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  • The recognition of foreign companies as Russian tax residents

    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 foreign companies as Russian tax residents

    Starting from 1 January 2015 a foreign organisation may be recognized as a Russian tax resident if, in particular, any of the following criteria are met:

    • The majority of the Board of Directors meetings are held on the territory of Russia

    • Executive body activities are regularly exercised in Russia;

    • Top management functions are exercised by key organisation officials from Russia


    If none of the 1-2 criteria above are met or only one of them is met, a foreign organisation may be recognized as a tax resident in Russia based on any of the facts below:

    • Bookkeeping or managerial accounting of the organisation is carried out in Russia

    • Work paper management is carried out in Russia

    • Operational personnel management is conducted from Russia


    There are a number of cases when the activity of a foreign company cannot lead to the recognition of such company as a Russian tax resident, which include the following:

    • Preparation for and/or decision-making on matters relating to the competency of the general shareholders meeting is performed in Russia

    • Preparation for the Board of Directors is performed in Russia

    • Certain activities relating to planning and control are performed in Russia (strategic planning, budgeting, preparation and compilation of consolidated financial statements, audit and internal control, adoption of standards, methods and/policies which apply to all or to a substantial part of the subsidiaries of the foreign company)

    • Commercial activities are performed by a foreign company in a jurisdiction which has a signed double tax treaty with Russia by means of its own qualified personnel and assets located in this country



    Moreover, the Russian tax authorities shall not be entitled to consider a foreign company a Russian tax resident if:

    • The company is a tax resident in a foreign country in accordance with a double tax treaty concluded between Russia and this country

    • The CFC participates in profit-sharing agreements, concession agreements, licensing or service agreements similar to profit-sharing agreements, or other agreements with the government or other state authorities\state companies of the respective country

    • A Russian controlling person owns directly or indirectly 50% or more of the share capital in the foreign company for at least 1 year, and all the below conditions are met:

    –More than 50% of the foreign company's assets consist of investments in foreign subsidiaries which are tax residents in countries with which Russia has signed a double tax treaty and which exchange information with Russia, and the share of the active income of these subsidiaries is at least 80%

    –The foreign company owns no less than 50% of the share capital of its subsidiaries

    –The foreign company has no income or its income consists of more than 95% of dividends

    • The foreign company acts as the operator of a new offshore oil field or is a shareholder of such an operator

    • The foreign company is the issuer of traded Eurobonds, while the share of income from such activities is not less than 90%


    Voluntary claim of Russian tax resident status

    Unless otherwise stated in a respective double tax treaty, a foreign company which is a tax resident of a country which has a double tax treaty with Russia has the right to elect to become a Russian tax resident, provided it conducts activities through a PE in Russia.


    Should this be the case, a notification should be filed with the Russian tax authorities following the procedure and format developed by the competent authorities.


    Recognition of a foreign organisation as a Russian tax resident will result in taxation on the company’s worldwide income in Russia and obligations to comply with other requirements and rules provided by the Russian tax legislation.





    Source: Deloitte

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