Find the information about taxes your business needs to pay in Russia
On 30 April 2020, Russia notified OECD that it had completed its national procedures for implementing the Multilateral Convention (MLI) for 27 double tax treaties, on 26 November 2020 Russia notified about completing national procedures with 7 more jurisdictions. So MLI may become effective as early as 1 January 2021 for 27 DTTs applying to all taxes and for 7 DDTs applying only to WHT. MLI will be applied to these 7 DDT to all taxes since 1 January 2022. Treaty benefits will only apply if MLI criteria (including passing the principal purpose test) are satisfied.
As of 1 April 2020 and going forward reduced social contributions rates (around 15%) for Small and Middle Enterprises (SMEs) have been introduced.
As of 1 January 2021 significant tax benefits (reduced 3% corporate income tax rate and reduced social contributions to 7.6%) have been provided to Russian IT and technology companies. To apply the benefits such companies need to obtain special accreditation, employ at least seven people and generate at least 90% of their total revenues from the core activity. At the same time, VAT exemption applicable to software and databases transfers, including licensing, is significantly narrowed. As a result foreign software vendors on the Russian market will likely lose the right to apply this exemption and such supplies will be subject to the Russian VAT at the rate of 20%.
Russia has ratified amendments to DTTs with Cyprus and Luxembourg, amendments to DTT with Malta are expected to be ratified. The main points are increasing tax rates for dividends and interest. Maximum rate will be 15 % both for dividends and interest, but there are some exemptions (5 % and 0 % rates will be applied in some cases). Tax rate for royalties will remain at 0 % (5% with Malta). The amendments to the DTT with Cyprus apply from 1 January 2021. The Amendments to DTT with Malta and Luxembourg will likely apply from 2022 (ratification process has not been completed). Ratification process of protocol with Malta is also not completed; Application of new rates under the DTT with Malta in 2021 has to be clarified by the Ministry of Finance. In addition, Russia has announced about denunciation of DTT with the Netherlands (but in 2021 the DTT would still remain in force). Other DTTs with transit jurisdictions historically used for investments into Russia may also be revised.
From 2021 income from sale of shares and participatory interest both in Russian and foreign entities may be exempt from taxation after 5 year ownership term provided certain conditions are met.
Russian legal entities pay tax on their worldwide income (credit relief is available for foreign tax paid, up to the amount of the Russian tax liability that would have been due on the same amount under Russian rules).
The maximum CIT rate for all taxpayers in the Russian Federation has been set at 20%. In the period 2017 through 2024, the following allocation proportion applies: 3% of CIT revenues is allocated to the federal budget, whereas 17% is allocated to the budgets of the relevant constituent regions. The rate of tax payable to regional budgets (17% out of 20%) may be reduced under regional law for certain categories of taxpayers. The reduced regional rates introduced before 3 September 2018 will apply until the date of their expiry but not later than 1 January 2023.
Foreign legal entities (FLEs) pay tax on Russia-source income derived through a permanent establishment (PE) at 20% and are also subject to withholding tax (WHT) on income from Russian sources not related to a PE (at rates varying from 10% to 20%, depending on the type of income and the method used to calculate it).
Local income taxesThere are no provincial, municipal, or local taxes on income in the Russian Federation.
FLEs managed from Russia can be recognised as Russian tax residents. Russian tax residency means that the worldwide income of such entities is taxable in Russia.
The tax residency rules set basic and additional criteria for determining the place of management.
Russia will be recognised as a place of effective management of a foreign company if at least one of the following main conditions is fulfilled:
- An executive body (executive bodies) of a foreign company regularly carries out management activities in relation to that company from Russia (activities shall not be considered as carried out 'regularly' if they are carried out in Russia to a substantially lesser extent than in another state/states).
- The chief (executive) officers (persons who are responsible for and are authorised to execute planning, management, and control functions with regard to business activity of the company) mainly carry out executive management of that company from Russia.
If one of the above-mentioned key-criteria is satisfied for both Russia and any other jurisdiction, then Russia is considered to be the place of effective management of such foreign entity if one of the following additional criteria is satisfied:
- Maintenance of accounting or management reporting of the entity is performed in Russia (except for the preparation of consolidated financial and management statements, as well as analysis of the business activity of the foreign entity).
- Record keeping of the foreign entity is executed in Russia.
- Human resource (HR) management is executed in Russia (this may be interpreted in two ways, either as taking decisions with respect to HR matters from Russia or giving instructions to employees of the company from Russia).
The following activities of a foreign entity performed in Russia shall not by itself lead to Russia being recognised as a place of effective management of the company:
- Preparation and/or making decisions on issues related to competence of the general meeting of shareholders (participants) of a foreign entity.
