Tax rates differ – from 0.1% to 2% – Transport tax from Russia. depending on the type and value of the Individuals owning transport vehicles are An individual’s outstanding tax liability property. The rates may be adjusted by subject to transport tax. regional laws. should be paid personally by that taxpayer Taxable vehicles include automobiles, in Russian roubles. In certain cases tax Certain categories of taxpayer are motorcycles, scooters, buses / coaches, payments can be made by a third party (an exempt from personal property tax (e.g. airplanes, helicopters, motor vessels, individual or a legal entity) on a taxpayer’s pensioners). yachts, sailing boats, ships, snowmobiles, behalf. Individual property tax is assessed by the etc. Tax refund tax authorities annually and should be paid Transport tax is determined based on the Depending on the circumstances, a tax by taxpayers based on a tax assessment vehicle’s engine power, seating capacity refund may be claimed from a tax agent or issued by the tax authorities. and the respective tax rates established by from the tax authorities. A PIT declaration Land tax regional laws. may be required if individuals want to Individuals owning land plots are subject If an individual did not receive a tax claim certain tax deductions. to land tax. assessment on their property and/or The tax is generally assessed by the tax transport vehicles, they are obliged to Other taxes payable by authorities on the cadastral value of the inform the tax authorities about their land plot. property / transport vehicles by 31 individuals December of the subsequent calendar The tax rate depends on the type of land year. Personal property tax plot and regional laws; it should not Houses, apartments, cottages, garages exceed 1.5% of the cadastral value of the and other buildings, along with premises land plot. and constructions owned by individuals, are all subject to personal property tax.

Saint Petersburg

Russian Accounting The second level consists of accounting regulations and federal accounting Principles standards (which regulate accounting Russian accounting is regulated by a policies, the compilation and presentation system of legal acts with four different of financial statements, and accounting levels. for fixed and intangible assets, inventory, loans, income, expenses, financial The first level consists of laws regulating investments, profits tax, etc). Federal the way accounting is organised and accounting standards cannot contradict maintained by companies, including: the Federal Law on Accounting. —— The Federal Law on Accounting, Many of these regulations are in essence which contains basic accounting and close to International Financial Reporting reporting requirements. Standards (IFRS). Bringing the national —— The Civil Code of the Russian accounting system into line with IFRS Federation, which consolidates has been part of the accounting reform many accounting issues. The Civil process that began in 1998. Code of the Russian Federation It is intended that new federal accounting defines a legal entity as having its standards be issued in the future. Topics own balance sheet, establishes the covered will include the current list of requirement that annual financial IFRS standards. For instance, Russian statements are approved annually, accounting regulations currently have no and provides definitions of subsidi- standards on the leasing or impairment ary and associated companies. It of assets. That said, existing accounting also states the procedures by which regulations are revised on a regular basis different kinds of legal entities are to enhance their compliance with IFRS. reorganised or liquidated. —— The Federal Law on Governmental Unless new federal accounting standards Support for Small Businesses in the are issued, the accounting regulations Russian Federation provides a have the same status as federal simplified procedure covering standards. There is no requirement that accounting and the compilation of accounting regulations comply with reporting. federal accounting standards. —— The Federal Laws ‘On Joint Stock The third level comprises Companies’ and ‘On Limited Liability methodological instructions on Companies’, which establish accounting, including industry accounting information disclosure and standards, regulations of the Central presentation requirements, stipulate Bank of Russia, and recommendations on that data contained in the annual the specific procedures needed to apply financial statements must be accounting principles and regulations to confirmed by the internal auditor, and particular types of activities. Yuzhno-Sakhalinsk determines the procedure by which Industry accounting standards and the annual financial statements are to regulations of the Central Bank of be approved, as well as the situations Russia cannot contradict federal in which an external audit opinion is accounting standards or the Federal required. Law on Accounting. Neither can

