Tax System of Russia. Types of Taxes. Prospects of Tax Reform in Russia
Russian tax system is being constantly reformed. Currently major part of the tax system is regulated by the Tax Code of the Russian Federation, a direct acting law. At the same time, some taxes are established by individual laws of the Russian Federation or constituents of the Russian Federation.
Double tax treaties made between the Russian Federation and other countries are an integral part of Russian tax system. Currently over 60 such treaties are in force. Provisions of international agreements and treaties supersede national legislation (See Appendix 1).
Russian taxes are divided into federal, regional and local. (See Appendix 4).
Taxation of Foreign Legal Entities in the Russian Federation
Taxation of foreign legal entities in Russia depends on whether they carry out entrepreneurial activities in the territory of Russia via a permanent establishment or not.
1. Recognition of Permanent Establishment
In accordance with the Tax Code of the Russian Federation permanent establishment for the purpose of the profits tax shall mean any “separate subdivision” or another place of business of a foreign entity via which the organisation regularly carries out entrepreneurial activities in the territory of the Russian Federation relating to the use of subsoil and (or) other natural resources, performance of contractual services for the construction, installation, assembly, start-up and commissioning, maintenance and operation of equipment, selling of goods from warehouses located in the territory of the Russian Federation that are owned or leased by such entity, performance of work and carrying out other services, carrying out other activities, provided such activities are not preparatory or auxiliary activities rendered to such foreign entity.
Activities of a dependent agent of a foreign entity may lead to permanent establishment of such foreign entity in the territory of the Russian Federation.
Therefore, three characteristics are necessary to recognise that a foreign entity forms permanent
establishment in Russia, which are as follows:
1. A foreign entity has a “separate subdivision” or any other place of business in the Russian Federation,
2. A foreign entity carries out entrepreneurial activities in the territory of the Russian Federation,
3. A foreign entity carries out entrepreneurial activities on a regular basis.
Most double tax treaties deal with cases when a “separate subdivision” that performs supporting or preparatory activities does not form permanent establishment. Preparatory or supporting activities must be carried out in the interests of the foreign entity, not in the interests of third parties. It is noteworthy that in case preparatory or auxiliary activities constitute the whole or part of primary activities, such activities may be regarded as reasons leading to permanent establishment in the Russian Federation, provided relevant characteristics are available.
Generally, the fact that a foreign entity owns property in the territory of the Russian Federation cannot be regarded as leading to the permanent establishment of such entity in the territory of the Russian Federation.
Nevertheless, under some circumstances the use of such property for commercial purposes may lead to the formation of permanent establishment of a foreign entity. For example, if a foreign entity regularly leases out the property it owns, looks for tenants, makes lease agreements, makes contracts for current repair and maintenance of the premises, etc, such activities of a foreign entity may lead to the formation of permanent establishment in the Russian Federation.
When qualifying activities of a foreign entity providing personnel for working in the territory of Russia,
Russian tax authorities may recognise them as those leading to permanent establishment if the foreign entity also renders other services or when the amount of remuneration for the personnel provided significantly exceeds (by over 10%) the normal amount of wages and benefits (travel expenses, accommodation allowances, etc).
Thus, the term “permanent establishment” is a combination of characteristics and evaluations of activities of a foreign entity required to qualify activities of a foreign legal entity as leading to the permanent establishment in the territory of Russia and, therefore, obligation of a foreign entity to pay the income tax in the Russian Federation.