- Preparation to the meeting of the Board of Directors (BoD) of the foreign entity.
- Execution of certain functions in Russia related to the planning and control of the foreign entity’s business activities (in particular, such functions may include strategic planning, budgeting, preparation of consolidated financial and management statements, analysis of the business activity of the foreign entity, internal audit, and internal control, as well as adoption (approval) of standards, methodologies, and/or policies applicable to all or most of subsidiaries of the particular foreign entity).
According to p. 8 of article 246.2 of the Russian Tax Code (RTC), a foreign legal entity performing activity in Russia through a subdivision is eligible to voluntarily recognise itself as a Russian tax resident.
If a foreign legal entity is recognised as a Russian tax resident, it is liable to pay Russian profits tax on its worldwide income, as well as other applicable Russian taxes.
The rules also specify four situations when a company may be deemed a Russian tax resident only on a voluntary basis. These situations are when a company is:
- a party to a production sharing agreement (PSA);
- an 'active' foreign holding or sub-holding company (subject to compliance with certain conditions);
- an operator of a new subsea field (or a direct shareholder of such an operator); or
- engaged as its core activity in offering for lease or sublease marine or mixed river-ocean vessels and/or the international transportation of goods, passengers, and their baggage, and providing related services.
Permanent establishment (PE)
A 'permanent establishment' is broadly defined in the RTC as 'a branch, division, office, bureau, agency, or any other place through which a foreign legal entity regularly carries out its business activities in Russia'.
VAT is a federal tax in Russia, which is payable to the federal budget.
Taxpayers follow a ‘classical’ input-output VAT system, whereby a VAT payer generally accounts for VAT on a full sales price of the transaction and is entitled to recover input VAT incurred on inventory costs and other related business expenses. Although not originally based on the European Union (EU) model, the Russian VAT system has, nonetheless, converged more with it. Currently, however, it still differs from the EU VAT system in various ways.
Foreign companies providing electronic services to Russian customers (both physical persons and legal entities) must obtain VAT registration in Russia and pay VAT on their own.
The list of services deemed electronic for VAT purposes is provided in Article 174.2 of the Russian Tax Code and includes, in particular:
- granting of rights to use computer programs via the Internet
- provision of advertising services on the Internet
- provision of services for the placement of proposals for the acquisition or sale of goods, works, services, or property rights on the Internet
- sale of e-books, graphic images, and music through the Internet, and
- storage and processing of information, provision of domain names, hosting services, etc.
VAT usually applies to the value of goods, work, services, or property rights supplied in Russia. The standard VAT rate is 20% (18% before 2019) in Russia (with a lower rate of 10% applicable to certain basic foodstuffs, children's clothing, medicines and medical products, printed publications, etc.). The same VAT rates (as for domestic supplies) apply to imports of goods into Russia.
Exports of goods, international transportation and other services related to the export of goods from Russia, international passenger transportation, and certain other supplies are zero-rated with the right of input VAT recovery. The application of the 0% VAT rate and recovery of relevant input VAT amounts are confirmed by submitting a number of documents to the tax authorities within certain time limits. Recovery of input VAT related to the export of goods (except for exports of raw materials) is performed according to general recovery rules (i.e. prior to submission of confirmation documents to the tax authorities). Special rules are in place for the documentary confirmation of the right to tax export supplies to Customs Union member countries at the 0% VAT rate. Since 1 January 2018, it is possible to waive the application of the 0% VAT rate in respect of export of goods, international transportation and other services related to the export of goods from Russia and apply the standard VAT rate.
The list of VAT-exempt goods and services includes basic banking and insurance services, services provided by financial companies (depositaries, brokers, and some others), educational services provided by certified establishments, sales of certain essential medical equipment, passenger transportation, and certain other socially important services. Most accredited offices of FLEs (as well as their accredited employees) may be exempt from VAT on property rental payments.
Since 1 January 2021 VAT exemption applicable to software and databases transfers, including licensing, will be significantly narrowed. As a result foreign software vendors on the Russian market will likely lose the right to apply this exemption and such supplies will be subject to the Russian VAT at the rate of 20%.
The provision of VAT-exempt supplies does not entail the right to recover the attributable input VAT. Instead, costs associated with non-recoverable input VAT are, in most cases, deductible for CIT purposes.
The Russian VAT law provides rules for determining where services are supplied in terms of VAT. These rules divide all services into different categories in order to determine where they are deemed to have been supplied for VAT purposes. For example, certain services are deemed to have been supplied where they are performed, whereas some are deemed to have been supplied where the ‘buyer’ of the services carries out its activity, some where the relevant movable or immovable property is located, and still others where the ‘seller’ has its place of activity, etc.
