Choosing a tax system when registering an LLC

Contents:

• What is needed to know about taxation in general?
• Choosing a tax system for LLC
• Simplified Taxation System (USN)
• The general system of taxation (OSNO)
• Unified Agricultural Tax (ESHN)

A limited liability company is a form of business organization. It is established by one or more founders from among individuals or legal entities. The percentage of ownership is determined by the share in the authorized capital of the company.

The taxation system is the rules established by the legislation of the Russian Federation, including the Tax Code of the Russian Federation, which regulate the accrual and payment of taxes by companies.   

LLC, along with other forms of doing business, are required to charge and pay taxes to the budget of the Russian Federation in accordance with the chosen tax regime. The system is selected during the registration of the company. It is important to understand that this is an important decision that can affect the financial results of any company.

In this article, we will take a detailed look at the main taxation systems that are available for LLC, as well as help to choose the most suitable one for business.

What is needed to know about taxation in general?

Any tax regime consists of several important elements, without which it is impossible to implement fiscal policy as a whole. This concerns:

• Taxpayer — a person and an organization that pays taxes after accrual.
• The object of taxation — real estate, car, different assets, as well as the fact of their disposal (sale) from which tax is levied.
• Tax base — the amount from which the tax is paid.
• Tax rate — the set percentage to be paid from the amount.
• Tax period — the dates on which taxes need to be paid. It can be a quarter or a year.
• Reporting period — when a part of the tax base is formed and it is necessary to pay an advance payment or submit a report.
• The procedure for calculating the tax — the principle of calculation itself.
• Payment deadlines — the payment period established by law.
• Tax benefits — preferences that taxpayers can count on.

Choosing a tax system for LLC

Right now, there are following tax regimes in Russia:

• The general system of taxation — OSNO.
• Simplified taxation system — USN.
• The unified agricultural tax — ESKHN.
• Patent taxation system — PSN.
• Tax on professional income — NPD.

Let’s look at these systems in more detail.

Simplified Taxation System (USN)

The USN is intended for small enterprises with an annual income of no more than 490.5 million rubles (no more than 5 800 000 euro). Under USN, an entrepreneur can choose 2 options: USN 6% of income (revenue credited to the company’s current accounts) or USN 15% (income minus expenses).

In general, the USN assumes the payment of one income tax and social taxes (insurance premiums and personal income tax) for employees. This single tax replaces the income tax.

If the company’s revenue exceeds 20 million rubles (about 200 000 euro), then the company becomes a VAT payer – 5 (7)% preferential rates without deduction, or 22% with deduction. The reduced rates of 5% and 7% are beneficial with a small incoming VAT.

When applying the USN, the following revenue and VAT thresholds apply:

* Up to 20 million rubles (around 200 000 euro) pay only USN 6%, 

* 20 – 272,5 million rubles (around 200 000 – 3 200 000 euro) USN 6% + VAT 5% (without deduction) or 22% (with deduction)

* 272,5 -490,5 million rubles (around 3 200 000 – 5 800 000 euro) USN 6% + VAT 7% (without deduction) or 22% (with deduction)

* More than 490,5 million rubles (around 5 800 000 euro) – the right for the simplified taxation system is inapplicable, profit tax 25% and VAT 22% (with deduction) are paid.

If purchases are significant, it is more profitable to choose a rate of 22% with the right to deduction.

If the share of the founder, a legal entity, exceeds 25%, the USN will not be available, OSNO will be applied.

It is also important to consider the following payments:

• Property tax for objects in a special list. The list is individual for each subject. As a rule, we are talking about office and shopping centers. It is important to know that if the property is not on the list, then it is not needed to pay tax.
• Social contributions for employees. It concerns pension and health insurance. Since 2023, all contributions go to the unified Social Fund of Russia. It is important to know that firms can reduce the amount of contributions, but not by more than 50%, provided that the tax is paid at 6%. On the USN “Income minus expenses”, it is possible to include insurance premiums in expenses and so reduce the income from which the tax is charged.
• Transport tax. Subject to the availability of a car on the balance sheet of the company.
• Land tax. Subject to the availability of land on the balance sheet of the company.
• Trade fee. Concerns companies that are engaged in retail trade in Moscow.

Usually, an application for USN is filed to the tax service at the same time as the application for registration of the company is submitted. This is the easiest and most effective way to get started on the simplified system if the company falls under the criteria. It is also possible to submit a notification within 30 days after registration. If the company has been working on the market for a long time, then it is allowed to switch to the USN only from the beginning of next year. The notification is submitted up to December 31 of last year. It is important not to have tax debts.

The general system of taxation (OSNO)

OSNO is the most common taxation system for LLC. It is suitable for companies of any size and includes the payment of income tax and VAT. Companies using OSNO can deduct business-related expenses from their income, which helps to reduce the amount of tax payments. However, to use this tax system, it is necessary to keep strict accounting records and comply with numerous tax rules.

OSNO assumes the payment of the largest number of taxes. These include:

• VAT (value added tax). It is paid by the company when selling and reselling goods and services. It is paid every month at a rate of 22% (basic) or 10% (preferential when selling certain categories of goods). There is a 0% rate that applies to goods for export.
• Income tax. It is calculated from the difference between income and expenses. It is 25%.
• Property tax. It is charged from real estate objects – apartments, offices, garages, parking spaces owned by the company. It is calculated from the cadastral value. If the property is not included in the regional list of real estate, the tax is charged on the book value.
• Trade fee. Pay retail companies in Moscow.
• Social contributions. Pension, social and medical insurance. Contributions are transferred to the Social Fund of Russia.
• Transport taxes. They are paid if the company owns cars.
• Land tax. It is paid if the company owns land plots of any purpose.
• Other taxes. Including water and environmental charges.

There are several ways to switch to OSNO. The first and most obvious is the registration of a new company. If at the same time an application was not submitted for the transition to “simplified”, then the company will automatically work on a common system. It is also possible to abandon the USN or UTII in favor of the OSNO. In this case, a separate application is submitted. The compulsory order of transition involves exceeding the limits during the year or violating the conditions for the use of the USN or ESN.

Unified Agricultural Tax (ESHN)

Such a tax can be applied by companies with income from agricultural activities, which is at least 70% of all income. At the same time, no more than 300 people should work in the company. Fisheries and organizations providing services in the field of crop production and animal husbandry can switch to the regime.

The ESHN (by analogy with the USN) replaces the income tax and property tax. The total rate is 6%, which is calculated from the amount of income reduced by the expenses incurred. It is also needed to pay VAT on the sale and resale of goods. It is paid once a month.

VAT rates correspond to the main:

• Basic — 22%.
• Preferential — 10%.
• When exporting — 0%.

But for some companies, there are VAT benefits on the ESHN. For example, if the revenue for the previous year is less than 60 million rubles (about 600 000 euro), it is allowed not to pay VAT.  

It is also necessary to pay social taxes for employees.

It is possible to switch to ESHN once a year. The application is submitted from January 1 of the following year. It is necessary to fill out the relevant application in two copies and take it to the tax service at the place of registration of the company. There is exactly one year for this – until December 31.

Newly created sole proprietors and companies can submit a notification together with other documents for registration or within 30 calendar days after registration.

If there are any questions about the choice of a taxation system for an LLC or problems related to the transition from one regime to another, it is needed to seek qualified assistance. VALEN’s experienced lawyers and accountants will help you solve any issue and collect the necessary documents. We also provide consultations on choosing the optimal tax regime.