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Specifics of taxation in Russia

How is taxation regulated in Russia?

The Russian Tax Code, federal laws and regulations, as well as international agreements for avoidance of double taxation are the main documents regulating taxation in Russia.

Disputes have always arisen between tax authorities and taxpayers because laws can be interpreted differently. For this reason, it is common in Russia to find out the opinion held by state authorities on certain matters as well as review court practice.

Are OECD concepts effective in Russia?

Although OECD (Organisation for Economic Co-operation and Development) documents have no legal force in Russia, OECD concepts have unquestionably been used as a basis to draw up certain Russian laws as well as to interpret international regulations.

For example, OECD Guidelines have provided the basis for Russian regulations on transfer pricing. Most international treaties for avoidance of double taxation have been drafted on the basis of the OECD model tax convention, and state authorities are increasingly referring to OECD comments when they interpret the provisions of these treaties.

Modern tax experts must understand world trends in taxation and be able to apply this knowledge for the taxation of cross-border transactions. 

What issues are most relevant to foreign investors?

Financing of Russian companies

When starting a business, foreign investors need to determine how they will finance their Russian company: either through contributions to share capital, loans, financial aid, or by other means. Each option gives rise to its own tax consequences arising both upon financing and upon subsequent return of funds to company owners.

Transfer of revenues abroad

The issue of payment of revenues abroad arises as soon as Russian businesses pick up steam. Russian companies may transfer dividends, royalties, interest or other income to foreign companies, and Russian tax will be withheld from such income. It is therefore necessary to determine how to avoid double taxation of the income paid to company owners. Although agreements for avoidance of double taxation signed between countries address this issue, their interpretation is not unequivocal so the assistance of tax experts is necessary in such matters.

Tax consequences of complex transactions

The advice of tax experts is required when a company plans to engage in a new type of activity, build a plant, conclude complex transactions, enter into a joint venture, coordinate operations within a group of related companies, etc.

Companies often have the opportunity to benefit from tax benefits in case of investments so it is worth finding out about these opportunities beforehand.

When a company concludes transactions with related parties, it could unintentionally incur the risk of “unjustified tax benefit” as well as the risk of unplanned tax losses in case of disputes with tax authorities.

Joint activities performed, for example, under simple partnership allow companies to complete business projects jointly with partners. However, it is worth taking into account the tax consequences of such cooperation. For example, combining assets might preclude VAT deductions, while certain provisions of partnership agreements do not allow deducting costs.

Given the great number of these examples, we recommend engaging a tax expert before any new and complex transaction.

What do we offer?

We offer a full range of tax consulting services for foreign and Russian companies. Thanks to many years of experience working with foreign investors entering the Russian market, we have gained a wealth of knowledge and have become tax experts able to advice various clients on numerous matters.

If you need any tax advice or an expert opinion on taxation, please feel free to contact us.