Under the reverse-charge mechanism, a Russian buyer must account for VAT on any payment it makes to a non-tax registered foreign company if the payment is connected to the supply of goods or services considered to have been supplied in Russia, based on the VAT place of supply rules, and that do not fall under any VAT exemptions based on domestic VAT law. In such circumstances under the law, the Russian buyer shall act as a tax agent for Russian VAT purposes by withholding Russian VAT at the rate of 20/120 (18/118 before 2019) from payments to the foreign supplier and remit such VAT to the Russian budget. The VAT withheld may be recovered by Russian payers in accordance with the standard input VAT recovery rules as provided by law.
Input VAT recovery
Taxpayers are usually eligible to recover input VAT associated with the purchase of goods, work, services, or property rights, provided that they adhere to the set of rules established by VAT legislation. Input VAT can potentially be recovered by the taxpayer in the following cases:
- VAT related to goods, services, or work acquired for the purpose of conducting VATable transactions.
- Input VAT related to advance payments remitted to Russian suppliers of goods (work, services), provided that such acquired goods (work, services) are for use in VATable activities. Please note that taxpayers are entitled (rather than obligated) to apply this rule, and they may choose whether or not to exercise this right.
There are a number of cases when input VAT must be restored.
Effective 1 January 2018, a tax-free system is established in Russia. Foreign individuals are entitled to refund VAT paid upon retail purchase of goods. The refund is available if the amount of purchase is higher than RUB 10,000 and the location, where the goods were purchased, is included in the special list established by the government.
Effective 1 July 2019, corporate taxpayers get the right to recover input VAT in relation to export of many types of services, including software development, consulting, legal, and marketing services (despite the fact that they do not pay output VAT on rendering such services). However, the new provisions will not cover export of VAT-exempt services listed in Article 149 of the RTC. For example, taxpayers that transfer/license the rights to software products, inventions, know-how, and certain other intellectual property (IP) objects to foreign customers, or render certain types of research and development (R&D) services, will still not be entitled to recover input VAT.
VAT compliance requirements
Each taxpayer performing VATable supplies of goods, work, services, or property rights must issue VAT invoices and provide them to customers. A taxpayer supplying VATable goods, work, or services to a customer that is not a VAT payer may opt not to issue a VAT invoice if agreed in writing with the customer. VAT invoices must be issued within five days after the supply has occurred. The VAT invoice is a standard form that is established by the government. Compliance with invoicing requirements is crucial for the buyer's ability to recover input VAT.
Incoming and outgoing VAT invoices should usually be registered by taxpayers in special purchases and sales VAT ledgers.
VAT returns must be submitted electronically to the tax authorities on a quarterly basis. VAT must be paid after the end of each quarter in three instalments, no later than the 25th day of each of the three consecutive months following the quarter, except for remittal of VAT withheld by Russian buyers under the reverse-charge mechanism, which is to be remitted on the date of the external payment.
Import VAT is payable to customs upon importation of goods. The tax base for import VAT is generally the customs value of the imported goods, including excise duties. Either the 20% (18% before 2019) or 10% VAT rate may apply upon import of goods in Russia, depending on the specifics of the goods. Import VAT may generally be claimed for the recovery by the importer, provided that the established requirements for such recovery are met.
A limited scope of goods is eligible for exemption from import VAT. The list of such goods includes, for example, certain medical products and goods designated for diplomatic corps. Relief from import VAT is available on certain technological equipment (including their components and spare parts), analogues of which are not produced in Russia. The list of such equipment has been established by the Russian government.
Goods imported into the Russian Federation are subject to customs duties. The rate depends on the type of asset and the country of its origin (generally from 0% to 20% of the customs value). There is special relief from customs duties for qualifying goods contributed to the charter capital of Russian companies with foreign investments.
Russia was admitted to the World Trade Organization (WTO) in 2012.
Russia is a member of the Eurasian Economic Union (EAEU) as well (together with Belarus, Kazakhstan, Armenia, and Kyrgyzstan). The Union has a single customs territory, and sales between the member states are exempt from clearance formalities. Members of the EAEU apply unified customs tariffs and customs valuation methodology.
Goods transported across the Russian Federation’s customs border are subject to a customs processing fee with a flat rate. The fee depends on the customs value of transported goods. The fee is usually insignificant.
Excise taxes are generally paid by producers of excisable products on their domestic supplies. Excise taxes are also charged on imports of excisable goods. Exports of excisable products are generally exempt from excise taxes. Excisable goods include cars, tobacco, alcohol, and certain oil products. Special excise rates for each type of excisable goods are established in the RTC. The rates vary widely and are based on various factors.
