Taxation under an agency agreement with a foreign company

Contents:

• What is important to know about the agency agreement
• Taxation of agent’s income
• Taxation on the territory of a foreign company
• Registration with the tax authorities
• Accounting for tax deductions and the cost of services
• Not accounting for VAT under the agency agreement

An agency agreement with a foreign company is an important mechanism of cooperation for entrepreneurs seeking to expand their activities outside their country. However, when concluding and executing an agency agreement, it is important to take into account tax aspects in order to avoid undesirable financial consequences. In this article, taxation under an agency agreement with a foreign company will be considered.

What is important to know about the agency agreement

An agency agreement is an agreement between an agent and a principal (a foreign company), according to which the agent performs actions on behalf of and in the interests of the principal. They may include mediation in the sale of goods or services, customer search, negotiation and other operations.

Advantages of the contract for the principal:  

• A chance to expand business, increase revenue by delegating tasks, and finding new clients by an agent.
• Lack of contact with the end user of the product.
• Trusting non-core tasks to professionals.
• Deferral of income tax accrual.

Advantages for the agent:

• Saving money on the product.
• Earning commission from sales.
• The costs can be reimbursed by the customer, if it is specified in the contract.
• Saving on taxes.

It is important to determine the place of taxation where taxes will be paid. This may depend on the existence of tax agreements between countries, types of income and other factors. It is important to study international tax legislation and agreements on the avoidance of double taxation in order to correctly determine taxation obligations.

Often the place of implementation of the contract is the Russian Federation, so the question is relevant whether it is necessary to withhold VAT from the amounts transferred to a foreigner for the work performed by him. However, not all services can actually be performed on the territory of the country. This does not apply to works:

• Directly related to real estate. These are construction, installation, construction and installation, repair, restoration, landscaping, rental services, etc.
• Directly related to movable property, aircraft, sea vessels and inland navigation vessels located on the territory of the Russian Federation of Russia.
• In the sphere of culture, art, education (training), physical culture, tourism, recreation and sports implemented in Russia.
• Transfer, granting of patents, licenses, trademarks, copyrights.
• Software development, as well as consulting and audit services.
• Engineering services, advertising and marketing, information processing services, provision of personnel; rental of property, except real estate and cars.

The buyer’s place of business will be Russia if the person is registered here as a company or sole proprietor. If the works (services) are purchased by a branch or representative office of a domestic company and their place is determined by the constituent documents as the territory of another country, then the sale of services is not subject to VAT.

Taxation of agent’s income

Income received by an agent under an agency agreement with a foreign company may be taxed in the agent’s country of residence. However, in some cases, according to tax agreements, taxation may be established in the country of the principal. Therefore, it is important to take into account the tax laws and agreements of specific countries.

Taxation on the territory of a foreign company

A foreign principal company may be required to pay taxes in its own country on income received through an agent in another country. It depends on the legislation of the principal country and the nature of the income.

Registration with the tax authorities

The agent must register with the tax authorities of his country as a tax resident and provide information about his activities under the agency agreement. It is also important to monitor compliance with tax obligations and deadlines for paying taxes.

Accounting for tax deductions and the cost of services

The agent may be able to take into account the costs associated with the performance of agency activities for tax purposes. This may include advertising costs, office expenses, and others. It is also important to correctly determine the cost of the agent’s services and payment methods to avoid conflicts and problems with taxation.

Not accounting for VAT under the agency agreement

The tax is not charged in the following cases:

• If a foreign company that is not registered in the Russian Federation provides services to a Russian company.
• If it is agency services for the selection of potential customers for the conclusion of contracts for the supply of goods.

In these cases, the condition necessary to fulfill the duties of a tax agent regarding the place of sale of goods/services, as well as the naming of these services, is not fulfilled. This means that the territory of Russia is not recognized as the place of sale of such services provided by a foreign organization to a Russian principal. Thus, there is no need to pay VAT.

Results

An agency agreement with a foreign company can become an important tool for expanding business abroad. However, taxation in this context can be a complex and multifaceted issue. For successful cooperation, it is recommended to contact legal and tax consultants in order to properly organize agency activities taking into account tax aspects and comply with legal requirements.

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