In accordance with Chapter 25 of the Tax Code of the Russian Federation there are two methods of

recognising income – accrual basis method (i.e. as goods, work, services are sold) and cash basis method (i.e. as payments for goods, work and services are received). The method should be established by accounting policies of the taxpayer.

Tax Deductible Expenses

Applicable tax legislation allows to account expenses pertaining to the production and sale of goods, work, services as tax deductible, provided such expenses are economically justified and certified by relevant documents.

The Code sets deductibility restrictions only with respect to specific types of expenses, such as: expenses on the training of personnel, entertainment expenses, expenses on certain types of advertising. Losses incurred by the taxpayer may be carried forward during 10 years, however, in 2006 (tax period) taxable profit may be reduced by not more than 50 per cent. From 01.01.2007 this restriction will be cancelled. Expenses on the interest on any type of loan are deductible within the limits of an average interest on similar debt obligations of the taxpayer in the same reporting period (quarter or month). In the absence of similar

debt obligations interest are tax deductible within the following limits: on the loan received in Russian roubles – within the limits of the refinancing rate of the Central Bank of the Russian Federation multiplied by 1.1 index; on the loan received in foreign currency – within the limits of 15 per cent per annum. If a loan is received from an affiliated person, «thin capitalisation» rule shall apply.

A distinctive feature of effective legislation on the profits tax is an absence of any allowances for the

taxpayers. In accordance with the Code, constituents of the Russian Federation may decrease the tax rate due to the regional budget by no more than 4 per cent.

Double Tax Treaties

If a double tax treaty between Russia and the state of residence of a foreign company provides for a reduced tax rate or a tax exemption in Russia (See Appendix 1), such foreign company shall provide the tax agent (payer of income) with documents confirming its permanent residence in the state with which Russia has double tax treaty prior to the date of income payment.

Otherwise the tax agent will be obliged to withhold the tax. However, a foreign company has the right to apply to Russian tax authorities for tax refund within three years after the expiration of the tax period when income was paid.

Property Tax

Property tax is a regional tax and established by the Russian Federation Tax Code and by constituents of the Russian Federation. Tax base – net book value of fixed assets. The tax base is determined on the basis of the book value of the assets.

The tax rate may not exceed 2.2 per cent. For example, tax rate in Moscow is 2.2 per cent.

Reporting period is a quarter. The legislation provides for exemptions on specific types of property.

A number of double tax treaties between the Russian Federation and other states, for example, Agreement between the Russian Federation and the Federal Republic of Germany on the Avoidance of Double Taxation on Income and Property Tax exempts the property of permanent establishments from the tax provided the property is not used for commercial activities.