recommendations contradict federal ded in the reporting period in which In accordance with Russian legislation, and industry accounting standards or they occur, regardless of when commercial legal entities prepare annual regulations of the Central Bank of Russia. receipts or payments related to financial statements for each financial One of the most important documents at these transactions are actually made. year. A financial year is the calendar year this level is the Chart of Accounts and its —— Principle of timeliness and (1 January – 31 December), with the related instructions. completeness in recording exceptions being when a legal entity is transactions: the accountant should registered, reorganised or liquidated. If The fourth level includes documents make records on time and ensure required by law, a commercial legal entity issued by the company itself, which that they reflect all transactions made. must prepare and submit interim financial determine its accounting policies in all statements for periods that are shorter —— Prudence principle: the accountant systematic, technical and organisational than a financial year. Annual financial should record liabilities and aspects and are approved by an internal statements, except for when directed expenses rather than assets and decision taken by the company on otherwise by legislation, include the income and should not allow for any its accounting policies. If there are following: any specific accounting methods not hidden reserves. specified in the relevant accounting —— Substance-over-form principle: —— The balance sheet; standards, companies have the right to transactions should be accounted —— Financial result reports; develop them independently and to adopt for based on their economic —— Appendices to the above two them by including them in the decision substance and business circum- reports containing additional they take regarding their accounting stances rather than their legal form. information on changes in equity, policies. —— Principle of non-contradiction: cash flows, movements of borrowed Branches and representative offices of analytical accounting data should be funds, changes in accounts foreign companies located in the Russian identical to synthetic accounting receivable and payable, notes, etc; Federation are allowed to maintain their data on the last calendar day of each —— Tax returns and audit opinions are accounting on the basis of regulations month. not included in the financial established in the country in which the —— Rationality principle: application of statements. foreign company resides, unless these a rational accounting method based The information in the financial regulations contradict IFRS. However, on the company’s size and business statement for the reporting year and branches and Representative Offices environment. the previous year must be presented are still required to submit annual activity —— Materiality principle: data on in comparable formats. A company’s reports to the tax authorities, along with material assets, liabilities, income, financial statements must include the their tax returns. expenses and transactions should results of the activities of the company’s The key accounting principles in the be recorded separately if this branches, representative offices and Russian Federation are the: information is essential for other structural subdivisions. —— Separate entity principle: in evaluation of the entity’s financial Companies submit annual financial accordance with which the assets position or financial results. statements to: and liabilities of the company are Companies use a working chart of —— Shareholders; separated from the assets and accounts developed on the basis of the —— Statistics authorities; liabilities of the owner or assets centrally (government) established Chart provided to the entity by other of Accounts. —— Tax authorities; persons. All business operations performed by —— Other interested users (if the —— Going concern principle: in the companies should be supported by shareholders so decide). accordance with which it is relevant source documents in Russian. Currently, according to the Federal Law assumed that the company will These documents are the primary “On Consolidated Financial Reporting”, continue operating in the accounting documents underlying the the following Russian companies are foreseeable future. financial statements. Source documents obliged to consolidate financial reporting —— Principle of accounting policy prepared in other languages should be in accordance with the version of IFRS consistency: the accounting policy translated into Russian on a line-by-line officially adopted and published by selected by the company is applied basis. the Ministry of Finance of the Russian consistently from one reporting year Federation: credit institutions, insurance to another, with changes to the companies (excluding insurance policy only being possible if there Statutory reporting companies exclusively operating in the are changes in the legislation of the requirements field of mandatory medical insurance), Russian Federation or in accounting non-state pension funds, management A company’s financial statements must regulations, or if new accounting companies of incorporated investment reflect the company’s economic and methods are developed by the funds, and unit investment funds or financial position fully and reliably, along company, or there are significant non-state pension funds, clearing with any change in this position and changes in operating conditions. agencies, and those federal state unitary companies and joint-stock companies —— The matching principle: this states the financial results of the company’s owned by the Russian Government that that business operations are recor- activities.

appear on an approved list issued by the that don’t draw on the state budget); New industry accounting Russian Government. —— Companies (except for agricultural standards for non-credit Considering the fact that a typical cooperatives and unions of these company’s financial statements are cooperatives) whose annual financial organisations earnings from the sale of goods (or prepared in accordance with Russian Since 1st January 2018, a specific statutory legislation, and that this the performance of work or chart of accounts, along with industry differs from IFRS, in order to present provision of services) for the accounting standards, has been the financial statements to foreign preceding financial year exceed RUB introduced by the Central Bank for owners or investors, it is normally a 400,000,000 (USD6,451,644), or for some types of non-credit financial requirement that the statutory financial which the value of assets on the organisations (NFOs). statements are prepared with an IFRS balance sheet at the end of the year These NFOs are: reconciliation included. Presenting preceding the financial year exceeds financial statements in accordance with RUB 60,000,000 (USD967,747); —— professional participants on the stock IFRS and, consequently, increasing their —— Companies presenting and (or) market, acting as brokers; transparency, will facilitate the inflow of publishing consolidated financial —— professional participants on the stock foreign investment into the economy’s reports; market, conducting dealer activities; production sector and increase the —— Companies for which audits are —— professional participants on the stock possibility of more companies obtaining mandatory, according to other market, engaged in forex dealing; credit. Federal laws. —— professional participants on the stock Audits of listed companies, credit and market, providing securities Audit requirements insurance companies, non-state pension management services; funds, companies in which the state The Federal Law on Audit requires that —— professional participants on the stock owns more than 25%, state corporations, market, conducting depository the following Russian entities have state companies, public not-for-profit mandatory annual audits: activities, including the activities of organisations, and financial statements specialised investment fund, unit —— Joint-stock companies; included in the listing prospectus and investment fund and non-state —— Listed companies; consolidated financial reporting, can pension fund depositories; only be carried out by professional audit —— professional participants on the —— Credit institutions, credit history organisations. Because audits are subject securities market, maintaining offices, professional stock market to self-regulation, in order to provide registers of the holders of securities; operatives, insurance companies, audit services in the Russian Federation, clearing agencies, mutual insurance a professional auditing firm should be a —— trade organisers; associations, currency, commodity member of an appropriate self-regulating —— central counterparties; and stock exchanges, non-state organisation. pension and other funds, —— clearing organisations; incorporated investment funds, —— management companies of management companies of investment funds incorporated investment funds, and unit investment funds or non-state pension funds (excluding state funds

