Russian Federation: Tax Alert 10/96 - Tax Enforcement Decrees

Last Updated: 27 August 1996
1. In this Tax Alert we consider two recent and far reaching Presidential Decrees. Decree No. 1212 of 18 August 1996 places severe restrictions on bank and cash transfers, whilst Decree No.1215 of 18 August 1996 establishes a general obligation to collect personal income tax and social fund contributions in respect of all payments made to individuals.


2. An individual who earns income from sources other than a single employment (when income tax and social fund contributions should be accounted for by the employer) must generally file an annual tax declaration and settle the liabilities for himself. Compliance with this rule, however, has proved to be low, and the Decree now significantly extends the scope of the withholding principle: tax must be withheld and social contributions accounted for in respect of all payments made to individuals, including bank transfers and cash payments in respect of payment documents, for example promissory notes. A decision must be made whether or not to withhold tax and, if applicable, to make social fund contributions when making any payment to individuals, irrespective of whether the payor is a legal entity or also an individual himself.

3. Presidential Decree No. 1215 of 18 August 1996 was officially published in Rossiyskaja Gazeta on 22 August 1996. It states that the new withholding principle should be applied "in accordance with the legislation of the Russian Federation". Unofficially, a Government official has commented that in order to apply the Decree, amendments must first be made to the existing legislation and the Decree does not therefore have immediate effect. The Duma might not necessarily pass the necessary amendments, but if only amendments to Instructions are required, implementation will be much more straightforward. In response to the negative reaction from the business community, the Ministry of Finance issued a press release confirming that all existing concessions and exemptions will be honoured.


4. In order to withhold the correct amount of tax, the payor must know the annual income of the individual to date, but this is clearly impractical in most cases. According to current practice, tax is being withheld at the lowest rate of 12%, but if this approach is applied under the new regime, it will still often lead to the under-deduction of tax. In other tax jurisdictions, tax is often required to be withheld at the highest rate, but repayments at the end of the year are then usually forthcoming. In Russia, a credit is usually given against future liabilities. Probably, no tax will need to be withheld from payments which are exempt altogether, but where income is exempt within certain limits (for example, where an individual receives a housing allowance or sells property), a problem will arise. If an individual receives a promissory note or security that cannot be split, it is not clear how the withholding mechanism could be operated.


5. As far as contributions to the social funds are concerned, these are calculated and paid by the employer on the basis of the gross income of an employee. The use of the word "withholding" in the Decree does not seem appropriate in this respect, and may lead to the belief that the Decree refers to the employee's pension contribution, but it is assumed that the basis of calculation remains unchanged.


6. When an employer grants a loan to an employee, the interest thereon is deemed to be taxable profit of the enterprise. The rate of interest is that charged to the employee, or the CBR re-financing rate (currently 80% per annum), if greater. The provision seems particularly targeted at schemes whereby an employer lends funds interest free to an employee, which he places on bank deposit at a high rate of interest. Neither the loan or interest is subject to personal income tax or social fund contributions and the scheme therefore used to represent a significant saving for the employer. The new rule does not appear to apply, however, if the company issuing the loan is not subject to Russian profits tax or is not the employer of the individual - the variant of the above scheme which involves the employer depositing funds directly with the bank may well survive. However, there is also an indication that interest will be included within the taxable income of an individual at some date in the future.


7. Decree No. 1212 aims to prevent taxpayers with arrears from using more than one bank account for settling these tax liabilities, so helping to ensure that money is not being deviated for purposes other than the payment of those arrears. The Decree does not, however, introduce any new confiscation procedures. Furthermore, banks and credit institutions are required to inform the tax authorities within a month about all current bank accounts held by an enterprise.

8. The Decree enters into force on the day of its official publication, 22 August 1996. It applies to all Russian legal entities and foreign legal entities, with the general exception of banks and credit institutions, which have tax arrears (hereinafter: "payment defaulters"), as well as to their representations and branches if these are separate taxpayers. (This is usually the case if the subdivision has a separate bank account and is located in a different region than the 'Head Office' so that local and regional tax liabilities arise). The Decree applies to representative offices which carry out "economic activity" - a very broad term which is likely to include most offices.