The maximum property tax rate is 2.2%, and regional legislative bodies have the right to reduce it.
Movable property is not taxed. There is no clear definition of what property should be considered as movable and what property is clearly immovable. In practice, the tax authorities tend to apply wide interpretation of the immovable property.
Starting from 2020, the tax is calculated as follows:
- Immovable property accounted for as fixed assets is taxed based on the annual average cost in accordance with Russian GAAP.
- Certain items are taxed based on cadastral value (the balance sheet line does not matter). The list of such items include: trade and business centres, offices (the list of properties is approved by the relevant Russian region), residential premises, construction-in-progress assets, garages, parking spaces, as well as residential buildings, garden houses, household buildings (structures) located on land plots that have been provided for personal subsidiary farming, vegetable and fruit gardening, or individual residential housing construction (if the Russian region where the property is located establishes so in its statute). The tax rate for such properties may not exceed 2%.
From 2015 through 2034, a zero rate applies to trunk gas pipelines and structures constituting integral parts of such pipelines, as well as gas production project sites and helium production and storage facilities, subject to certain conditions (e.g. initial commissioning after 1 January 2015).
Transport tax is imposed on certain types of land, water, and air transport registered in Russia. Fixed rates apply (per unit of horsepower, gross tonnage, or unit of transport), which may differ based on engine capacity, gross tonnage, and type of transport. The actual rates in Russia’s regions may be subject to a maximum ten-fold increase/reduction by the legislative bodies of individual Russian constituent regions. Reporting and payment rules have been established by regional legislative authorities.
A multiplier (up to three) depends on the age and cost of a car.
The annual salaries of all employees are taxed under the following rules in 2021:
- Contributions to the Social Insurance Fund: Only the first RUB 966,000 of salary is taxed (at a rate of 2.9%).
- Contributions to the Pension Fund: The first RUB 1,465,000 is taxed at 22%, and the excess is taxed at 10%.
- Contributions to the Medical Insurance Fund: A 5.1% rate applies to the total salary.
Remuneration of foreign nationals temporarily staying in Russia are covered by (i) pension insurance contributions at a rate of 22% within the threshold of RUB 1,465,000 and a 10% top-up charge on remuneration paid in excess of the threshold and (ii) social insurance contributions at a rate of 1.8% within the threshold of RUB 966,000. The only exception is available for highly qualified specialists who hold a relevant work permit.
Starting from 1 April 2020 and going forward social contributions for Small and Medium Enterprises have been reduced almost to 15%.
Social contribution benefits will be available for IT and technology companies as of 1 January 2021 provided certain criteria are met:
|IT companies (not exceeding the upper limit) – contributions to the Pension Fund||14%||7.6%|
|IT companies (exceeding the upper limit) – contributions to the Medical Insurance Fund||4%||0.1%|
|Technology companies (not exceeding the upper limit) - contributions to the Pension Fund||no benefits||7.6%|
|Technology companies (not exceeding the upper limit) - contributions to the Medical Insurance Fund||no benefits||0.1%|
Employers are also obligated to pay a contribution of insurance against accidents at work and work-related diseases. The rate of this contribution varies from 0.2% to 8.5% of the wage fund, depending on the type of activity of the employer.
The MRET calculation depends on the type of mineral resource.
The MRET for coal, oil, gas, and gas condensate is calculated using the extracted volume of the relevant resource. The tax rate is established as a fixed rate multiplied by various coefficients linked to world prices and field characteristics. A zero MRET rate applies to oil extracted from greenfields in certain regions of Russia (e.g. Eastern Siberia, internal and territorial waters in the northern polar zone, the Azov and Caspian Seas, and the Nenets and Yamal regions) during their initial production stage.
he MRET on other natural resources depends on the value of the resources extracted. The tax rate varies from 3.8% to 8%. For instance, 3.8% for potassium salt, 4.8% for ferrous metals, 6% for products containing gold, and 8% for non-ferrous metals and diamonds.
Reduced MRET rates apply to investors in Russia's Far East and Advanced Development Zones
An environmental fee must be paid by manufacturers and importers of goods to be disposed of after they are no longer fit for use or consumption because of wear and tear, broken down by certain groups of goods. These include paper and paper products, rubber and plastic products, textile and leather, metals, and electronics.
It should be noted that the fee is not technically a tax, and is established by a special law that is not part of the RTC. It is levied on entities operating in specific industries whose products are determined to have an environmental impact that warrants compensation.
