Permanent establishment risk
Risks of direct sales to Russia
- Additional corporate tax liabilities;
- Audits from tax authorities;
- Penalties and interest charges;
- Damage to business reputation.
Companies generally pay profit tax in their host country, but if a foreign company performs an activity in Russia that gives rise to a permanent establishment in Russia, then the company must pay profit tax on this activity in Russia.
We offer permanent establishment formation support services which entail:
- Reviewing your circumstances to determine whether they give rise to a permanent establishment in Russia;
- Giving recommendations on how to change your operations in the Russian Federation;
- Calculating the amount of profit that is safe for the permanent establishment;
- Assisting in answering the queries from tax authorities;
- Assisting with tax audits.
Taxable presence conditions
A permanent establishment generally arises when:
- Regular business activities are performed through a branch/division in the Russian Federation. The office of a Russian subsidiary may also be considered a branch/division in the Russian Federation;
- Activities are performed in the Russian Federation through a dependent agent. A Russian subsidiary may also be recognized as a dependent agent;
- Foreign organizations perform preparatory, auxiliary activities in the interests of third parties;
- Foreign organizations perform construction and installation works in Russia.
How to evaluate tax and other risks related to PEs
The issue of permanent establishment formation must be considered in view of the provisions of international treaties concluded between Russia and foreign countries. How the sale process is conducted in Russia is relevant to assess the risk of permanent establishment formation as well as the functions fulfilled by the Russian subsidiary, the regularity of transactions/projects in the Russian Federation, and other circumstances.
The risk of permanent establishment formation is minimal if all sales are made in the Russian Federation through a Russian subsidiary or independent distributors.
This risk is, however, substantial when:
- Foreign organizations conclude direct contracts for sale of goods/services with Russian customers;
- Russian subsidiaries act as an agent of foreign organizations, prospect for customers, conclude deals with customers and are involved in sales and post-sales;
- A non-profit representative office of a foreign organization is involved in the sale process in the Russian Federation;
- Works, services, etc. are included in contracts for supply of equipment to the Russian Federation by a foreign organization.
Foreign organizations whose activities give rise to a permanent establishment in the Russian Federation must register with Russian tax authorities, declare and pay Russian profit tax, and fulfill other obligations to be performed by Russian taxpayers. If these obligations are not fulfilled, foreign organizations are subject to the same sanctions as those imposed on Russian companies.