Voronezh

Dividends Interest Royalties Dividends Interest Royalties Country Country percent percent percent percent percent percent Albania 10 10 10 Lebanon 10 0; 5* 5 Algeria 5; 15* 0; 15* 15 Lithuania 5; 10* 0; 10 5; 10* Argentina 10; 15* 0; 15* 15 Luxembourg 5; 15* 0 0 Armenia 5; 10* 0; 10* 0 Macedonia 10 10 10 Australia 5; 15* 10 10 Malaysia -; 15* 0; 15* 10; 15* Austria 5; 15* 0 0 Mali 10; 15* 0; 15* 0 Azerbaijan 10 0; 10* 10 Malta 0; 5; 10* 5 5 Belarus 15 0; 10* 10 Mexico 10 0; 10* 10 Belgium 10 0; 10* 0 Moldova 10 0 10 Botswana 5; 10* 0; 10* 10 Mongolia 10 0; 10* -* Brazil Montenegro 5; 15* 10 10 10; 15* 0; 15* 15 (not yet in force) Morocco 5; 10* 0; 10* 10 Bulgaria 15 0; 15* 15 Namibia 5; 10* 0; 10* 5 Canada 10; 15* 0; 10* 0; 10* Netherlands 5; 15* 0 0 Chile 5; 10* 15 5; 10* New Zealand 15 10 10 China 5; 10* 0 6 Norway 10 10 0 Croatia 5; 10* 10 10 Philippines 15 0; 15* 15 Cyprus 5; 10* 0 0 Poland 10 10 10 Cuba 5; 15* 0; 10* 5 Portugal 10; 15* 0; 10* 10 Czech Republic 10 0 10 Qatar 5 0; 5* 0 Denmark 10 0 0 Romania 15 0; 15* 10 Egypt 10 0; 15* 15 Saudi Arabia 0; 5* 0; 5* 10 Finland 5; 12* 0 0 Serbia 5; 15* 10 10 France 5; 10; 15* 0 0 Singapore 5; 10* 0 5 Germany 5; 15* 0 0 Slovak Republic 10 0 10 Greece 5; 10* 7 7 Slovenia 10 10 10 Hong Kong 5; 10; 0* 0 3 South Africa 10; 15* 0; 10* 0 Hungary 10 0 0 Spain 5; 10; 15* 0; 5* 5 Iceland 5; 15* 0 0 Sri Lanka 10; 15* 0; 10* 10 10 India 10 0; 10* Sweden 5; 15* 0 0 Indonesia 15 0; 15* 15 Switzerland 0; 5; 15* 0* 0 Iran 5; 10* 0; 7.5* 5 Syria 15 0; 10* 4.5/13.5/18 Ireland 10 0 0 Tajikistan 5; 10* 0; 10* 0 Israel 10 0; 10* 10 Thailand 15 -; 0; 10* 15 Italy 5; 10* 10 0 Tu rke y 10 0; 10* 10 Japan 15 0; 10* 0; 10* Turkmenistan 10 5 5 Kazakhstan 10 0; 10* 10 UAE -/0* -/0* -* North Korea 10 0 0 UK 10* 0 0 (Dem. People’s Rep.) Ukraine 5; 15* 0; 10* 10 South Korea (Rep.) 5; 10* 0 5 USA 5; 10* 0 0 0; 5* 0 Kuwait 10 Uzbekistan 10 0; 10* 0 Kyrgyzstan 10 0; 10* 10 Venezuela 10; 15* 0; 5; 10* 10; 15* Latvia 5; 10* 5; 10* 5 Vietnam 10; 15* 10 15

