Russian tax system brief review

Russian taxes are listed and regulated by the Russian Tax Code. The article published in previous issue of PRISM contains general information about taxation in Russia. This article presents more details concerning tax base and exceptions for some taxes. 

Corporate income tax 

Exempt income 

The most significant exemption provided by the Tax Code is the exemption for funds received by Russian organization without consideration (gratuitous financing) from its parent (an entity or a physical person), if the parent owns more than 50% of charter capital of the Russian organization, or from its subsidiary, if the Russian organization owns more than 50% of this subsidiary. 

Other exemptions provided by the Tax Code include, in particular, an exemption for contributions to the charter capital, credit facility or loans received, reimbursement of agent’s expenses, and assets received as a pledge or deposit as security for an obligation, as well as other specific exemptions.

Deductible expenses 

Generally, expenses are considered to be deductible for profits tax purposes if they are “economically justified” and supported by proper documentation (drawn up in accordance with the laws of the Russian Federation), unless specifically disallowed by the Tax Code. The Tax Code contains a list of tax-deductible expenses, but this list is explicitly open and is secondary to the primary business purpose criteria. 

In practice, form over substance has been the standard approach by the tax authorities, and the inability to support an expense by contract and invoice (plus other supporting documentation for certain expenses) tends to result in a non-deductible expense. 

Interest 

Interest expense deductibility is subject to arm’s length and thin capitalization tests. 

Thus, interest on any type of loan taken to finance business-related expenses (current or capital expenses) is in principle fully tax-deductible provided the interest charged is at an arm’s length rate, i.e., does not deviate more than 20% from the interest charged for comparable loans as defined by the Tax Code. 

Dividend income 

Dividends received by Russian companies are subject to a 9% tax rate. In order to prevent double taxation of dividends, the tax base on domestic dividends paid is determined as the difference between dividends paid to Russian organizations by the taxpayer and dividends received from Russian organizations; i.e., further distribution of dividends received by Russian organizations from other Russian organizations to their own Russian investors is not taxable. 

VAT

Only goods and services which are deemed to be sold in Russia are the subject for VAT. Goods are classified either they are situated in Russia and are not shipped or transported or these goods are situated in Russia at the time of the commencement of shipment or transportation. 

Services are deemed to be provided in Russia in the following seven situations: 

• the services are directly connected with immovable property situated in Russia; 

• the services are connected with movable property situated in Russia; 

• the services are actually rendered in Russia in the sphere of culture, art, education, tourism, leisure, or sport;

• the purchaser of the services carries out activities in Russia;

• transportation services and related services provided by Russian organizations or private entrepreneurs, where the point of departure and/ or destination point are in the territory of Russia; 

• services which are directly connected with transportation of goods placed under the international customs transit regime and are provided by organizations or private entrepreneurs whose place of activity is deemed to be the territory of Russia; 

• the activities of the organization or a private entrepreneur which performs the work (renders the services) are carried out in the territory of Russia (with respect to the performance of work (rendering of services) not envisaged in points above. 

The point concerning “purchaser of the services carries out activities in Russia” relates to the following types of services: the transfer and licensing of intangible property; the provision of consulting, legal, accounting, advertising, marketing, engineering, and information processing services; the rent of movable property (with the exception of land motor vehicles); the provision of services related to the development of computer programs and databases as well as their adaptation and modification; and certain other types of services.