Conducting business absent registration is illegal in Russia. Although there is federal law governing registration, it is often subject to local interpretation. Russian law offers several commonly used structures to conduct business: representative or branch office of a foreign company; registration as an individual private entrepreneur; subsidiary companies; Limited Liability Company (OOO); privately held, closed joint stock company (ZAO); and publicly held, open joint stock company (OAO).

Branch offices and accredited representative offices

Branch offices and accredited representative offices are both legally distinct from Russian corporations, which may be established by foreign firms either as joint stock companies with partial Russian ownership or as wholly-owned subsidiaries of a foreign firm. Foreign ownership is legally permitted to be as high as 100 percent in most sectors, but potentially limited in industries defined by the “Strategic Sectors Law.”

Federal Law no. 106-FZ, last amended in May 2016, governs branch and representative offices of foreign entities. Pursuant to the law, accreditation of branches and representative offices of foreign companies is regulated by the Federal Tax Service of the Russian Federation (FTS). The FTS accredits branches and representative offices of all foreign companies, except for foreign banks and foreign civil aviation companies, which are accredited by the Central Bank of Russia and the Federal Aviation Service respectively.

The FTS maintains the register of accredited branches and representative offices of foreign entities (the “Register”).

Individual accreditation and visa support for foreign employees of branches and representative offices is supported by the Chamber of Commerce and Industry of the Russian Federation (CCI).

The accreditation procedure consists of several steps. (1) First, the application for accreditation is submitted to the FTS within 12 months of the date the decision by the foreign company’s headquarters to open the branch or representative office is adopted.
(2) The application should include certain documents (the list of the documents will be published by the FTS) and shall be accompanied by CCI certification regarding the number of foreign employees of a branch or representative office. (3) The time for the FTS’s decision on accreditation is 25 business days. A document confirming entry into the Register constitutes confirmation of accreditation. (4) Accreditation can be denied in the event of either inconsistencies in the documents submitted or a violation of the term for their delivery. Accreditation will be denied if the purposes of a branch or representative office runs contrary to Russian law, and in cases when FTS assesses that the entity threatens the sovereignty, political independence, territorial integrity, or national interests of the Russian Federation. (5) Changes in the Register occur within 10 business days from the day of delivery of required documents to the FTS.

Bylaws of a branch or a representative office of a foreign company must contain certain provisions set by law. The accreditation fee for each branch office is 120,000 rubles (approximately USD2,000, at current exchange rates).

Taxation

Companies are required to register with the Russian tax authorities, which will also include registration with the Russian Social Security Fund. Documents for state registration should be prepared and submitted to the local Tax Inspectorate in accordance with Chapter 12 of the August 8, 2001 Federal Law on State Registration of Legal Entities. An authorized legal entity, the Moscow Department of Russia’s Ministry of Finance (15, Tulskaya Street, Moscow), provides counseling to businesses on registration procedures and documents.

Tax code

Major revisions to Russia’s tax code took place from 1999 to 2003. The resulting tax laws more closely matches the needs of a growing market economy, and many provisions that distorted the business environment and kept many businesses in the shadow economy were removed.

The most fundamental changes affecting the value-added tax (VAT), excise taxes, and individual income tax were reflected in the new chapters of the Tax Code Part II. The Federal Law on the Introduction of Amendments and Additions to Part II of the Russian Federation Tax Code was also amended along with separate Russian Federation legislative acts. These changes aimed at improving Part II of the Russian Tax Code were passed by the Duma and enacted in 2003. Ongoing tax reform has further improved procedural rules and reduced the overall tax burden in the country.

Companies operating in Russia should consult with a professional tax advisor to learn about the nuances of taxation requirements. A general overview of Russian taxes follows.

Profits tax

The profits tax is levied on net profits. The standard profits tax rate is 20 percent (17 percent is allocated to regional Russian authorities and three percent to federal authorities). The regional authorities may, at their discretion, reduce the regional profits tax rate to as low as 12.5 percent. The tax rate was reduced in tandem with the introduction of more realistic interpretations of deductible expenses, the combined impact of which was to reduce significantly the profit tax burden and support the Russian economy during the financial downturn.

The provisions on profit taxation enable foreign companies operating in Russia to benefit from the reduced withholding tax rates and exemptions under Russia’s double taxation treaties (the United States and Russia launched a double taxation treaty in 1992), which could be advantageous for U.S. companies in certain cases. For example, representative offices are permitted to deduct expenses incurred on their behalf by a parent company located abroad.

Value-added tax and import duties

VAT is designed as a tax to be borne ultimately by consumers, but is collected on a basis similar to the European Union model. VAT is calculated on sales value and is applied at a uniform rate of 18 percent, except for certain foodstuffs, pharmaceuticals, and children’s clothes, which are taxed at 10 percent. Some products including certain financial services and medical equipment are entirely exempt, along with some intangibles, such as inventions, software, and industrial designs. As of June 2018, the Russian government is considering raising the standard rate to 20 percent from 18 percent.

