Foreign company operations in the Russian Federation without opening a permanent establishment
Both Russian and foreign companies can operate within the territory of the Russian Federation. Any chosen form of operation of a foreign business in Russia has its own tax consequences, so it is of utmost importance to choose the most appropriate and advantageous operations model.
Legal opportunities
A foreign company can legally conduct business in Russia through a permanent establishment or without it. Depending on the nature of operations and characteristics of the workflow, there exist the following options:
1. Permanent establishment
A permanent establishment of a foreign company is defined as its subdivision through which a company regularly conducts business in the Russian Federation. To operate through a permanent establishment, a company needs to register with the tax authorities of the Russian Federation. The legislation of the Russian Federation puts a considerable tax burden on permanent establishments. A company needs to pay a 24% income tax, access VAT and UST from employee compensations through the establishment, and pay corporate property taxes.
2. Operations without a permanent establishment
The main advantage foreign companies operating without a permanent establishment within the Russian Federation have is that their taxes are avoided. In this case, a company does not have to pay taxes on earnings of enterprise; other income taxes are withheld by an agent at a reduced rate. Input VAT is withheld by an agent during transfers of VATable income while output VAT is set to zero. Moreover, a foreign organization operating in the Russian Federation without a permanent establishment does not pay either corporate property tax or UST.
A foreign company can legally conduct business in Russia through a permanent establishment or without it. Depending on the nature of operations and characteristics of the workflow, there exist the following options:
1. Permanent establishment
A permanent establishment of a foreign company is defined as its subdivision through which a company regularly conducts business in the Russian Federation. To operate through a permanent establishment, a company needs to register with the tax authorities of the Russian Federation. The legislation of the Russian Federation puts a considerable tax burden on permanent establishments. A company needs to pay a 24% income tax, access VAT and UST from employee compensations through the establishment, and pay corporate property taxes.
2. Operations without a permanent establishment
The main advantage foreign companies operating without a permanent establishment within the Russian Federation have is that their taxes are avoided. In this case, a company does not have to pay taxes on earnings of enterprise; other income taxes are withheld by an agent at a reduced rate. Input VAT is withheld by an agent during transfers of VATable income while output VAT is set to zero. Moreover, a foreign organization operating in the Russian Federation without a permanent establishment does not pay either corporate property tax or UST.
Analyzing provisions of article 306 of the Russian Tax Code allows for the following conclusion: foreign company operations by itself does not necessarily lead to the creation of a permanent establishment if:
·A foreign company sends personnel to work in the Russian Federation, and such personnel acts in the name and interests of the organization they were sent to;
·A foreign company works in the Russian Federation through a broker, commissioner, management of a foreign investment fund (company), professional participants of the Russian securities market or any other agent acting in the ordinary course of business;
·A foreign company only signs a contract for joint operations of its parties that is conducted fully or partially within the territory of the Russian Federation.
·A foreign company sends personnel to work in the Russian Federation, and such personnel acts in the name and interests of the organization they were sent to;
·A foreign company works in the Russian Federation through a broker, commissioner, management of a foreign investment fund (company), professional participants of the Russian securities market or any other agent acting in the ordinary course of business;
·A foreign company only signs a contract for joint operations of its parties that is conducted fully or partially within the territory of the Russian Federation.
Alternatively, a foreign company can work within the territory of the Russian Federation without opening a permanent establishment if its activities are not of regular kind, or if the double tax agreement between the Russian Federation and the country in question does not require such an establishment to be opened. To conduct business in the Russian Federation without opening a permanent establishment, a company may choose, for instance, to sign direct contracts with Russian contractors; opt for secondment; or hire natural persons who are residents of the Russian Federation. Alternatively, a foreign company can found a branch organization in Russia.
3. Branch organization
A branch organization founded by a foreign company has to pay taxes at the same rates as Russian residents, yet in certain cases it can apply a simplify taxation system, while permanent establishments do not possess this right.
Also, it is possible to reduce the tax load through reallocation of funds: dividends, borrowing interests, or license payments. Apart from that, a foreign company can operate in the Russian Federation through a branch Russian organization by signing a partnership intermediate agreement with the Russian company.
3. Branch organization
A branch organization founded by a foreign company has to pay taxes at the same rates as Russian residents, yet in certain cases it can apply a simplify taxation system, while permanent establishments do not possess this right.
Also, it is possible to reduce the tax load through reallocation of funds: dividends, borrowing interests, or license payments. Apart from that, a foreign company can operate in the Russian Federation through a branch Russian organization by signing a partnership intermediate agreement with the Russian company.
What is more advantageous?
Tax planning plays a major role in the operations of any organization, including foreign ones. The chosen mode of operation within the territory of the Russian Federation determines the tax burden.
It is crucial for a company to choose the most efficient mode of operation and minimize tax exposure. Accounting for opportunities and limitations stipulated in the legislation, a foreign company can considerably lower expenses in the case when it operates in the Russian Federation without a permanent establishment.
Tax planning plays a major role in the operations of any organization, including foreign ones. The chosen mode of operation within the territory of the Russian Federation determines the tax burden.
It is crucial for a company to choose the most efficient mode of operation and minimize tax exposure. Accounting for opportunities and limitations stipulated in the legislation, a foreign company can considerably lower expenses in the case when it operates in the Russian Federation without a permanent establishment.