—— Algeria: 5% on dividends — this rate applies if the recipient —— China: 5% on dividends — this rate applies if the recipient company (not a partnership) directly owns at least 25% of company directly owns at least 25% of the capital in the the capital in the Russian company; otherwise, 15%. 0% on Russian company and the holding value exceeds EUR80,000 interest applies to interest paid by the government or its or its equivalent in any other currency; otherwise, 10%. local authorities or paid to the government, its local —— Croatia: 5% on dividends — this rate applies if the recipient authorities or the central bank; otherwise, 15%. company owns at least 25% of the capital of the Russian —— Argentina: 10% on dividends — this rate applies if the company, and the holding value is at least USD100,000 or its recipient directly owns at least 25% of the capital in the equivalent in another currency; otherwise, 10%. Russian company; otherwise, 15%. 0% on interest applies —— Cyprus: 5% on dividends — this rate applies if the holding to interest paid to the government or the central bank; value is at least EUR100,000; otherwise, 10%. otherwise, 15%. —— Cuba: 5% on dividends — this rate applies if the recipient —— Armenia: 5% on dividends — this rate applies if the recipient company (not a partnership) directly owns at least 25% of company directly owns at least 25% of the capital in the the capital in the Russian company; otherwise, 15%. 0% on Russian company; otherwise, 10%. 0% on interest applies interest applies to interest paid to the government, its local to interest paid to the government or the central bank; authorities or public bodies; otherwise, 10%. otherwise, 10%. —— Egypt: 0% on interest applies to interest paid to the —— Australia: 5% on dividends — this rate applies to dividends government, its local authorities, public bodies or the paid out of profits that carry normal tax rates if the dividends national banks; otherwise, 15%. are paid to an Australian company (not a partnership) that directly holds at least 10% of the capital of the Russian —— Finland: 5% on dividends — this rate applies if the recipient company. In addition, the Australian company’s holding must company (other than a partnership) directly owns at least be worth at least AUD700,000, and the dividends must be 30% of the capital in the Russian company, and the holding exempt from tax in Australia; in all other cases, 15%. value is at least USD100,000 or its equivalent in national currencies; otherwise, 12%. —— Austria: 5% on dividends — this rate applies if the recipient company (not a partnership) directly owns at least 10% of —— France: 5% on dividends — this rate applies if the French the capital in the Russian company, and the holding value company (i) has directly invested at least FRF500,000 in the exceeds USD100,000; otherwise, 15%. Russian company and (ii) is taxed in France but is exempt with respect to dividends (i.e. has a participation exemption). —— Azerbaijan: 0% on interest applies to interest paid to the A 10% rate applies if only one of the requirements is government; otherwise, 10%. fulfilled; otherwise, 15%. —— Belarus: 0% on interest applies to interest paid to the —— Germany: 5% on dividends — this rate applies if the German government or the national bank; otherwise, 10%. company owns at least 10% of the capital in the Russian —— Belgium: 0% on interest applies to interest paid to the company and the holding value is at least EUR80,000; government, its local authorities, public bodies and to banks otherwise, 15%. and other financial institutions; otherwise, 10%. —— Greece: 5% on dividends — this rate applies if the recipient —— Botswana: 5% on dividends — this rate applies if the company (not a partnership) directly owns at least 25% of recipient directly owns at least 25% of the capital in the the capital in the Russian company; otherwise, 10%. Russian company; otherwise, 10%. 0% on interest applies —— Hong Kong: 0% on dividends— this rate applies if dividends to interest paid to the government, its local authorities, are distributed to the Government of the Hong Kong Special political subdivision or the central bank; otherwise, 10%. Administrative Region, to the Hong Kong Monetary —— Brazil: 10% on dividends — this rate applies if the recipient Authority, to the Exchange Fund, or to any entity wholly or directly owns at least 20% of the capital in the Russian mainly owned by the Government of the Hong Kong Special company; otherwise, 15%. 0% on interest applies to Administrative Region and mutually agreed upon by the interest paid to the government or public bodies; otherwise, competent authorities of the two contracting parties; 5% on 15%. dividends — this rate applies if the recipient company (not a partnership) directly owns at least 15% of the capital in the —— Bulgaria: 0% on interest applies to interest paid to the Russian company; otherwise, 10%. government or the Bank of Bulgaria; otherwise, 15%. —— Iceland: 5% on dividends — this rate applies if the recipient —— Canada: 10% on dividends — this rate applies if the recipient company (not a partnership) owns at least 25% of the capital company owns at least 10% of the capital or voting shares in in the Russian company and the value of the capital the Russian company; otherwise, 15%. 0% on interest investment is at least USD100,000; otherwise, 15%. applies to interest paid to the central bank; otherwise, 10%. 0% on royalties — the rate applies to computer software, —— India: a 0% tax rate on interest applies to interest paid to the patents and know-how; otherwise, 10%. government, its local authorities, public bodies or the central bank; otherwise, 10%. —— Chile: 5% on dividends — this rate applies if the recipient directly owns at least 25% of the capital in the Russian —— Indonesia: a 0% tax rate on interest applies to interest paid company; otherwise, 10%. 5% on royalties — the rate to the government, its local authorities, political subdivisions, applies to equipment rentals; otherwise, 10%. the central bank; otherwise, 15%.