Imports are also subject to VAT, calculated based on the item’s customs value plus customs duties and fees. In addition, import duties are assessed at specified rates, ranging from five percent to 30 percent. As of January 1, 2010, import duty rates for some goods increased with the introduction of the Eurasian Customs Union (EACU). The EACU initially consisted of Belarus, Kazakhstan, and Russia, and was enlarged to include Armenia on January 1, 2015, when the group became the Eurasian Economic Union (EAEU). Kyrgyzstan also joined in 2015. The duties are assessed according to classifications and are applied to the customs value of the imported goods, including shipping charges and insurance. Goods imported by foreign partners as in-kind contributions to the charter capital of a new enterprise may be exempt from import duties during a period specified in the charter documents and exempt from import VAT under certain conditions (e.g., the goods qualify as technological equipment, which has no analogs manufactured in Russia).

In general, goods manufactured or assembled in Russia, whether by a Russian or a foreign company, and then exported out of Russia, are not subject to VAT. If these goods are exported before payment is received, then no VAT should be collected. However, if payment is received before shipment, the exporter must pay the applicable VAT and then request a refund from the tax authorities.

Social welfare taxes

As of January 1, 2010, the Unified Social Tax was replaced by social security (payroll) contributions to the State Pension Fund, the Social Security Fund, Federal Medical Insurance Fund, and the Territorial Medical Insurance Fund. A business is liable for the entirety of social security contributions and no amount is withheld from employees.

Social security contributions apply at the aggregate rate of 30 percent of an employee’s annual salary, and the percent of salary/rate of contribution may be adjusted in the future by the Russian government. The portion of an employee’s annual salary in excess of this threshold is exempt from social security contributions. Social security contributions are distributed as follows: 22 percent to the State Pension Fund (SPF), 2.9 percent to the Social Security Fund (SSF), 5.1 percent to the Federal Medical Insurance Fund. Social security contributions apply to all payments to employees considered permanent residents, including individuals that apply for a simplified system of taxation. Salary or other payments to foreign citizens temporarily present in Russia (i.e., not having a permanent resident permit) are not subject to social security contributions. Social security contributions are paid on a monthly basis and the contribution calculations were filed until 2017 with the SPF and the SSF on a quarterly basis. As of January 1, 2017, FTS accepts reports and payments for workplace accident contributions, which will remain under the purview of the SSF, and pensions, which are now under the purview of the SPF.

Reduced social security contribution rates apply to certain business categories, including software and high-tech companies (14 percent from 2011 until 2023) and companies engaged in special innovation projects (14 percent). Companies that are members of the Skolkovo project pay 20 percent to the SPF and are exempt from payments to the SSF and the Federal Medical Insurance Fund.

Workplace accident insurance is paid by the employer in addition to social security contributions. Rates vary depending on the established class of professional risk.

Following a change of law in November 2011, income paid to foreign employees (individual contractors) became subject to employer contributions. When the following conditions are met, the income is subject to the contributions: (1) the foreign employee is a temporary resident or is temporarily staying in Russia, and (2) the foreign employee works under an employment agreement for an indefinite period or a fixed-term agreement for a period of six months or more.

However, these insurance contributions are due only for the part allocated to the Pension Fund at a rate of 22 percent (of the total 30 percent). But by an explicit provision of the law, although the remuneration of these foreign employees is subject to pension contributions, they will still not be entitled to any pension. (Only those foreign nationals who have received a temporary or permanent residence in Russia are entitled to a Russian state pension.)

Withholding on dividends, interest, and royalties

Foreign legal entities without a business presence in Russia are subject to a withholding tax of 10 percent on freight services provided in Russia. Most Russian-sourced income, including interest, royalty, income from leasing, and rental operations, is taxed at a 20-percent rate. Dividends are taxed at a rate of 15 percent. These rates are often reduced pursuant to an applicable double taxation treaty. Interest on certain types of state and municipal securities, mortgage-backed bonds, and certain income from certificates of participation in a mortgage pool also benefit from reduced rates. For example, the United States-Russia tax treaty may potentially reduce the dividends rate to as low as five percent, depending on whether ownership and investment criteria are met, and the tax on interest and royalties could drop to zero percent. Lease payments and other income are subject to a 20-percent withholding rate.

Land, property and personal income taxes

Local authorities may impose a tax on land according to its type and location. The rate is higher in Moscow and St. Petersburg than in other cities and rural areas.

The personal income tax rate for Russian residents is a flat 13 percent imposed on worldwide income while non-residents are taxed at 30 percent of Russian-sourced income.