Taxation of branches of a foreign company in Russia

Contents:

• Tax obligations of a branch in Russia
• How income tax is determined depending on income
• Peculiarities of taxation of a foreign legal entity
• What do you need to know about taxation of foreign companies in 2023?
• How to make accounting statements?

Tax liabilities of a branch of a foreign company in the Russian Federation arise in cases when the branch is officially registered in the territory of the country.  

In accordance with paragraph 2 of Article 306 of the Tax Code of the Russian Federation, a branch opened by a foreign firm on the territory of Russia qualifies for tax purposes as a permanent representative office – this is a branch, representative office, branch, bureau, office, agency or any other separate subdivision through which the organization regularly carries out business activities on the territory of the Russian Federation related to:

• The use of mineral resources and (or) the use of other natural resources.
• Carrying out works stipulated by contracts for the construction, installation, installation, assembly, commissioning, maintenance and operation of equipment, including slot machines.
• Sale of goods from warehouses located on the territory of the Russian Federation and owned by this organization or leased by it.
• Performing other works, rendering services, conducting other activities.

 A permanent establishment is characterized by the following features:

• Isolation — territorial remoteness from the head office of a foreign company that opened it (the presence of a place of activity in the Russian Federation).
• Commercial purpose of the activity.
• “Profitable” regularity — the implementation of activities aimed at systematic profit-making.

In addition, if the branch meets the above characteristics, there is a need to register with the tax authorities of the Russian Federation and pay taxes to the budget. We will tell you about how to properly organize the taxation of representative offices of a foreign company in Russia in this article.

Tax obligations of a branch in Russia

When calculating income tax payments, a permanent establishment in this case should be guided by the Tax Code of Russia and international treaties on taxation. If there are other rules and regulations regarding taxation in an international agreement than provided for in the Tax Code of the Russian Federation, the provisions of the international agreement apply.

The procedure for the execution of taxation of foreign companies is described in paragraph 8 of Article 307 of the Tax Code of the Russian Federation and includes:

• Calculation according to the norms of Russian legislation and payment of income tax to the budget of the Russian Federation.
• Submission of tax returns and a report on the activities of the PP to the tax authorities.
• Calculation according to the norms of Russian legislation and payment of income tax to the budget of the Russian Federation.
• Submission of tax returns and a report on the activities of the PP to the tax authorities.

How income tax is determined depending on income

To determine the amount of income tax on a branch of a foreign company in Russia, one should be guided by Article 307 of the Tax Code of the Russian Federation, which establishes the basic elements necessary for calculating the tax.

The tax base is determined depending on:

• From entrepreneurial activity according to the formula: Income – Expenses.
• From ownership, use and (or) disposal of property according to the formula: income from ownership of property – expenses.

The income of a permanent establishment must also be included in the calculation of income tax, regardless of how it was received. For example, in kind, in the form of debt forgiveness, by paying off obligations or as a set-off of claims.

The amount of income tax is directly proportional to the factors presented below:

• Income is considered only those receipts that relate to the activities of this permanent establishment.
• Expenses included in the calculation.

In addition, specific requirements are imposed on the above-mentioned expenses of a branch of a foreign company in Russia. Such conditions, as a rule, include reasonableness, economic justifications, monetary estimates and documentary evidence.

Peculiarities of taxation of a foreign legal entity

The functioning of a permanent representative office, as a rule, is associated with the performance of the duties of a tax agent, when the income of a permanent representative office is paid to the company’s employees and individuals who are hired under civil contracts. At the same time, the tax legislation of the Russian Federation provides for a permanent representative office:

• Calculation of personal income tax in accordance with the norms of Article 224 of the Tax Code of the Russian Federation.
• All tangible assets that can be considered as income are subject to personal income tax.
• The insurance premium is subject to payments and remuneration that are accrued in favor of employees of a branch of a foreign legal entity.
• Organization of branch reporting in order to avoid tax claims.

The tax service, with the exception of the income tax declaration, which is mandatory for absolutely all branches of foreign companies in Russia taxation and for any indicators, even if they are zero, will also need to provide such reporting forms and information as property declarations, “salary” certificates and calculations, VAT declarations, information about the average number of employees for the previous year and others.

