Russian Federation: Tax Alert 11/96 - Pension Fund Contributions

Last Updated: 5 September 1996
1. In this Tax Alert, we discuss recent changes to the Pension Fund legislation concerning exempt payments, individual Pension Fund registration of employees and the new rates for late payment interest.

Payments Not Subject To Pension Fund Contributions

2. Under Government Regulation No. 153 of 19 February 1996 and No. 966 of 13 August 1996, most payments made by an employer to an employee within an employment relationship, civil law contract and author's rights contract, as well as various types of remuneration in kind, are subject to Pension Fund contributions, unless there is a specific exemption granted. Below we list the main types of exempt payments.

  • redundancy payments on termination of a labour contract and compensation for unused holidays, if the employee is dismissed in accordance with the Labour Code. We believe that this provision will be interpreted as requiring contributions to be made on payments in excess of amounts of redundancy payments stipulated by the Labour Code (two weeks' salary);
  • maternity leave payments - within the the norms specified in legislation;
  • material aid, in certain cases. The amount paid out that qualifies for the exemption is, in principle, not subject to limitations. The legistation, however, specifies the circumstances in which such assistance can be given. Broadly such payments must be compensation for personal loss, through injury, damage to health, theft of property and the like;
  • lump sum payments in connection with retirement;
  • business trip expenses within officially established norms;
  • business expenses in certain cases. Business expenses are described as compensation for a private car used for business purposes, compensation for the wear and tear of tools used for production, etc.;
  • the cost of clothes and meals provided to employees in certain cases, such as work under harmful working conditions. This exemption does not relate to free lunches, nor to clothes which remain in the permanent use of the employee;
  • the cost of accommodation and living costs paid by the employer in certain cases described by the legislation;
  • "stipendia" paid by an organisation to students;
  • dividends;
  • insurance premiums paid by an employer for obligatory insurance.

Payments made by an employer to a non-state pension fund for the benefit of an employee is not subject to pension contributions if the payments do not exceed 24 times the minimum monthly wage per year (this currently equals about US$ 350) and the pension fund does not make any payments to the employee before he actually retires or becomes disabled. The exemption in contingent on timely payments of current liabilities to the Pension Fund;

3. Most other types of payments made by the employer are, generally, subject to contributions. This should be taken into account when planning remuneration schemes for employees. Amongst the taxable payments are, for example, compensation for the construction or purchase of an apartment (with exception of cases provided for by the Law), which may be exempt from personal income tax.

Individual Registration With The Pension Fund

4. In accordance with the Law "On individual registration (record) in the system of Pension insurance", officially published on 10 April 1996, all employers should register their employees with the Pension Fund. The Pension Fund will open an individual account for each citizen and all income on which contributions has been paid will be indicated on this account. This procedure is intended to improve the accuracy of calculation of pension payments when a registered person retires. Until now, pensions have been paid on the basis of the number of years worked and the income earned during the last five years before retirement. There is no direct link, however, with the actual amount of pension fund contributions made over the working life of the employee.

5. The law is already effective for certain regions, including Moscow and St. Petersburg and will become effective for the whole of Russia as of 1 January 1997. The procedure of registration is relatively straightforward. On a prescribed form employees should indicate basic information about themselves, such as address, date of birth, etc. This should be confirmed by a stamp of the employer. The procedure of indication of contributions paid for each individual account has, however, not been determined so far. Penalties are not yet specified for non-registration of employees (when registration is required), but it is likely that from January 1997 certain penalties will be introduced.

New Rate Of Late Payment Interest

6. The Law "On budget of the Pension Fund for 1996" introduced a new rate for late payment interest which is now 1/300 of the refinancing rate set by the Central Bank. The wording of the law says that this rate is effective in 1996, but it was recently confirmed by the Pension Fund that this rate should be applied only as of 24 July 1996. As far as the period up to 23 July is concerned, the refinancing rate established by the Central Bank was 120%, and this resulted in a rate of late payment interest of 0.4% per day. From 23 July the effective rate is 0.37% per day and from 19 August 0.27% per day. Recently, however, a fixed rate of 0.3% per day was set by Presidential Decree (Decree No. 1212 of 18 August 1996, see our Tax Alert 10/96), to be applied as of 22 August 1996.

7. If you feel that any of the issues discussed above applies to you, please address your usual contact at Coopers & Lybrand.

For further information contact Bauke van der Meer on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: Click Contact Link 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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