2. Taxation of Foreign Legal Entities that do not Carry out Entrepreneurial Activities in the Territory of Russia via Permanent Establishment Value Added Tax

Foreign legal entities selling goods, performing work and providing services in the territory of Russia are

payers of the value added tax. The territory of Russia is recognised as a place of performing work and

rendering services in the following cases:

- if work and services are directly related to immovable property located in the territory of Russia. Among other things, such work (services) includes construction, assembly, repair and renewal services;

- if work (services) is connected with movable property located in the territory of the Russian Federation;

- if services are actually provided in the territory of Russia and refer to the field of culture, art, education

(training), physical culture, tourism, recreation and sport;

Russia is regarded as a place of providing certain services and performing certain work if the purchaser of these services and work actually operates in the territory of Russia. Such work and services include, among other things, the following:

- transfer or granting of patents, licenses, trade marks, copyrights or other similar rights (royalty);

- advisory, legal, accounting, engineering, advertising, marketing, data processing, research and development services;

- leasing out of movable property, except land transportation vehicles;

- services of an agent engaging, on behalf of the principal, another party (an entity or an individual) for

performing the above specified services;

If work or services performed or rendered by a foreign company are subject to the value added tax and the foreign company is not registered with tax authorities of Russia, the purchasers of such work and services, registered taxpayers (legal entities and entrepreneurs), act as tax agents.

A tax agent is obliged to compute and withhold the tax and transfer it to the federal budget of Russia. This procedure is similar to VAT reverse charge in Europe.

In accordance with Article 174 of the Russian Federation Tax Code the value added tax is to be withheld by the tax agent at the moment funds are transferred to the foreign company. According to Russian arbitration court practice, if a contract with a foreign company provides for in-kind settlements, the purchaser of goods, work, services has no possibility to withhold funds in order to transfer them to the budget and, therefore, purchasers of such goods, work and services cannot fulfil their tax agent’s liabilities with respect to the value added tax. In this case purchasers of goods, work and services are obliged to inform tax authorities at the place of registration of impossibility to withhold the value added tax from a foreign company. Therefore, the foreign company is still in debt to the Budget on value added tax. This might be crucial in the case when a foreign company possesses some property located in Russia, and Russian tax authorities may seize the property.

Due to the explanations made by tax authorities value added tax must be withheld by a tax agent even when a foreign company has a permanent establishment in Russia registered with Russian tax authorities, and this permanent establishment is not involved in performing work (rendering services).