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  • The recognition of PE of foreign companies in Russia
    A foreign legal entity (FLE) that conducts business activities in Russia through a "separate division", a term which includes representative offices, branches, construction sites and other places of business, for a period exceeding 30 days in a calendar year, is required to register with the Russian tax authorities within 30 days of the commencement of such activities.

     

    This is regardless of whether the activities are taxable or not. If the FLE operates in more than one location, it must register separately in each of the locations that it is present in. Each real estate project or construction site must also be registered separately. Although the taxation of a separate division of an FLE is similar to the taxation of a Russian legal entity, there are a number of differences that can make this an attractive form of doing business in Russia.

      

    In general, FLEs may be liable for taxation in Russia in the following cases:

    If they are recognized as Russian tax residents based on certain criteria

    • If their business activities create a permanent establishment (PE) in Russia

    If they receive income from a source in Russia (not connected with the activities of a PE) that is subject to withholding tax as described in the chapter entitled "Russian-sourced income of foreign companies"

     

    The recognition of PE of foreign companies in Russia

    The Tax Code defines the term "permanent establishment" (PE) as a branch ("filial"), representative office, division, bureau, office, agency or any other separate fixed place of activity, through which a foreign company regularly engages in business activities in Russia. The term is used exclusively for tax purposes and does not affect the legal status of an entity.

    The following areas of activity are expressly listed as giving rise to the creation of a PE:

    • Exploration for, or extraction of, natural resources

    • Construction, installation, assembly, adjustment, maintenance and operation of machinery and equipment, including gambling equipment

    • Sales from warehouses owned or rented by a foreign legal entity in Russia

    • Provision of services or performance of any other activity, apart from "preparatory and auxiliary" activities or activities explicitly defined as not creating a PE

     

    A foreign legal entity may also be considered as having a PE if it conducts the activities listed above through a dependent agent. A dependent agent represents an FLE in Russia under a contract, acts on its behalf, and has and regularly exercises the right to sign contracts on behalf of the FLE, or negotiates significant terms on its behalf.

     

    Russian tax law specifically stipulates that the gathering and distribution of information, marketing, advertising, market research and the import and export of goods by a foreign company should not themselves lead to the creation of a PE.

     

    Russia's double tax treaties, which prevail over Russian domestic law, also include a definition of a PE. Thus, if an FLE qualifies as a resident of a country with which Russia has a tax treaty in force, then the definition of a PE in that treaty will prevail. A list of countries with which Russia has a double tax treaty is provided in the Appendix on pages 102-105. PEs and Russian legal entities use similar rules for determining taxable profits and for calculating taxes due. The rules on filing tax returns and maintaining tax registers are also similar. The only major difference between a foreign entity with a PE and a Russian legal entity relates to the monthly advance payment of profits tax. PEs are exempt from this requirement and are thus not obliged to remit profit tax on a monthly basis.

     

    Generally, PEs should calculate their profit tax using the direct method (i.e. gross income net of allowable deductions) to arrive at their taxable income. However, when a foreign entity has a PE because it conducts preparatory and auxiliary activities in Russia in favour of third parties on a free-of-charge basis, the PE will be deemed to have taxable income equal to 20% of the expenses of the PE.

     

    In addition, Russian tax law allows an FLE to allocate income and expenses to its Russian PE. In particular, where all income from activities in Russia earned through a PE is received by the head office of the FLE, the income of the Russian PE is determined through reference to the FLE's accounting policy. Moreover, in cases set out in double tax treaties, Russian tax law also allows a deduction by the PE of overhead expenses incurred by the head office but relating to the PE, e.g. management and administrative costs. The tax authorities may require documentary support and justification of any amounts allocated.

     

    Nevertheless, the allocation of income and expenses between an FLE and its Russian PE should take into account the functions carried out in Russia, the assets used and the commercial risks borne. Russia does not impose a "branch profits" tax on profits repatriated by a PE to its head office.

     

    In addition, a FLE that carries out activities in Russia through a PE is liable to corporate property tax on movable property recorded as fixed assets before 1 January 2013, as well as on the immovable property of the PE in accordance with the corporate property tax rules applicable to Russian legal entities (refer to the chapter entitled "Property tax"). Movable property that is recorded as fixed assets after 1 January 2013 should not be subject to property tax.

     

     

     

     

     

    Source: Deloitte

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