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:

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions