Russian Federation: Tax Alert 2/96 - 10 March 1996

Last Updated: 10 March 1996
In this tax alert we consider recent legislation on the deferment of tax debts and on the tax privileges available for small enterprises.


Presidential Decree No 65 of 17 February 1996 gives enterprises with tax arrears outstanding as at 1 January 1996 the opportunity - until 15 March 1996 - to apply for a deferment of these arrears. A letter of the Ministry of Finance and State Tax Service clarifies the implementation of the Decree.

To take advantage of this deferment, an application must be filed with the financial body of the local authority where the taxpayer is registered, and before it is granted, the local tax inspectorate and pension fund must confirm the exact amounts outstanding as at 1 January 1996.

The deferment regime consists of two stages. For the first ten quarters from 1 April 1996 until 1 October 1998, 5% of the outstanding amount is payable at the end of each quarter together with interest at 7.5% per quarter. The interest is calculated, however, on the basis of the whole amount outstanding, inclusive of interest, whilst normally interest would only be charged on the arrears and penalties. During the following ten quarters, 2.5% of the outstanding amount is payable quarterly, without interest accruing.

The 15 March deadline is clearly not very generous, but there are some rather more fundamental problems with the deferment regime as announced, as follows:

- the final amount of (for example) profits tax outstanding will not be known until after the declaration has been filed and a payment order has been received from the tax inspectorate probably after the 15 March deadline;

- from the text of the letter, it is not entirely clear that the quarterly instalments diminish the base on which interest is calculated

- the deferment regime requires that all current tax and pension fund payments are made properly, so that one delay or understatement may lead to revocation;

- the regime was mainly intended to assist very large Russian enterprises which have crippling tax debts. The attitude of the local financial bodies - which appear to have absolute discretion - to companies with foreign shareholders, remains to be seen.

Careful evaluation of the financial implications of deferment need to be made before submitting an application, and alternatives considered . We should be pleased to assist with such evaluation.


There are two different laws which aim to support 'small entrepreneurs' (small businesses). Under the profit tax law, small enterprises are entitled to several privileges, amongst which is a two year tax holiday. The Law "On the State Support of Small Entrepreneurs" elaborates the regime addressed in the profit tax law and provides additional benefits such as increased depreciation.

An enterprise can qualify as a small enterprise if the number of people working therein (including secondees) does not exceed a maximum set by reference to the type of business and provided the turnover does not exceed 100,000 times the minimum monthly wage (approximately US $ 1.3 million). The company has to be specially registered, but the method of doing so is awaiting clarification

An additional requirement is that no more than 25% of the shares can be held by enterprises which are not 'small' and the question therefore arises whether foreign enterprises have to be included in this test, thus disqualifying many Russian companies with foreign shareholders. In the context of the profits tax law, the word 'enterprise' strictly only relates to Russian enterprises, since foreign legal entities are mentioned as a separate category. The Russian tax authorities, however, have always taken the view that an 'enterprise' included foreign legal entities so as to extend the scope of the former excess wages tax to foreign legal entities. In applying the ownership test, we believe that every company in a chain must meet the test until the ultimate owner is reached. This, however, is not beyond doubt.

The Law "On the State Support of Small Entrepreneurs" allows 'commercial organisations' to apply for the status of small enterprises, which in the context of the Civil Code means Russian legal entities which are allowed to make and distribute profit. This poses the question as to whether a foreign legal entity can be a "commercial organisation" and claim relief in respect of a Russian branch.

The Federal Law of 29 December 1995 No 222-FZ "On the simplified form of taxation, accounting and consolidation for small entrepreneurs" introduces another privilege with the same name: 'small entrepreneurship'. The law does not refer to either of the laws mentioned in paragragh 7 above and merely contains a general provision that it is to be applied 'along with' the tax legislation. It will only be effective when its terms have been incorporated into specific tax laws.

According to this law, a 'legal entity' can qualify as a small enterprise provided the total number of employees does not exceed 15 and its activities are not disqualified (e.g. are not financial). Privileges include simplified accounting requirements and taxation of up to 30% of the gross profit or up to 10% of turnover. Most other taxes will cease to be due. Enterprises wishing to receive the status of small enterprise must file an application as described in Appendix 1 to the Order of the State Tax Service of 24 January 1996, with the local tax authorities

Further advice on the possible application of a small enterprise regime can be obtained from Coopers & Lybrand.

Legal developments are reported in tax news reporter on official publication. This may be long after the law is issued.

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

For further information contact the firm on +007 503 232 5511 or enter a text search 'Coopers & Lybrand' and 'Business Monitor'.

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