9. According to current legislation and practice, "arrears" include amounts of tax which remain unpaid after the payment date specified in respect of a tax declaration (in case of self-declared taxes) or the tax assessment, has expired. Since penalties for non-compliance with the Decree could be severe, enterprises may wish to be conservative in assessing whether or not the Decree applies to them, or alternatively seek confirmation from the tax authorities that they do not have any tax arrears. Unpaid taxes established during the course of an audit by the tax authorities should not result in the application of penalties, although the arrears would then need to be paid in order to prevent the application of the regime in future.


10. Payment defaulters are obliged to identify one bank account as a "payment defaulter's bank account". The bank must be informed within 3 days, and the account must be registered as such with the local tax authorities, within one week after the Decree has entered into force. The effective deadline for registration is thus 29 August 1996, although according to the Decree, the method of registration must be laid down by the State Tax Service within two weeks and this has not yet been done. The tax authorities have the right to deny registration of a bank account if it has no funds.

11. All incoming rouble funds, as well as rouble funds currently deposited on other accounts, should be deposited in the "payment defaulter's bank account", except for:

  • funds designated to provide payments of the first or second priority as defined in article 855 of the Civil Code (civil liability claims for harm to life or health, payments of aliments, salary and authors rights)
  • funds provided from the budget (subsidies)

12. The time frame within which the transfers from other accounts to the payment defaulter's bank account must be completed should be agreed with the local tax authorities. When the transfer is actually made, the tax authorities should be informed accordingly. Banks are allowed not to execute payment transfer orders which contradict the Decree. The CBR is instructed to prepare, within a week of the publication of the Decree, an order forbidding banks from making such transfers. Penalties will be laid down for banks and certain senior banking staff for violation of the rules.


13. If a payment defaulter's purchases or sales with one specific enterprise exceed US$ 100,000 per accounting year, the defaulter must present, together with the annual accounts, a form indicating the full name and place of registration of the other party, the bank accounts involved, and the main place of economic activity of the other party. Non-compliance with this provision or giving false information, may result in a penalty equal to the amount of the transaction. This will, however, only apply from April 1997 when the 1996 accounts are submitted to the tax authorities. The result of this will be stricter control over tax compliance with respect to payments received by foreign suppliers from Russia for goods and services.


14. Payments may no longer be made and received by an agent through his bank account on behalf of his principal - only the principal's bank account may be used. In addition to this, the agent can only receive his remuneration or commission after the amount of the transaction (apparently including the commission) has been transferred to the bank account of the principal. If an agent carries out a transaction in his own name but for the account of his principal, amounts received by the agent must be transferred to the principal's bank account within three working days. The agent is allowed to withhold his commission from this payment. These provisions appear, however, not to apply if the agent acts as a representative of the purchaser rather than of the seller.


15. The Central Bank is instructed to prepare an Instruction according to which cash can only be withdrawn from the current account or the budget subsidy account of an enterprise. Cash may be withdrawn to cover the payment of salaries, business trip expenses or "economic necessities". It is not clear what the latter term includes, but is likely to be restrictive, although both the banks and tax authorities may have some discretionary power in determining its scope.

16. Cash payments in exchange for promissory notes or reimbursement of advance payments received may only be made if the money involved has first passed through a bank account, i.e. it is no longer possible to make this type of payment out of cash received from such operations. If the provisions are violated, the tax authorities or Federal tax police may levy a penalty equal to the amount unlawfully transferred.


17. The Decree also purports to set the rate of interest for late payment of contributions to the pension fund at 0.3% per day. This contradicts the rate set by an earlier law (Federal Law of 8 July 1996 No. 88-FZ), which set the rate for 1996 at 1/300 of the refinancing rate of the CBR, and the Pension Fund itself confirmed this basis as effective from 24 July 1996. On the basis of the new refinancing rate of 80% per annum, this results in an interest rate of less than 0.3% per day, and is therefore preferable when compared to the Decree.


18. Both Decrees introduce far reaching measures to increase revenue collection but fail to provide sufficient clarity as to how to apply these rules. It therefore remains to be seen to what extent they will be enforced, but the potential exposure to draconian penalties makes it impossible for banks, enterprises and individuals to adopt a 'wait-and-see' approach. All enterprises will need to review cash circulation procedures and, if applicable, the issue of loans to employees. Enterprises with tax arrears face significant restrictions on the use of more than one bank account, together with intrusive reporting requirements on significant business partners.

For further information contact Bauke van der Meer on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: Click Contact Link or enter a text search 'Coopers & Lybrand' and 'Business Monitor'

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.

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”

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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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