—— Iran: 5% on dividends — this rate applies if the recipient —— Malaysia: 15% on dividends — this rate applies to the profits company (not a partnership) directly owns at least 25% of of joint ventures; otherwise, the domestic rate applies; there the capital in the Russian company; otherwise, 10%. 0% on is no reduction under the treaty. 0% on interest applies to interest applies to interest paid to the contracting state, its interest paid to the government and the central bank; local authorities, public bodies or the national banks; otherwise, 15%. 10% on royalties — this rate applies to otherwise, 7.5%. authors’ rights and equipment rentals; 15% on royalties — this rate applies to films and broadcasting programs and —— Israel: 0% on interest applies to interest paid to the copyrights on items of literature or art. government, local authorities and the central bank; otherwise, 10%. —— Mali: 10% on dividends — this rate applies if the value of the holding is at least FRF1 million; otherwise, 15%. 0% on —— Italy: 5% on dividends — this rate applies if the recipient interest applies to interest paid by the government or its company directly owns at least 10% of the capital in the local authorities, paid to the government, its local authorities Russian company and the holding value is at least or the central bank; otherwise, 15%. USD100,000; otherwise, 10%. —— Malta: 5% on dividends — this rate applies if the recipient —— Japan: a 0% tax rate on interest applies to interest paid to company owns at least 25% of the capital in the Russian the government, its local authorities, public bodies or the company and the total amount of investments into capital is central bank; otherwise, 10%. 0% on royalties — this rate at least EUR100,000; otherwise, 10%. The zero rate applies applies to copyright royalties; otherwise, 10%. to dividends paid to a pension fund, if such dividends are —— Kazakhstan: a 0% tax rate on interest applies to interest paid derived from investments made using the assets of that to the contracting state, local authorities or public bodies; pension fund. otherwise, 10%. —— Mexico: 0% on interest — this lower rate applies to interest —— South Korea (Rep.): 5% on dividends — this rate applies if paid to the government, the central bank and public bodies, the recipient company owns directly at least 30% of the and interest paid in respect of a loan for a period of at least capital in the Russian company and the value of the holding three years granted, guaranteed or insured by specified is at least USD100,000; otherwise, 10%. banks; in other cases, 10%. —— Kuwait: 0% on dividends — this rate applies if dividends are —— Mongolia: 0% on interest — this lower rate applies to distributed to the government, local authorities, public interest paid to the government or the central bank; in other entities, the central bank, and public financial institutions; cases, 10%. Taxation of royalties — the domestic rate otherwise, 5%. applies; there is no reduction under the treaty. —— Kyrgyzstan: a 0% tax rate on interest applies to interest paid —— Montenegro: 5% on dividends — this rate applies if the to the government, its local authorities, public bodies and recipient company (other than a partnership) directly owns at the central bank; otherwise, 10%. least 25% of the capital in the Russian company and the value of the capital investment is at least USD100,000; —— Latvia: 5% on dividends — this rate applies if the recipient otherwise, 15%. company (other than a partnership) owns directly at least 25% of the capital in the Russian company and the capital —— Morocco: 5% on dividends — this rate applies if the value of invested exceeds USD75,000; otherwise, 10%. 5% on the holding of the recipient company is at least USD500,000; interest applies to the interest on loans of any kind granted otherwise, 10%. 0% on interest — this lower rate applies to by a bank or other financial institution of one of the interest on foreign currency deposits or interest paid by the contracting states to a bank or other financial institution of government; otherwise, 10%. the other contracting state; otherwise, 10%. —— Namibia: 5% on dividends — this rate applies if the recipient —— Lebanon: 0% on interest applies to interest paid to the company (other than a partnership) directly owns at least government, its local authorities, and public bodies; 25% of the capital in the Russian company and the value of otherwise, 5%. the capital investment is at least USD100,000; otherwise, 10%. 0% on interest — this lower rate applies to interest —— Lithuania: 5% on dividends — this rate applies if the paid to the government, its local authorities or public bodies; recipient company (other than a partnership) directly owns at otherwise, 10%. least 25% of the capital in the Russian company and the value of the capital investment is at least USD100,000; —— Netherlands: 5% on dividends — this rate applies if a Dutch otherwise, 10%. 0% on interest applies to interest paid to company (other than a partnership) directly owns at least the government, its local authorities, public bodies, and the 25% of the capital in a Russian company and has invested in central bank; otherwise, 10%. 5% on royalties — this rate it at least EUR75,000 or its equivalent in national currency; applies to equipment rentals; otherwise, 10%. otherwise, 15%. —— Luxembourg: 5% on dividends — this lower rate applies if —— Norway: 0% on interest if paid to the government, local the Luxembourg recipient directly owns at least 10% of the authorities, Central Bank or other agreed financial capital in the Russian company and the holding value is at institutions; otherwise 10%. least EUR80,000 or its equivalent in national currency; —— Philippines: 0% on interest — this lower rate applies to otherwise, 15%. interest paid to the government, its local authorities or public bodies; otherwise, 15%.

—— Portugal: 10% on dividends — this rate applies if the the capital investment is at least USD100,000; Portuguese company has directly owned at least 25% of the otherwise,15%. capital in the Russian company for an uninterrupted period of —— Singapore: 5% on dividends — this rate applies if the at least 2 years prior to the payment; otherwise, 15%. A 0% recipient of the dividends is a company which directly owns tax rate on interest applies to interest paid to the govern- at least 15% of the share capital in the company paying ment, its local authorities or public bodies; otherwise, 10%. dividends; otherwise, 10%. The 10% tax rate also applies to —— Qatar: 0% on interest — this lower rate applies to interest payments distributed by property investment funds. paid to the government, its local authorities or public bodies; —— South Africa: 10% on dividends — this rate applies if the otherwise, 5%. recipient company owns at least 30% of the capital in the —— Romania: 0% on interest — this lower rate applies to Russian company and has directly invested in this interest paid to the government, the national bank, foreign company at least USD100,000; otherwise, 15%. A 0% tax trading banks, or Eximbank; otherwise, 15%. rate on interest applies to interest paid by public bodies; otherwise, 10%. —— Saudi Arabia: 0% on dividends — this lower rate applies to dividends distributed to the government, its local authorities, —— Spain: 5% on dividends — this 5% rate applies if (i) the public bodies, and the central bank; otherwise, 5%. 0% on Spanish company has invested at least EUR100,000 in the interest — this lower rate applies to interest paid by the Russian company and (ii) the dividends are exempt in government, its local authorities or paid to the government, Spain. A 10% rate applies if only one of the conditions is its local authorities, and public bodies; otherwise, 5%. met; otherwise, 15%. 0% on interest — this lower rate applies to long-term loans (minimum 7 years) granted by —— Serbia: 5% on dividends — this rate applies if the recipient credit institutions residing in a contracting state; company (other than a partnership) directly owns at least otherwise, 5%. 25% of the capital in the Russian company and the value of