The fee is calculated by multiplying three values: (mass/quantity of goods subject to utilisation [or mass of packaging]) * (levy rate) * (utilisation standard in relative units).
The following groups of goods are subject to the highest environmental fee amounts: rechargeable batteries, computer hardware, consumer electronics, and some types of industrial equipment.
Regional authorities may introduce a trade levy in their respective municipalities (or federal cities). It is to be applied towards assets used in retail and wholesale trade.
To date, the levy has only been enacted by Moscow.
FLEs pay tax on profits attributable to a PE. The profits of an FLE’s PE are calculated primarily on the same basis as Russian legal entities, including the composition of tax-deductible expenses. Although the RTC does not specifically mention the deductibility of expenses incurred outside of Russia by a foreign corporate head office with respect to its PE in Russia (including a reasonable allocation of administration costs), most DTTs provide for such an option.
Russian tax law has recently been amended to include a special provision on the taxable income of PEs. When determining the taxable income of a PE in Russia, its functions, assets, and economic and commercial risks should be taken into account. This provision does not contain any guidance on specific transfer pricing methods that taxpayers should follow. In addition, court practice regarding this approach has not yet been developed.
If an FLE conducts free-of-charge preparatory and/or auxiliary services for the benefit of third parties, then a PE would be considered to have been formed, and the tax base of such a PE would be calculated as 20% of its expenses related to such activities.
FLEs operating in Russia through a PE must follow the filing and payment schedules established for Russian legal entities. Although they do not make monthly advance payments, they should pay CIT on a quarterly and annual basis.
The accounting period in Russia is the calendar year. Different periods are not permitted. The taxable base is calculated on an accrual basis (only small-scale taxpayers are allowed to use a cash basis).
Taxable income is to be calculated following the rules and principles established in the RTC. Taxpayers must maintain tax accounting registers. Statutory accounts may be used for computing tax items for which accounting methods are the same. In practice, most taxpayers use statutory accounts as a basis and apply adjustments so as to arrive at their taxable income.
Inventory can be valued using one of the following methods: first in first out (FIFO), average cost, and individual unit cost.
Capital gains are subject to the same 20% CIT rate and are added to ordinary income in order to arrive at the taxable income.
There are two tax baskets for taxpayers performing operations with securities and derivatives: (i) general and (ii) results from operations with non-listed securities and non-listed derivatives. A loss on the second basket cannot be offset with profits on the first basket (however, the opposite offset is possible). It is worth noting that prices charged in transactions with securities and derivatives should be compared with the market price only if a transaction is controlled under transfer pricing rules.
Gains from the sale of fixed assets and other property are equal to the difference between the sale price and their net book value for tax purposes. Losses resulting from the sale of fixed assets should be deducted in equal monthly instalments during the period, defined as the difference between their normative useful life and the actual time of use.
A 0% tax rate is available for capital gains from the sale or other disposal (including redemption) of shares in Russian and (or) foreign entities (interests in Russian and (or) foreign entities’ charter capital) held before the sale for more than 5 years. One of the following conditions must be met in order to apply a 0% tax rate:
- Less than 50% of the entity’s total assets are represented by Russian immovable property at the end of the month preceding the sale;
- Shares sold are shares of listed Russian technology companies.
Also, the exemption does not apply to the shares of the the companies located in black listed jurisdictions.
Dividends earned by Russian legal entities from Russian legal entities or FLEs are taxed in Russia at a 13% flat rate.
Participation exemption rules (0% rate on dividends) are applicable to the following situation:
- the owner (recipient of dividends) owns at least 50% of the capital of the payer of dividends or owns depository receipts entitling it to receive at least 50% of the total amount of dividends paid out, and
- the shares or depository receipts have been owned for at least 365 calendar days at the date when the dividends are declared.
Dividends from companies domiciled in low tax offshore zones are not eligible for this tax exemption. The Ministry of Finance maintains a list of offshore zones.
Effective from 2021, a 0% tax rate may not be applied to dividends distributed between Russian corporate tax residents when using the look-through approach. It sets a transition period of 1 January 2021 through 31 December 2023 during which a 0% rate may be still applied, provided certain conditions are met.
Foreign companies being Russian tax residents may apply a 0% tax rate on dividends through 31 December 2023.
Tax on dividends from abroad withheld in the source country may be credited against Russian tax.
The standard 15% tax rate is applicable to dividends paid by Russian legal entities to FLEs. The tax should be withheld by the Russian legal entity paying dividends. The tax may be reduced based on a relevant DTT, usually to 10% or 5%.
Interest income is taxed on an accrual basis. A standard tax rate of 20% is applied to interest income, except for interest on government and municipal securities, which are taxed at 0%, 9%, or 15%, depending on the type of security.
