Russian Federation: Expatriate Secondment Arrangements

Last Updated: 11 March 1998
Permanent establishment risk under secondment arrangements

It is common practice amongst expatriate personnel working for international groups in Russia to be employed by an entity outside Russia and then assigned to the entity with operations here. Sometimes the expatriate is seconded directly to the Russian operation, sometimes indirectly, via the parent company of a Russian subsidiary. The costs of employing secondees are then typically recharged to the entity in Russia to which they are assigned. Where appropriately structured and documented, such arrangements have not been considered to give rise to a taxable presence ("permanent establishment") of the secondee company, under usual double tax treaty provisions and, more significantly, a specific provision of Instruction No. 34 on the taxation of foreign legal entities.

We have recently become aware that there is a change in the position of the Federal State Tax Service in relation to such arrangements. Senior officials are now taking the view that such secondment arrangements generally create a permanent establishment in Russia for the foreign company employing the secondees, that the apparent exemption provided by Instruction No. 34 is not applicable to this type of service, and that treaty protection is not available. In some recent cases the State Tax Service has recently refused advance double tax treaty exemption claims in respect of service charges arising from secondment arrangements.

It is important to emphasise that this change of position has not, to date, been reflected in any public pronouncement by the authorities. This has several implications which must be borne in mind:

  • it means that the explanations in this bulletin can only represent our best judgements in an uncertain situation which might be transformed in practice, or by subsequent official clarifications, regulations or legislation, so that caution should be exercised, and specific professional advice obtained, before taking decisions prompted by this bulletinuntil an official clarification is issued, local tax inspectors may continue not recognising a taxable presence where secondment structures are in place;
  • we recommend our clients to consider the specific circumstances of their structures and options available to them notwithstanding any deceptive passiveness of the tax inspectorsin the absence of official guidance, local tax inspectors who become aware of the change of approach at the federal level might elect to apply the new concepts to previous periods, compounding the potential tax, interest and penalty exposures
  • on the other hand, it is possible that any official pronouncement might include a provision "grandfathering" secondment-related service charges arising prior to the change of practice.

Potential liabilities

Should a foreign company employing and assigning secondees to work in Russia be considered to carry on activities in this country, it would have an obligation to register with the Russian tax authorities. Should a permanent establishment be recognised under the provisions of Instruction 34, and treaty benefits be denied, the company would be subject to Russian profits tax on its secondment income. The liability would be computed, broadly, on the net profit, if the seconding company has a tax registration in Russia, or as a withholding tax of 20% of gross income, if unregistered. The company may also be liable to turnover taxes in Russia, which in Moscow are currently charged at an aggregate rate of 4%.

If the company employs expatriate secondees directly, after registration in Russia it could become liable to pay various social fund contributions in Russia on the salaries of the expatriate employees. The maximum amount of such contributions, at current rates, would be 11.5%.


The likely new approach by the authorities can be supported under both Russian law and double tax treaties. There are also good technical arguments that can be advanced against this position. However, we believe it likely that the permanent establishment risk will not go away, and that our clients will need to factor it into their future planning.

If a problem is encountered, by a foreign seconding company, or by the Russian business to which secondees are assigned, there is a range of posssible responses, the choice of which will depend on the precise circumstances and the corporate policies of the companies involved.

The new view that we believe to be emerging is an interpretation, which might be resisted on the basis of Russian legislation and/or double tax treaties, through the Arbitrage courts, particularly in cases where the seconding entity is the parent of the Russian company to which secondees have been assigned, or through claims for redress under a double tax treaty to the "competent authority" in the home country, or, by lobbying through embassies, trade associations, etc.

We would advise clients to resist vigorously any attempt to collect tax in relation to payments for which double tax treaty clearance had previously been granted by the tax authorities.

In practice, a claim for back taxes by the Russian authorities from an aggrieved foreign company might be difficult to enforce, particularly if that company does not have any physical presence in Russia, nor any shares or other property in this country. We recommend full compliance with Russian statutory requirements by all persons within its jurisdiction.

Restructuring for the future

For the future, we believe that many international groups operating in Russia will need to restructure their expatriate employment arrangements to reflect the new position of the Russian authorities, as soon as there can be reasonable confidence as to its application in practice. These options might include a combination of the following approaches.

In our experience, this problem has arisen hitherto mainly where the seconding company already has a registration in Russia. It is possible that those companies without such registration will be able, in practice, to continue as at present, without attracting adverse attention from the tax authorities. VAT and profits tax (if no treaty exemption is available) would be accounted for by withholding, as is done at present. Any problem that might arise should be signalled through problems in obtaining advance exemption for service fee payments under double tax treaties and the option of recourse to the courts or to treaty grievance procedures, discussed above, would remain.

Expatriate secondees could be transferred to the local payroll of the Russian subsidiary, which may offer both tax advantages and disadvantages, as well as personnel management issues.

Expatriates could continue to be employed and seconded as at present, with the foreign secondment company becoming registered in Russia and paying Russian profits tax on actual profits, and any other applicable taxes, including turnover taxes.

The secondment company employing expatriates might be structured such that it paid profits tax under the notional method, on deemed profits. This and the options above would allow the secondment company to gross-up its management fee to compensate for the additional tax expense.

There is a range of options for structuring compensation to avoid the need for secondment structures and service charges, where, for example, a tax deduction for expatriate employment costs would be available in another jurisdiction, or where there is a pool of low-taxed income associated with Russian operations that might be used to fund compensation.

These options might be combined with more traditional approaches to tax planning in Russia, and would in all cases need to be tailored to meet the specific circumstances, policies and needs of each client, but they offer the possibility of, at least, reducing the financial, compliance and disclosure implications otherwise likely to be involved in registering additional entities with the Russian authorities.

Any substantive developments in this area will be announced in our Tax News Reporter or a subsequent Tax Alert. In the meantime, any client wishing to discuss how the issues discussed here might affect operations in Russia should call her or his usual contact in Coopers & Lybrand Russia.

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.

For further information contact Alla Shaulina on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly:

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