Vladivostok

—— Sri Lanka: 10% on dividends — this rate applies if the —— Syria: 0% on interest — this lower rate applies to interest recipient company (other than a partnership) directly owns at paid to the government, its local authorities, and public least 25% of the capital in the Russian company; otherwise, bodies; otherwise, 10%. 4.5% on royalties — this rate 15%. 0% on interest — this lower rate applies to interest applies to films and broadcasting programs, and to paid to the government, its local authorities, public bodies, recordings for radio/TV broadcasting; 13.5% on royalties the central bank; otherwise, 10%. — this rate applies to copyrights on items of literature, art or science; 18% – this rate applies to patents, trade mark —— Sweden: 5% on dividends — this rate applies if a Swedish design or models, plans, secret formulae/processes, any company (other than a partnership) owns 100% of the computer software programs, or for information concerning capital in a Russian company (or in the case of a joint industrial, commercial or scientific experience. venture, at least 30% of the capital in the joint venture) and foreign capital invested exceeds USD100,000 or its —— Tajikistan: 5% on dividends — this rate applies if the equivalent in national currencies; otherwise, 15%. recipient company directly owns at least 25% of the capital in a Russian company; otherwise, 10%. A 0% tax —— Switzerland: 0% on dividends — this rate applies if dividends rate on interest applies to interest paid to the are distributed to a pension fund (or similar institution), the government, its local authorities, public bodies or the government, any political subdivision, local authority or the central bank; otherwise, 10%. central bank; a 5% rate on dividends applies if the Swiss company (other than a partnership) directly owns at least —— Thailand: A 0% tax rate on interest applies to interest paid to 20% of the capital in the Russian company and the holding the government, public bodies, the central bank, or the value exceeds CHF200,000 or its equivalent in another —— Export-Import Bank of Thailand; a 10% tax rate on interest currency; otherwise, 15%. applies to interest paid to financial institutions. The domestic

Saint Petersburg

rate applies in other cases; there is no general reduction —— Uzbekistan: A 0% tax rate on interest applies to interest paid under the treaty. to the government, its local authorities or the central bank; otherwise, 10%. —— Turkey: A 0% tax rate on interest applies to interest paid to the government or the central bank, or to the Turkish —— Venezuela: 10% on dividends — this rate applies if the Eximbank; otherwise, 10%. recipient company (other than a partnership) directly owns at least 10% of the capital in the Russian company and the —— UAE: 0% on dividends — this rate applies only if the holding value is at least USD100,000; otherwise, 15%. A recipient is a financial or investment institution. A 0% tax 0% tax rate on interest applies to interest paid by (or to) the rate on interest — this rate applies only if the recipient is a government, its local authorities, the central bank or public financial or investment institution. The treaty does not cover bodies. If the interest is paid on a loan granted/guaranteed royalties. by a financial institution of a public character with the —— UK: 10% on dividends — applies if dividends in the hands of objective of promoting exports and development, then a 5% the recipient company are subject to tax. tax rate on interest applies to interest paid to the bank; otherwise, 10%. 10% on royalties — this rate applies to fees —— Ukraine: 5% on dividends — this rate applies if the holding for technical services; otherwise, 15%. value is at least USD50,000; otherwise, 15%. A 0% tax rate on interest applies to interest paid to the government or the —— Vietnam: 10% on dividends — this rate applies if the central bank; otherwise, 10%. recipient company has invested in the capital of the Russian company at least USD10 million; otherwise, 15%. —— USA: 5% on dividends — this rate applies if the recipient company owns at least 10% of the capital or voting power in the Russian company; otherwise, 10%.

Fines based on the Tax Code

Type of infringement Fine RUB 10,000 (approximately USD 161) if the registration deadlines are missed. Late registration with the tax If activities have been conducted without registration: 10% of the income received authorities as a result of the activities, but not less than RUB 40,000 (approximately USD 645)* 5% of the amount due for each full or part month late, but not more than 30%, and Late submission of tax returns not less than RUB 1,000 (approximately USD 16)*

Substantial violation of the RUB 10,000 (approximately USD 161)* rules governing the accounting If committed in several tax periods: RUB 30,000 (approximately USD 484)* of taxable income and If this has resulted in understatement of the tax base: then 20% of the amount of expenses tax underpaid (if any), but not less than RUB 40,000 (approximately USD 645)* 20% of the tax underpaid as a result of understating the taxable base or of other Payment default or incorrect calculations of tax or any other illegal actions. 40% of the tax underpaid if the underpayment of taxes tax underpayment was deliberate. Non-withholding and/or default in the payment of taxes 20% of the tax not withheld and not paid by the tax agent. by a tax agent

