1. On 5 December 1995, the State Duma adopted Federal Laws on the Introduction of Amendments to the Profits Tax and VAT Laws. Approved by the Federation Council on 19 December and awaiting signature by the President, the new laws should come into effect on 1 January 1996. Subject to this, a number of major changes will be introduced to tax legislation, including:
- an exemption from profits tax in respect of the transfer of funds between parent and daughter companies, and within a legal entity, subject to specific conditions;
- new rules on how the place of provision of services will be determined for VAT purposes;
- exemption from import VAT is provided in respect of contributions to charter funds of Russian companies with foreign shareholders.
2. We will monitor further legislative progress with respect to these Laws and notify our clients of any amendments made. Further details of the proposed legislation are set out below.
Taxpayers, tax base and procedure for the calculation of tax liabilities
3. Further to the provisions of the recently issued Instruction No. 34 on the taxation of foreign legal entities, the amendments confirm that a Russian filial of a foreign legal entity must be regarded as a Russian permanent establishment of the company for profits tax purposes.
4. Proceeds from the sale of land are to be included in the tax base for profits tax purposes.
5. The following types of financial receipts by taxpayers will be profits tax exempt:
- funds donated by foreign States under intergovernmental agreements;
- funds donated by foreign organisations to support Russian education, science and culture;
- investments received by privatised companies as a result of investment tenders (this exemption has already been in force for some time);
- funds transferred between parent and subsidiary companies provided that the parent company owns more than 50% of the authorised capital of the subsidiary;
- funds transferred within one legal entity for the purpose of the development of production and non-production infrastructure.
6. If a taxpayer receives foreign currency funds as payment for goods sold or services provided, the receipt should be converted into roubles for profits tax purposes at the exchange rate effective on the day when the sale of goods or provision of services is recorded according to its accounting policy, i.e. on the cash or accruals basis. It is unclear which exchange rate should be used if foreign currency receipts are not related to sales of goods or provision of services. We recommend that the exchange rate effective on the date of receipt be used for profits tax purposes.
7. The amendments confirm the right of banks and other kinds of credit institutions to create profits tax deductible reserves for the depreciation of securities and for losses on loans. The procedure for the creation of such reserves must be established by the Central Bank of Russia and agreed with the Ministry of Finance.
8. A major change is introduced with respect to the taxation of parties to joint activity agreements ("JAA"). The amendments provide that the company accounting for such operations will be required to report to its local tax office and to the JAA parties the profit shares on a quarterly basis. Subsequently, these amounts will be included in the tax base for profits tax purposes of the JAA parties regardless of whether the profits have been distributed.
9. Interest on bank loans used to finance capital investments may be deducted for profits tax purposes. This does not, however, apply to non-production investments, with the exception of housing construction. This concession will be available for the installation of waste refining equipment; the existing concession for capital investments in ecological technology is removed from the Law.
10. The maximum deduction for donations to State cultural and artistic organisations is increased to 5% of taxable profits. A deduction of up to 3% of taxable profits will be available for donations to national parks and botanic gardens.
11. The concession in respect of dividends paid to individuals and then used for further investment in a company is removed from the Law. A new deduction, of up to 10% of taxable profits, has been introduced for funds used for research and development or donated to the Russian Foundation of Fundamental Research or to the Russian Foundation of Technological Development.
12. The tax benefits for small businesses have been revised as follows:
- the definition of small business is that used in the Federal Law `On the State Support of Small Business in Russia';
- the deduction for profits reinvested in a small business is waived;
- a detailed list of activities in which a small business must be engaged in order to benefit from a two-year tax holiday and subsequent reduced tax rates, is provided.
13. The following types of losses may not be carried forward:
- losses arising as a result of the concealment or underestimation of profits;
- losses arising in respect of excess wages and other specific costs in excess of established norms.
14. Profits of companies producing specifically listed medical products are not subject to tax.
Taxation of income
15. The exemption in respect of income from state and municipal securities is limited to interest (discount) on such securities. Taxable income derived by banks from securities and shares will be taxed at 15%, the same rate as for other types of companies for this source of income.
16. Companies making distributions of income in respect of shares or securities must file withholding tax returns within 5 days of the date of the decision to pay such income to shareholders, etc., and not later than 10 days from the date of distribution of the income. The tax is payable within 5 days of the filing day.