The WHT rate on interest income paid abroad equals 20% and may be reduced (typically to zero) under relevant DTT.
The level of interest income recognised for tax purposes may be subject to control
There is no separate tax on royalty income. A standard CIT rate of 20% applies.
Exchange gains and losses
Foreign exchange gains and losses are recognised for tax purposes on an accrual basis only.
Russian legal entities pay tax on their worldwide income. Credit relief is available for foreign taxes paid up to the amount of the Russian tax liability that would have been due on the same amount under Russian rules.
Current tax legislation does not contain provisions that allow tax deferral with respect to foreign income.
Expenses are deducted on an accrual basis. The main criteria for deductibility of expenses is that the expense is properly documented, aimed at generating income, and not specified in the RTC as non-deductible for tax purposes.
Depreciation and amortisation
Two methods of depreciation are allowed: the straight-line method and the declining-balance method. The useful lifespans of assets for tax purposes are established in the Classification of Fixed Assets, which was approved by the Russian government, for example:
|Fixed asset||Useful life (years)|
|Personal computer||2 to 3|
|Automobile||3 to 5|
|Truck (capacity above 5t)||7 to 10|
|Aircraft||10 to 15|
|Blast furnace||20 to 25|
Accelerated depreciation is permitted in respect to some types of property (a special ratio of up to three may be applied). It is prohibited to apply several special coefficients to a normal rate of depreciation.
An upfront premium is allowed, which means that a taxpayer has the right to deduct 10% (or 30% for certain categories of fixed assets) of the cost of fixed assets purchased (or built) in the month when the depreciation started. The balance is depreciated over the useful life of the asset. A premium must be recaptured if a relevant asset is sold within five years of its acquisition (the requirement to recapture has not applied to sales to unrelated parties since 2013).
Intangible assets are amortised over their useful life, or over ten years (two years for certain types of intangible assets) if their useful life cannot be determined.
Under Russian tax law, a mark-up (the difference between the acquisition value and net assets of the business [property complex] purchased) should be recognised as goodwill for tax purposes and may be amortised by a buyer over five years. However, this tax regime often does not apply since a business (subject of a deal) needs to be registered as a property complex with the government authorities. However, sellers almost never do this.
Russian tax law does not contain specific provisions on the deductibility of start-up expenses. In some cases, they may not be deducted by either a parent company or a subsidiary for tax purposes.
The tax authorities can audit interest income and expenses only for transactions that are deemed as controlled under the Russian transfer pricing rules (this means transactions with related parties in most cases) and only in accordance with these rules.
The following table shows how the market corridors (safe harbours) are applied to interest accrued:
|Debt currency||Type of loan||Safe harbour rates (from...to) in 2020-2021||Safe harbour rates (from...to) before 2020 and after 2022|
|Russian rubles (RUB)||Ruble-denominated loans between Russian entities||0% to 180% of the Central Bank of Russia (CBR) key rate||75% to 125% of the Central Bank of Russia (CBR) key rate|
|Other ruble-denominated loans||75% to 180% of the CBR key rate||75% to 125% of the CBR key rate|
|Euros (EUR)||EURIBOR 0 % to EURIBOR +7%||EURIBOR +4% to EURIBOR +7%|
|Chinese renminbi (CNY)||SHIBOR 0 % to SHIBOR +7%||SHIBOR +4% to SHIBOR +7%|
|British pounds (GBP)||Foreign currency-denominated loans||LIBOR 0 % to LIBOR in GBP +7%||LIBOR in GBP +4% to LIBOR in GBP +7%|
Swiss francs (CHF) or
Japanese yen (JPY)
|LIBOR 0 % to LIBOR in relevant currency +5%||
LIBOR in relevant currency +2% to
LIBOR in relevant currency +5%
|Other||LIBOR 0 % to LIBOR in USD +7%||LIBOR in United States dollars (USD) +4% to LIBOR in USD +7%|
The CBR’s key rate has been established at the level of 4.25% since 27 July 2020.
Free-of-charge loans between Russian related parties are not controlled under transfer pricing rules.
Losses in the form of bad debts written off are usually deductible. Companies may create a bad debt provision. The method of accrual for the provision for tax purposes may differ from that in financial accounting, as it is based only on the overdue payment period (i.e. if the delay exceeds 90 days, the full amount of the account receivable is included in the reserve).
A tax deductible bad debt provision can be created only to the extent of the excess of amounts receivable over amounts payable (if any) to the same counterparty.
