Russian Federation: Tax Alert 15/96 - New Accounting Law - Foreign Legal Entities

Last Updated: 17 December 1996
1. In this Tax Alert, we will discuss the tax implications of the new accounting law (Federal Law of 21 November 1996 No. 129-FZ) on foreign legal entities. The law was published in the Rossijskaya Gazeta of 28 November 1996 and enters into force as of that date. The law (re)defines the principles of Russian accounting in general. Existing accounting regulations remain in force to the extent that they do not contradict the law.


2. Article 4 of the accounting law states that the law is applicable to "all organisations, located on the territory of the Russian Federation" and to "representations and branches of foreign legal entities". This seems to imply that foreign legal entities operating in Russia are now subject to Russian accounting regulations. Maintaining a Russian accounting system would include the following:

  • recording every operation under the prescribed Russian double entry system;
  • using the prescribed Russian chart of accounts;
  • preparing Russian balance sheets and profit & loss accounts;

This is a significant change, as operating the Russian accounting system usually proves to be complicated and time-consuming.

3. Officials of the Moscow Tax Inspectorate have already made it clear that they will not require foreign legal entities to operate a Russian accounting system. Officials of the Ministry of Finance indicated that the requirement to submit a Russian balance sheet and profit and loss accounts would not apply to foreign legal entities, without explicitly stating that the law will de facto only apply to Russian legal entities.

4. We understand that there is also a formal legal argument to support the notion that the law does not apply in this respect to foreign legal entities, since it makes no further mention of the category "representations and branches of foreign legal entities". With regard to material requirements, such as the submission of balance sheets and profit and loss accounts, the law only refers to "organisations". As the term "organisations" refers only to Russian legal entities in the context of the law, this could lead to the conclusion that the law does not apply to foreign legal entities.

5. However, because of the explicit statement in article 4, it is too early to conclude that foreign legal entities are not subject to Russian accounting. It is therefore necessary to consider for what purposes and to what extent representations and branches of foreign legal entities could be required to operate the system. Apart from providing management information etc., Russian accounting in practice serves to enable proper and timely payment of taxes and the making of returns to the statistical authorities.


6. Instruction No. 34 of the State Tax Service allows representative offices and branches of foreign legal entities to operate the accounting system used by the foreign head office company. In addition to this, it requires companies to record income and expenditure in a prescribed format for Russian tax purposes. The most distinctive feature of this Russian "tax accounting" for foreign legal entities is the categorisation of expenses: certain types of business expenses, such as staff training, entertaining, advertising and business trips expenses are strictly defined and should be accounted for separately. A representative office or a branch can also be requested to provide the tax authorities with a description of the accounting system it operates and with a Russian translation of the entries made.


7. In order to protect the interests of the shareholders or owners of a legal entity, it is generally desirable that proper records are kept of its assets and liabilities. However, the protection of the shareholders of a foreign legal entity is not governed by Russian legislation but rather by the legislation of the state where the foreign entity is registered and it may be argued that the protection of the shareholders of a foreign legal entity falls outside the jurisdiction of Russian legislation.


8. Article 16 of the law states that open joint stock companies, banks and other credit organisations, stock exchanges, investment and other funds must publish their annual accounts no later than 1 July of the following year. As banks and investment funds are predominantly Russian legal entities for legal and licensing reasons, the practical implications for foreign legal entities of the new law appear to be limited in this respect.

9. In principle, the general public (including employees, suppliers etc.) has a legitimate interest in being provided with reliable information on the state of health of any enterprise, whether foreign or Russian, which is active on the Russian market. The fact that many representative offices here are undertaking commercial activities (albeit on no sound legal basis) lends support to the idea that they too should comply with Russian accounting requirements. Foreign jurisdictions deal with this by limiting the activities of such offices to representation only, whilst permitting commercial activities through a branch which must provide limited information, eg it must file a copy of the head office accounts.


11. Failure to maintain a Russian accounting system can be considered a violation of Russian law and may, according to article 18 of the law, lead to "administrative or criminal liability of the responsible officials". Administrative liability generally leads to a penalty, payable by the person responsible. Criminal liability may only arise in very rare cases in combination with concealment of taxes or violation of currency regulation.

12. Whilst the new accounting law explicitly states that it applies to representative offices and branches of foreign legal entities in Russia and thus these penalties are potentially applicable, the authorities do not currently appear to expect compliance with Russian accounting regulations. Foreign legal entities will most probably not encounter trouble if they continue to comply with the tax accounting requirements of Instruction No. 34, but the position should be kept under constant review. We will keep you informed on any developments in this respect.

For further information contact Bauke van der Meer on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: or enter a text search 'Coopers & Lybrand' and 'Business Monitor'

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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