In some cases vat amounts paid to the suppliers of goods, work, services are added to the profits tax deductible expenses (for example, if they are used for vat exempt operations).

Suppliers must provide their purchasers with VAT invoices (schet-faktura) no later than 5 days after goods, work or services were provided.

For major part of taxpayers the tax period with respect to VAT is one calendar month. Value added tax return shall be submitted at latest on the 20th day of the month following the tax period. VAT balance determined as a difference between VAT amount due to the budget and VAT paid to suppliers and included into offset amount is payable to the budget prior to the 20th day of the month following the reporting month. In a number of cases offset VAT amounts are to be recovered and paid to the budget. For example, when goods or other property are contributed to the charter of a subsidiary. According to the Tax Code of the Russian Federation, contribution of property to the charter capital is not regarded as sales and, therefore, is not subject to the value added tax.

In case the value of goods, work and services is accounted as tax-deductible expenses (e.g., entertainment expenses, advertising expenses), VAT paid on such goods, work, services is to be offset in proportion to tax deductible expenses.

Profits Tax

Foreign companies carrying out entrepreneurial activities through permanent establishment located in the territory of Russia shall pay the profits tax on all income received from activities of such a permanent establishment (part of the worldwide income of a foreign company received from activities of a permanent establishment may also be subject to taxation).

Profit of a foreign company received as a result of activities of permanent establishment is subject to the profits tax in accordance with generally established procedures similar to Russian companies. At the same time, a number of double tax treaties provide for a possibility for foreign companies to include into tax deductible expenses incurred by the head office in connection with commercial activities of the permanent establishment or specific expenses subject to no restrictions established by law (advertising expenses, entertainment expenses, travel expenses, etc).

If a foreign company carries out preparatory or supporting activities on behalf of third parties in the territory of the Russian Federation leading to permanent establishment when no remuneration is envisaged for such activities, the tax base may be determined at 20 per cent of expenses incurred by such permanent establishment on such activities.

The profits tax is regulated by Chapter 25 of the Tax Code of the Russian Federation.

The tax period is a calendar year.

Basic tax rate is equal to 24%. The tax is allocated to various budget levels: to the federal budget – 6.5%, to the budget of the constituent of the Russian Federation – 17.5%.

Financing of a Russian Subsidiary by Founders

According to the law, the property contributed by a founder whose share in the charter capital exceeds 50 percent is not subject to the profits tax provided such property (except cash) is not transferred to third parties within one year from the moment it was received.

Dividends

When income is received in the form of dividends paid by Russian legal entities, the profits tax rate is equal to 9 per cent. For a Russian company drawing dividends from a foreign company or for a foreign company drawing dividends from a Russian company the profits tax rate is equal to 15 per cent.

Recognition of Income for the Purposes of the Profits Tax