Russian Federation: Tax Alert 16/95 - 3 August 1995

Last Updated: 2 October 1995


A new instruction "On the profit and income taxation of foreign legal entities" ("Instruction 34") came into force on 28 July 1995, the date of its official publication. The instruction makes a number of potentially significant changes to the taxation regime as it applies to foreign legal entities operating in Russia. Clarification is currently being sought from the authorities on some of the issues raised and when this is received further Tax Alerts will be issued. This Tax Alert concerns two major points which may require immediate attention:

	the issue of Taxpayer Identification Numbers ("TIN") to 	representative offices of foreign companies, and the requirement 	that branches of foreign companies register with the Moscow Tax 	Office

	new tax accounting requirements for branches and representative 	offices of foreign legal entities operating in Russia.

Registration requirements

The new instruction confirms the obligation of foreign legal entities operating in Russia to register with the tax authorities regardless of whether or not their activity will be considered as taxable. Each office established should seek separate registration with its local tax authorities.

Upon registration a foreign company will now be given a TIN which should in future be indicated on all documents submitted to the tax authorities, and on all settlement instructions as mentioned in our Tax Alert 15/95 of 25 July 1995.

The Tax Office is in the process of issuing TINs to representative offices which are already registered with the authorities. Rather than contact each company individually it appears that the authorities intend to rely upon professional advisors to disseminate the information. We are currently compiling a list of the TINs for our clients and will be advising them shortly. Clients who have not heard from us within the next two weeks are advised to call their usual C&L tax department contact.
Hitherto branches ("filials") of foreign legal entities operating in Russia were required to register with the tax authorities local to their branch. The new Instruction appears to require branches to re-register with the Moscow Tax Office. We have however received information that the Moscow Tax Office may instruct the local offices to forward files to Moscow to allow for re-registration without the taxpayer having to take any specific action. We therefore suggest that no action is taken at present to re-register branches, although there may be a need to do so in the future.

Tax accounting for permanent establishments

The Instruction has introduced new accounting requirements for all permanent establishments ("PEs") of foreign legal entities operating in Russia. All PEs are now required to keep certain prescribed books and records in particular formats. The accounting records may be kept abroad, but they must be made available to the Tax Authorities within a reasonable time should they request them. If a company has a number of separate PEs in Russia, the records kept should separately identify the activities of each office.

Profit of foreign legal entities may be calculated either on the accruals basis or on the cash basis. Once the method of profit calculation has been chosen the PE should use that method for a complete financial year.

The Tax Authorities can request the submission of a description of the accounting system of a PE. This description should include information on depreciation methods in respect of fixed assets and intangible assets, valuation methods for finished goods, industrial stock and work in progress, accounting standards adopted, chart of accounts etc. The accounting records, including all supporting documentation such as contracts, invoices and bank statements etc., should be maintained so that all the necessary reports can be prepared in accordance with the requirements of the instruction. All records must be retained for six years.

While the actual reporting to the tax authorities must be made in the Russian language, the underlying records may be retained in a foreign language, but translations must be presented to the authorities on request.

We have copies of the detailed requirements issued by the authorities as Appendices to the Instruction in both Russian and English. Please contact a member of the Tax department should you wish to receive a copy.

The instruction has also introduced simplified accounting requirements for representations which do not constitute permanent establishments. It provides that a representation may apply to the tax authorities at the beginning of the financial year if it believes that its activity is not taxable in Russia. Companies with offices which are currently treated as non taxable should therefore consider making an application for the simplified treatment before the end of December 1995.

If you require further information or advice in relation to any of the changes described above should contact a member of our tax department.

Exemption of small business with foreign equity from advance profits tax payments

In our Tax Alert 15/95 dated 25 July 1995 we mentioned that in accordance with the Letter of the State Tax Service and the Ministry of Finance dated 5 July 1995, with effect from the third quarter of 1995 enterprises with foreign investment are now subject to the same rules as Russian owned companies. This means that they are now required to make monthly advance payments of profits tax based on the estimated profit for the quarter, and in the case of any discrepancy between the amount of advance payments and actual liabilities an adjustment will be made using the prime rate of the Bank of Russia.

Enterprises with foreign investment may, however, also benefit from the exemption from advance instalment payments for small businesses set out in the Presidential Decree No 2270 of 22 December 1993. The definition of small business is set out in the Federal Law "On the State support of small business of Russian Federation" approved by the State Duma on 12 May 1995. The conditions to be satisfied include:

	ownership by charities and other funds does not exceed 25 %

	ownership by an enterprise or enterprises which are not 	themselves small businesses does not exceed 25%

	the average number of employees does not exceed certain limits 	which range between 30 to 100 depending upon the type of 	business. Personnel of the subsidiaries, branches and 	representation offices of small business are included into the 	average number of employees. 

If you think you may qualify for this exemption pleases contact a member of the tax department for further details.

This publication is intended for general guidance only and should not form the basis of specific decisions.

For further information contact the firm on +750 2225 8600, or enter text search 'Coopers & Lybrand' and 'Business Monitor'.

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