RUSSIAN TAX PLANNING
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Методы снижения налоговых платежей при использовании Российских и иностранных офшорных компаний
TAX PLANNING IN RUSSIA
Businessmen considering or planning to do business in Russia should not underestimate the options that are open to them via correct use of the so-called Russian "offshore" companies incorporated in certain low tax regions of Russia, namely, Altai republic.
In most cases it is wiser to do business in Russia through such a company rather than use a foreign company.
As a rule most foreign companies expanding their operations in Russia set up branches and representative offices in Russia, not being aware of the fact that according to the Russian tax laws activating a business in Russia leads to the creation of a "permanent establishment" which is liable to the full burden of Russian taxation at 90-100% (considering the salary tax). Besides, "foreign companies attract too much undesirable attention from the Russian tax authorities who are concerned solely with collecting taxes. Of course setting up a representative office in Russia which would only carry out representative functions and no real business easily avoids this problem.
However in case real business transactions are planned, low taxed Russian companies owned by foreign businessmen should be employed.
Here are the differences in tax rates imposed on regular Russian companies and low tax companies:
Regular Company .....Low Tax Company
Profit tax 33-35% .....6.5%
VAT 20% .....15%
Road tax 2.5% .......1.25%
Salary tax 40% .....40%
Quarterly fee None..... 6640 rubles (US$265)
Total: 97.5% ......62.75% + US$265 per quarter
It must be noted that it is relatively easy to avoid the salary tax by correct structuring of the company and in certain cases it is possible to reduce VAT to about 5-10% thus in effect reducing the overall taxation of a low tax company to about 10-15%.
It is also possible to convert tax assessment of a low tax company to the simplified tax assessment system whereby the company is liable to either 3.33% turnover tax or 10% income tax in lieu of the above mentioned taxes. It should be noted that the company is allowed to substitute all the taxes by the turnover tax in the amount of 3.33% or income tax in the amount of 10% on the condition the turnover of the company does not exceed US$332,000.
As regards repatriation of profits out of Russia it is possible to structure outflow of profits as dividends, interest or royalty. It should be understood that dividends are not tax deductible and can be paid out only after paying all taxes that are due (about 10-15% for a low tax company).
It should also be noted that outgoing flows of funds out of Russia are subject to the following withholding taxes:
* foreign income tax at the source of payment (15% in the case of dividends and interest and 20% in all other cases) and * VAT in the amount of 20% (also at the source of payment).
However remittances of dividends and interest are not subject to VAT assessment. As regards royalty payments they can avoid VAT only in a few isolated instances.
Foreign income tax can be avoided through import of goods, services and commodities into Russia. However they are subject to import duty and tariff as well as VAT and in some cases excise tax.
Thus one might come to conclusion that payment of interest (which is tax deductible only up to 15% per annum) and in some cases royalty is the most efficient tax reducing mechanism.
Speaking about tax reducing mechanisms in Russia one can't ignore the existence of a Double tax treaty between Russia and Cyprus that makes it possible to avoid withholding foreign income tax in Russia in the amount of 15%/20%.
You can find more information on these possibilities in the article on Cyprus with detailed explanations of a Cypriot option with regard to tax planning in Russia.
Russia has very strict exchange control regulations deterring the use of offshore companies while doing business in Russia. However in spite of these regulations large numbers of knowledgeable Russian companies are using Latvian banks to transfer their funds abroad without any withholding taxation at the source of payment. Despite its dubious legality this method still allows repatriation of funds out of Russia by sending ruble payments to the correspondent account of a Latvian bank with a Russian bank and requesting the Latvian bank to convert rubles into dollars on behalf of the client and then remit anywhere in the world. By sending payment in rubles the Russian Company (payer) avoids exchange control regulations of Russia because of the fact that exchange control regulations cover only transactions in hard currency. Again more information on this method can be found in the article on Cyprus.
Palms & Company welcomes any inquiries from interested parties wishing to expand their operations in Russia. All inquiries will receive prompt and reliable assistance in planning tax matters that they encounter when doing business in Russia. Our hourly rates are $100 payable in the United States of Europe.
Our tax advisor is a Russian national, accounant and former employee of the Ruiisan tax department
Watch for more articles to be posted in this section devoted to the subject uses of foreign offshore companies in Russia.
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