In the above cases, if a taxpayer corrects the errors the thirtieth day of delay in payment, the late payment themselves and pays the additional taxes and late interest rises higher to 1/150 of the Russian Central payment interest payable, fines for erroneous Bank’s refinancing rate. bookkeeping and tax calculation are not assessed. At present, the interest would be 0.025% per day during Normally late payment interest is charged at 1/300th of the first thirty days of delay in payment. After the thirtieth the refinancing rate of the Central Bank of the Russian day of delay in the payment of interest, it would increase Federation (7.5% as at 21 February 2018) for each day to 0.05% per day (since October 2017). the tax payment was delayed. As of 1 October 2017, after

Fines based on the Administrative Code

Type of infringement Fine Violation of the terms of RUB 500–RUB 1,000 (from USD8 to USD16), or a warning for missing the registration with the tax registration deadlines; RUB 2,000–RUB 3,000 (from USD32 to USD48), if activities authorities were undertaken without registration. These apply to company executives. Violation of the terms for RUB 300–RUB 500 (from USD5 to USD8), or a warning. These apply to company submission of tax returns executives. Non-submission of essential For individuals: RUB 100–RUB 300 (from USD2 to USD5), information for tax control For company executives: RUB 300–RUB 500 (from USD5 to USD8) for not submitting purposes information, or submitting information that was incomplete during tax control procedures.

Fines based on the Russian Criminal Code Among other clarifications, the Russian Criminal Code —— a penalty consisting of the amount of salary or other prescribes the liability faced by individuals and legal entities income received by the guilty person for 1-2 (1-3) years, when evading tax on large and very large amounts. OR The criteria for individuals and legal entities on whether non- —— forced labour for up to two (five) years, and maybe taxed amounts qualify as large or very large are established disqualification from the right to hold certain positions or in the Russian Criminal Code. to perform certain activities for a period of up to three years, OR For instance, for legal entities, amounts are deemed to be large (very large in brackets) if: —— arrest for up to six months (only for tax evasions on large amounts), OR —— the amount of tax underpaid exceeds RUB 5 (15) million / USD80,646 (USD241,937) for 3 financial years AND the —— imprisonment for up to two (six) years, and maybe share of the tax underpayments exceeds 25% (50%) of disqualification from the right to hold certain positions or tax liabilities, OR to perform certain activities for a period of up three years**. —— tax underpayment exceeds RUB 15 (45) million / USD80,646 (USD725,810)**. The criminal liability for the The tax officials of a company will be subject to criminal above tax evasion by legal entities is as follows for large liability for the above tax evasions if the evasion is committed amounts (very large amounts, or tax evasions committed with express malice. by a group of persons, shown in brackets): An organisation is exempted from criminal liability if it has —— a penalty of RUB 100,000 – RUB 300,000 (200,000 – committed tax evasion for the first time and has paid to the 500,000) / from USD1,613 to USD4,839 (from USD3,226 state budget, in full, the amount of tax owed, late payment to USD 8,065), OR interest, and all associated fines.

Fines for customs violations

Type of violation Fine Illegal movement of goods and/or vehicles across Fine of 50% to 300% of the value of the goods and/or vehicles, with the customs border of the Eurasian Economic Union (EEU) the possibility of the goods / vehicles being seized. Non-declaration of goods in accordance with Fine of 50% to 200% of the value of the goods, with the possibility of established procedures the goods being seized. Incorrect declarations (e.g. provision of incorrect information regarding the name, description, Fine of 50% to 200% of the underpaid customs payments, with the classification code of goods, etc.), if the declaration possibility of the goods in question being seized. led to underpayment of customs duties Violations of customs procedures Fine of 50% to 200% of the value of goods, with the possibility of the goods being seized. Illegal acquisition, use, storage, or transportation of Fine of 50% to 200% of the value of goods, with the possibility of the goods goods being seized. Evasion of customs duties Fine of RUB 100,000–RUB 500,000 (from USD1,613 to USD8,065) or of 1–3 years’ salary, or forced community service for a period of up to 480 hours, or forced labour or confinement for a period of up to two years. If there has been an especially large evasion of customs duties, a fine of RUB 300,000–RUB 500,000 (from USD4,839 to USD8,065) or of 2–3 years’ salary, or forced labour or confinement of up to 5 years, possibly accompanied by a forfeit of the right to hold some posts or carry out some activities for a period of up to 3 years. Evasion of customs duties is considered large scale if the total sum of unpaid customs duties exceeds RUB 2,000,000 (USD32,258), and is considered exceptionally large scale if it exceeds RUB 6,000,000 (USD96,775).