In addition, if the activities of the considered permanent representative office of a foreign company in the Russian Federation may be associated with tax risks, suspicious transactions should be excluded from the calculation of tax liabilities, updated tax returns for periods with high tax risk should be provided to the controllers, and an explanatory note should also be sent to the tax authorities.

What do you need to know about taxation of foreign companies in 2023?

Taxation of foreign individuals and legal entities is regulated in accordance with Article 208 of the Tax Code of the Russian Federation. Based on this article, residents pay 13% of personal income tax from all their income from sources around the world. In the case of non-residents, they pay 30% of personal income tax on income from sources in Russia.

When foreign companies carry out activities in the Russian Federation through the establishment of a Russian permanent representative office, advance payments and income tax are subject to payment, as well as a tax return and a report on the activities of a foreign organization are mandatory.

How to make accounting statements?

As we noted above, if branches of foreign companies are established in accordance with foreign laws, then they may not keep accounting on the territory of our country. However, often parent companies need to register a company in Russia. In this case, accounting will be mandatory.

The Order of the Ministry of Finance of 30.09.2010 N 117n “On approval of the accounting features in the tax authorities of foreign organizations that are not investors under a production sharing agreement or operators of the agreement” states that a foreign company that operates in Russia through a permanent representative office is subject to registration with the tax authority at the place of implementation of this activity. In some cases, a branch is registered at the location of a permanent representative office or at the location of a legal entity. The application for registration is submitted to the tax authority no later than 30 calendar days from the date of commencement of activities on the territory of the Russian Federation.

If the branch operates in the territory of the Russian Federation through a permanent representative office, then the application is submitted on form N11IO. At the same time it is necessary to collect the following documents:

• Constituent documents for a legal entity.
• A document confirming the legal status of the parent company. This may be an extract from the register of legal entities of another country.
• A document containing the taxpayer’s code and confirming registration with the Federal Tax Service in Russia.
• The decision of a foreign company to open a branch in Russia.
• Regulations on a separate subdivision.
• A power of attorney confirming the powers of the director.
• Receipt of payment of the state fee for registration of a separate subdivision.
• Two copies of the inventory of documents sent to the Federal Tax Service.

It should also be taken into account that documents on the location of a branch in the Russian Federation may be requested. This may be a copy of the lease agreement, a mark of the BTI or a copy of the certificate of ownership. It is also necessary to have a copy of the passport of the head of the new branch with a notarized translation.

All foreign documents need to be legalized at the consulate, which includes translation and notarization.

In general , the registration procedure looks like this:

• Submission to the Federal Tax Service of an application for accreditation of a separate unit with approval by the Chamber of Commerce and Industry of the number of foreign employees.
• Production of the branch seal.
• Receipt of a document on registration of a foreign branch in the statistical register of Rosstat.
• Registration of a foreign branch in the IFNS.
• Registration of a foreign branch in extra-budgetary funds.
• Preparation of documents for the purpose of opening a settlement account of a branch of a foreign company in a bank in the territory of the Russian Federation.
• The activity of a branch of a foreign company begins only after the issuance of the relevant documents by the registering authority.

The amount of the state fee for registration of a branch or representative office of a foreign company in Russia is 120 thousand rubles per unit. A state fee of 200 rubles is charged for obtaining information from the state register of foreign branches that have been accredited in the Russian Federation.

The foreign organization must be registered for tax purposes within 5 working days after the receipt of the documents by the employees of the Federal Tax Service.

If difficulties arise, you can turn to the services of third-party companies. VALEN agency specialists assist foreign companies in opening branches in the territory of the Russian Federation. We provide consulting services, as well as help in collecting a package of documents.

After registration with the tax authorities, the company can work in the country through a representative office. At the same time, it is important to take into account international agreements on the avoidance of double taxation. Article 7 of the Tax Code of the Russian Federation establishes the priority of the rules and norms of international treaties of the Russian Federation containing provisions concerning taxation over the norms of the Tax Code of the Russian Federation and regulatory legal acts on taxes and fees adopted in accordance with it.

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