Entities may deduct expenditures in the form of property (including cash) donated as charity for tax purposes. Deductions may not exceed 1% of revenues. For this purpose, a new sub-clause was added to Article 265 of the Russian Tax Code.
The new provisions cover relationships that arose on or after 1 January 2020.
Taxpayers may deduct these expenditures if the receiving party (non-profit organisation) falls into one of the following categories:
- non-profit organization is included in the Register of Socially Oriented Non-Profit Organisations and has received grants and subsidies since 2017;
- non-profit organization is a faith-based organisation;
- non-profit organisation has been affected by the COVID-19 crisis.
The rules for creating the Register of Socially Oriented Non-Profit Organisations are to be approved by the Russian Government, so this mechanism will work only after the Government passes a set of bylaws and regulations.
Research and development (R&D) expenses
R&D expenses (including R&D with a negative result) are deductible within one year after completion. Certain R&D expenses may be deducted using a coefficient of 1.5. The list of R&D categories elegible for super deduction is determined by the Russian government. A provision for future R&D expenses may be created for tax purposes.
Expenses related to all types of obligatory insurance are deductible and subject to government tariff limitations, wherever established. Voluntary insurance expenses are deductible to the extent that they relate to the insurance of damage and losses related to certain classes of assets, and the insurance of construction activity risks. Contract liability insurance expenses are deductible to the extent that such insurance is required by an international treaty to which Russia is a party or a generally accepted international trade custom.
Long-term life and pension insurance is deductible within a limit of 12% of the payroll fund. Voluntary medical insurance is deductible within a limit of 6% of the payroll fund.
Fines and penalties
Fines and penalties paid to contractors for violating contractual terms may be deducted for tax purposes.
Fines and penalties paid to a government budget are not deductible.
Taxes paid by a taxpayer, as well as social contributions of employers, are deductible for tax purposes. Trade levies are credited against CIT.
Net operating and capital losses
The amount of a recognised loss of prior periods cannot exceed 50% of the current year tax base for CIT purposes. This limitation applies from 1 January 2017 up to 31 December 2021.
The loss may be carried forward until fully utilised. Carryback of losses is not allowed.
Losses from the sale of fixed assets are recognised evenly during the remaining useful life.
Losses and income from different tax baskets are determined separately.
In order to utilise losses upon reorganizations a business purpose test should be met. If the test fails, the losses available at the level of the merged company should be written off and could be used for tax purposes.
Payments to foreign affiliates
There are no special tax provisions with respect to the deductibility of payments to foreign affiliates for services provided. They may be deducted in full if general deductibility criteria are met. Charges with respect to administrative support provided by foreign affiliates may be deductible. However, due care should be taken with regard to the documents used to support the nature and actual receipt of service.
Consolidated taxpayer regime
Since 2018, it is forbidden to create new consolidated groups. Groups formed before 2018 may apply the regime until 2023.
A group can comprise two or more Russian entities in which the direct or indirect equity interest of one member in the charter/share capital of the other members equals at least 90%. In order to establish and apply this regime, all group members should meet the following requirements:
The advantages of applying this regime are as follows. First, transactions among group member entities are not controllable under Russian transfer pricing legislation (with one exception: transactions with mineral resources subject to MRET with a percentage rate are still subject to control). Second, for the purposes of calculating CIT, it is possible to consolidate group member entities' profits and losses.
A limitation on recognition of losses incurred by loss-making members of a consolidated group has been introduced. The limit is set as 50% of the given consolidated group’s tax base for the current (tax) period.
Russian transfer pricing legislation is essentially based on Organisation for Economic Co-operation and Development (OECD) principles, with certain important deviations. This legislation establishes criteria for related parties and controlled transactions, transfer pricing methods for determining arm’s-length prices/profitability, a list of permitted information sources, and compliance requirements.
Under the Russian transfer pricing rules, the following parties are recognised as being related:
Generally, the following transactions will be controlled if the income earned exceeds RUB 60 million per year:
*Transactions between Russian tax residents are subject to control only if the annual income on the transactions between such parties exceeds RUB 1 billion and at least one of the following criteria is met:
With that some types of transactions are never controlled (for instance, transactions between members of the same consolidated group of taxpayers).
The revised rules will apply to transactions for which the income and expenses are recognised after 1 January 2019 (irrespective of the contract date).
The Russian tax authorities may request transfer pricing documentation during a transfer pricing audit, but not earlier than by 1 June of the calendar year following the year in which a controlled transaction was performed. Taxpayers will be required to present transfer pricing documentation within 30 working days of receiving a tax authority’s request.