** Article 199 of the Russian Criminal Code

Why KPMG Corporate tax services

KPMG in Russia and the CIS employs more than 400 tax and KPMG has teams dedicated to addressing all of the tax issues legal consultants, consisting of both domestic and foreign that corporations confront: specialists. They bring with them vast experience not only in —— Indirect tax; advisory services but in the business world as well. —— Transfer pricing; With his extensive knowledge of tax advisory services in Russia, Mikhail Orlov, the Head of Tax & Legal in Russia and —— Effective management of tax liabilities (and its outsourcing); the CIS, also chairs the Tax and Customs Law Expert Council —— Development of problem-solving methods; of the Russian State Duma, drafts legislation and works as —— Tax considerations during restructuring; a Public Tax Ombudsman under the Russian Federation’s Presidential Commissioner for the Rights of Business People. —— International tax planning; As the head of a strong and cohesive team of professionals, —— Tax structuring for mergers and acquisitions, including Mikhail makes it the department’s priority to be not only support for the times after companies have been consultants who help solve for our clients their urgent and integrated. sensitive issues quickly and efficiently, but also to be their trusted partners. People services We provide services for private clients and company staff. These Our team services include helping to ensure personal compliance with tax KPMG in Russia employs more than 400 tax and legal legislation, implementing relevant company-wide programmes, professionals, including both local and foreign specialists. pension planning and private client services. Our specialists also They bring with them vast experience not only in advisory provide professional wealth management services. Personnel services also include secondment structuring (both inbound and services but in the business world as well. outbound) as well as related tax, legal and immigration issues. Our approach to key issues: Legal advice —— Tax effectiveness. To raise tax effectiveness, KPMG KPMG’s Law practice consists of more than 50 lawyers and uses a combined approach that improves cash flow, attorneys with international legal experience based in Moscow centralises funds, reallocates group management expenses, engages in international planning, and Saint Petersburg, including PhDs in law and lawyers who implements appropriate ERP and tax management qualified and practiced in England and the United States. systems, and conducts fiscal management. We have direct access to KPMG Law’s international network, —— Transfer pricing. We have completed more than 100 superior in its global coverage to most other international complex analyses of transfer prices for Russian and law firms, covering more than 70 jurisdictions and providing international clients working across many different international legal solutions to our global clients as they conduct sectors. their transnational projects. —— International tax planning. We will help you find the most effective way to build your international group Complex tax projects structure. If you have subsidiaries located abroad, we will help you structure their activities. The specialists at KPMG Tax & Legal have experience supporting, from a tax and legal perspective, IT projects and —— Mergers and acquisitions. Our team provides a full projects requiring financial and strategic consulting. We analyse range of services from financial, legal and tax due financial risks, develop progressive approaches and adapt diligence to restructuring and legal advice on systems to conform with Russian and international legislation. transaction agreements. Our experience includes introducing new software systems, —— Tax dispute resolution. Our litigation group provides overseeing commercial restructuring of holding companies, support during tax disputes, which includes and advising on money laundering, as well as issues related representing clients’ interests in court, supporting to corporate intelligence and resolving commercial issues. clients during tax audits and throughout the pre-trial Moreover, we actively participate in projects where we work to settlement process, preparing appeals to court improve personnel management and support the improvement decisions and appeals to tax authorities to take action of operational efficiency within our clients’ companies. or to remain uninvolved, and interpreting laws and practice for clients who are dealing with state authorities.

AUD Australian dollar JSC Joint stock companies BRIC Brazil, Russia, India And China Kg Kilogram BVI British Virgin Islands LLC Limited liability companies CHF Swiss franc OJSC Open joint stock companies CIS Commonwealth of Independent States PE Permanent establishment CJSC Closed joint stock companies PIT Personal income tax ERP Enterprise Resource Planning R&D Research and development EUR Euro RA Rating agency FCZ Free customs zone RLE Russian Link Exchange FDI Foreign direct investment RO Representative office FLE Foreign legal entity RUB Russian rouble FMS Federal Migration Service RF Russian Federation FRF French Franc SEZ Special economic zone FZ Federal law (Federalniy Zakon) UCT Unified Customs Tariff GDP Gross domestic product UK United Kingdom HQS Highly qualified specialist US United States ID Identification USD United States dollars IFRS International Financial Reporting Standards USSR Union of Soviet Socialist Republics VAT Value added tax IT Information and technology Yo Y Year-on-year

Ekaterinburg

Oleg Goshchansky Mikhail Orlov Chairman and Head of Tax and Legal Managing Partner KPMG in Russia and the CIS KPMG in Russia and the CIS Partner T: +7 (495) 937 44 77 T: +7 (495) 937 44 77 F: +7 (495) 937 44 99 F: +7 (495) 937 44 99 E: [email protected] E: [email protected]

Sean Tiernan Kirill Altukhov CIS Head of Advisory CIS Head of Audit KPMG in Russia and the CIS KPMG in Russia and the CIS Partner Partner T: +7 (495) 937 44 77 T: +7 (495) 937 44 77 F: +7 (495) 937 44 99 F: +7 (495) 937 44 99 E: [email protected] E: [email protected]

Our offices

KPMG in Russia

Head Office, Russia and the CIS Republic of Tatarstan Moscow Kazan Т: +7 495 937 4477 Т: +7 843 210 0090 North-West Regional Center Ufa Saint Petersburg T: +7 347 226 4477 Т: +7 812 313 7300 Voronezh Volga Regional Center T: +7 473 220 4477 Nizhny Novgorod Krasnoyarsk Т: +7 831 296 9202 Т: +7 391 257 0400 Siberia Regional Center Perm Novosibirsk Т: +7 342 259 4400 Т: +7 383 230 2255 Vladivostok Urals Regional Center Т: +7 423 265 9977 Ekaterinburg Т: +7 343 253 0900 South Regional Center Rostov-on-Don Т: +7 863 204 0050

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