Personal income tax for foreign employees in Russia
Author: Sergey Shabotinsky, Chief Accountant at Accountor
When foreign nationals start working in Russia, they are often baffled by the calculation of income tax because it is dependent on criteria such as the type of work permit (work permit for highly qualified specialists or regular work permit), tax status in Russia and tax status in foreign nationals’ country of origin.
We have outlined below the particularities of personal income tax for foreign employees in Russia.
Main distinction: resident or non-resident
To calculate personal income tax, it is first necessary to determine the residence status as the applicable tax rate depends on it: personal income tax rate is 13% for residents and 30% for non-residents.
The residency status is determined by how many days foreign nationals have been in the Russian Federation over the last 12 months prior to income accrual. The accrual days for different types of income are as follows:
- Last day of the month for salaries;
- Date of bonus award for bonuses;
- Vacation start date for vacation pay.
If foreign nationals have, on the date of accrual, spent more than 183 days in Russia, then they are deemed tax residents in Russia.
Personal income tax for highly qualified specialists
Highly qualified specialists are an exception to the rule of 30% personal income tax rate for non-residents. The income of highly qualified specialists is, indeed, taxed at 13% regardless of how long they have been in the Russian Federation. However, the law expressly provides for this preferential rate only for salaries and similar payments. It therefore does not apply to income in kind.
For example, when a company pays compensation to highly qualified specialists for accommodation, meals or Russian language courses, these payments are taxed at a rate of 30%.
Where taxes should be paid for foreign nationals? In their country or in Russia?
This question is usually raised by foreign nationals who are employed at the same time by foreign companies and their Russian divisions.
For example, a Finnish citizen is at the same time head of international business development in a Finnish company and general director in the company’s Russian subsidiary. This person has been hired in Russia with the status of highly qualified specialist and has stayed 100 days in Russia over the last 12 months, while remaining the rest of the time in Finland. According to the double taxation treaty between Russia and Finland,the income tax rate for this employee will be as follows:
- Usual general tax rate in Finland;
- 13% personal income tax rate in Russia as this employee has been hired as a highly qualified specialist.
If the employee from the example above receives income from a company in Russia, according to the double taxation treaty with Finland, this employee will be taxed in Russia if the work for which the employee is paid in Russia is not performed in Finland.
When countries have signed double taxation treaties (as is the case between Russia and Finland), then there are various options for paying taxes in different countries depending on the provisions of the signed double taxation treaties.
How to avoid double income tax
The main principle of double taxation treaties is that income should not be taxed in several countries. To avoid double taxation, it is necessary to confirm in one country that tax has been paid in another.
For example, if an employee of a Finnish company is assigned to open a division of the company in Russia and works in Russia for more than six months, such employee will automatically pay tax in Finland, but his/her Finnish income may also be taxed in Russia as this employee has now become a tax resident in Russia. In such case, the employee can choose in which country he/she will pay tax.
For example, if the employee chooses to pay tax in Russia, then he/she will need to:
- Pay tax in Russia. This is most often done by the employer. If the employer cannot be a tax agent, then the employee will need to pay tax himself/herself;
- Obtain documents from the Federal Tax Service at the location of his/her company:
- Certificate of residence in Russia. Such certificate is issued upon written request. Those who are registeredon the website of the Federal Tax Service may do so in this special section of the website;
- Confirmation of tax payment in the Russian Federation.
These documents should be submitted to Finnish tax authorities, apostilled with notarized translation.
The same should be done if certificates of residence and confirmation of tax payment are received in Finland when the employee chooses to pay tax there. Since personal income tax is paid by employers in Russia, employers should be notified if tax is to be paid in Finland.
There are, however, some particular points in double taxation treaties. For example, if an employee only supervises the construction of a facility in Russia, then it will not be possible to tax such employee’s income in Russia.
What to do if there is no double taxation treaty between Russia and my country?
Russia has signed double taxation treaties with many countries. The full list of countries is available on the site of the Federal Tax Service.
If there is no double taxation treaty between Russia and your country, income tax must be paid in the country in which income is received.
If you have any further questions related to taxation in Russia, feel free to contact us.