According to the Base Erosion and Profit Shifting (BEPS) Action 13 report Russia has implemented three-tier transfer pricing documentation. The requirement is applicable to financial years starting in 2017. Thus, multinational groups of companies (MNCs) with a total income (revenue) over RUB 50 billion under consolidated financial statements for the previous financial year must submit three-tier documentation to tax authorities, including Master file, Local file, and Country-by-Country (CbC) report, as well as a notification on their membership in an MNC.
Advanced pricing agreements (APAs), including bilateral APAs, are available to Russian companies registered as 'largest' taxpayers.
Transfer pricing audits will be performed by a special unit of the Federal Tax Service. Local authorities are entitled to check notification forms correctness and notify the Federal Tax Service if additional controllable transactions are identified – notify the Federal Tax Service. The penalty rate for additional transfer pricing charges is 40%.
Since 2020 amendments in the Russian Tax Code introducing provisions regarding comparability of commercial and financial terms of transactions, the functions pertaining to the use of intangible assets and related risks have come into effect. The list textually reproduces the DEMPE (Development, Enhancement, Maintenance, Protection, Exploitation) functions defined by the OECD. There have been 5 court cases based on application of new TP rules in Russia up to date. All 4 cases have been lost by the taxpayers. The tax authorities mainly focus on testing export of commodities and apply CUP based on prices published by price agencies.
Under the RTC, interests are deductible if the debt does not exceed the amount of equity by three times (12.5 times for banks and leasing companies). If the debt amount exceeds this limit, excess interest will be reclassified for taxation purposes as dividends paid to foreign shareholders. Such dividends are not deductible for CIT purposes and are subject to WHT at the rate of 15% (treaty benefits may apply to reduce the rate).
Three types of Russian borrowers' debt are subject to thin capitalisation rules (with some exceptions provided):
For debt from Party 1, the relationship would be defined based on the transfer pricing rules (in particular, the 25% participation criterion is applied).
The scope of thin capitalisation rules includes loans from foreign-related companies that do not hold a direct or indirect interest in Russian borrower (foreign 'sister' companies). At the same time, interest on loans from independent banks are exempted from the rules (provided the debt [both principal and interest] was not repaid by a foreign shareholder or its affiliates as a result of execution of a guarantee to the bank).
Among other features:
Controlled foreign companies (CFCs)
Under the Russian CFC rules, the retained earnings of a CFC that is controlled by a Russian tax resident are taxable in Russia on an annual basis (at the 20% CIT rate if the controlling person is a legal entity Russian tax resident, or at the 13% tax rate if the controlling person is an individual Russian tax resident).
Definition of a CFC
An entity is deemed to be a CFC (or other structure) if it meets the following criteria:
A controlling person of a foreign company is defined as:
The definition of ‘control’ is rather broad and thus could be construed to mean that control exists even when the percentage of a shareholding (interest) is less than the thresholds noted above. For example, the CFC Law stipulates that control may exist based on a management agreement or other means of control. Control may be established directly or indirectly. The existence of control should be determined on a case-by-case basis.
Available CFC exemptions
The CFC Law provides that profits earned by the following types of companies (or other structures) are exempt from CFC taxation in Russia:
In addition, de minimis exemptions from the CFC rules are available for profits RUB 10 million for 2017 onwards.
These exemptions may be applied by Russian controlling parties when calculating their taxable base in Russia. If such an exemption is applicable, then a CFC’s profits should not be included in the taxable base of its controlling party in Russia.
Calculating taxable profits
The taxable profits of a CFC are calculated using one of the following two methods:
A CFC’s taxable profits may be reduced by the amount of dividends paid out of such profits during the tax year in which they were generated (interim dividends) and the subsequent 12 months.
As of 1 January 2020, if the chain of passive income payments looks like 'Russian legal entity - CFC - Russian controlling party', it is necessary to withhold and pay the tax in Russia only once, when income is paid from Russia, and in such a way as if the income was paid to this controlling party directly. This amendment applies from 2020.
Losses incurred by a CFC may be carried forward without any time limitations (subject to certain restrictions). Losses incurred by a CFC before 1 January 2015 may be carried forward up to the amount of losses for the three financial years preceding 1 January 2015 and may be deducted from the CFC's profit.
Relief from foreign taxes
Foreign taxes paid on the profits of a CFC, either under Russian law or the laws of a foreign jurisdiction, may be offset against the Russian tax liabilities charged on the CFC’s attributed profits.
Implications for affected entities
If none of the available exemptions may be applied, the CFC’s chargeable profits must be apportioned among the relevant Russian controlling persons in proportion to their interest(s) in the CFC, and such persons should be taxed on their portion(s) at the applicable rate. However, the Russian CFC rules have no implications for the CFC itself.