17. Any company, Russian or foreign, paying Russian source income to foreign legal entities must withhold tax. We understand that this requirement applies to all foreign companies, including those without any presence in Russia, although it will be difficult to enforce it in such circumstances. If Russian source income is paid in securities, in kind or in any other non-monetary way withholding tax will be payable in respect of the financial equivalent of such income.
VALUE ADDED TAX
Taxpayers and tax base
18. The new version of the VAT Law states that the taxable turnover should include all financial receipts of companies if they are connected with settlements for goods sold or services provided. The Presidential Decree No. 2270 dated 22 December 1993 with subsequent amendments provided for a much wider determination of the taxable turnover, requiring the taxation of all financial receipts of companies, such as funds transferred free of charge and loans provided by non-banking organisations. The only exemption provided was in respect of contributions to the charter funds of companies, special-purpose budget financing and contributions made under joint activity agreements. The introduction of the new provision may repeal the relevant requirements of Decree No. 2270. We plan to seek clarification of this issue from the Ministry of Finance if this provision remains in the final version of the Law.
19. The place of provision of services shall be determined for VAT purposes in accordance with the following rules:
- if services are directly connected with immovable property they will be regarded as provided at the place of location of this property;
- if services are connected with movable property they will be regarded as provided at the place where they are actually rendered;
- the same rule will apply if services are rendered in the field of culture, art, education, sport, etc.;
- transportation services will be regarded as provided at the place where the transportation takes place, taking into account the distance covered. Such services will be regarded as provided in Russia if more than a half of the distance covered is within its territory;
- if the provider of the following types of services is situated in one country and the customer in another the services will be regarded as provided in the country in which the customer carries on his business activity:
- transfer of patents, licenses, trademarks, copyright, etc.
- consultancy, legal, accounting, engineering, advertising, information processing services, etc.
- provision of personnel
- rent of movable property, except for rent of vehicles by transport companies
- agency services where the agent concludes an agreement with a company or an individual on behalf of a principal party to a contract for the provision of services of one of the kinds described above;
- if services rendered do not fall into any of the above categories, they will be regarded as provided at the place of business activity of the supplier.
20. Under the current Law, the tax exemption for exported goods may only be obtained by their producer. Under the proposed amendments, there is no such limitation. An exporter which has simply purchased goods in Russia may benefit from the tax exemption upon export.
21. Banking operations are exempted from VAT, except for services provided by cash carriers.
22. A number of important new exemptions from import VAT at the point of customs clearance is provided in respect of the following items:
(a) contributions in kind to the charter funds of companies with foreign shareholders;
(b) goods imported under joint scientific research agreements between Russian organisations and foreign institutions and companies;
(c) goods imported within the framework of international loan agreements concluded by Russia with foreign governments and international financial organisations, and goods imported as repayment of state loans provided by the U.S.S.R. and Russia to foreign states. This exemption will be inapplicable to goods which are subject to Russian excise tax.
23. If a company makes both VATable and non VATable supplies, it should record separately all expenses and costs relating to its exempt activities as input VAT on these costs may not be offset by output VAT.
Tax rate, tax computation and payment due dates
24. The amendments stipulate that the 10% rate will also be applicable to the following items:
(a) corn and raw sugar;
(b) fish flour, fish and seafood used for technical purposes, for the production of forage and drugs.
25. The amount of VAT paid by a company on the purchase of fixed and intangible assets will be eligible for offset against output VAT immediately the assets have been booked on the company's balance sheet. Under the existing VAT Law, VAT suffered on such purchases may be offset only after the assets have been put into use, over a six-month period.
26. VAT on goods or services paid for in hard currency may be paid to the budget in either roubles or hard currency.
27. Small businesses as defined by the Federal Law `On the State Support of Small Business in Russia' will be entitled to pay VAT on a quarterly basis.
28. Finally, we would like to clarify that paragraph 6 of Tax Alert 19/95 (VAT on sale of second-hand fixed assets) relates to barter sales only.
This publication is intended for general guidance only and should not form the basis of specific decisions.
For further information please contact the firm on +007 503 232 5511 or enter text search 'Coopers and Lybrand' and 'Business Monitor'.