Russia offers an attractive taxation regime of employment income for tax residents and expatriates employed under a Highly Qualified Specialist (“HQS”) regime. No social security contributions are levied from employees. On the other hand, there are some uncommon rules, which may trigger unexpected additional tax liabilities for expatriates in Russia (eg, a loan at an interest rate below 9 percent per annum). Russia levies tax upon profits of controlled foreign companies. Compliance with Russian immigration and labour law rules may be a challenge for the employer.
Russia has currency control law, which envisages unobvious rules. The risk of incompliance is especially relevant for Russian citizens assigned abroad. Incompliance with these rules triggers severe penalties up to the amount of earnings abroad.
From the compliance perspective, assignment of an expatriate to Russia, including business travelers, requires careful consideration of Russian immigration, labour law, tax and social security rules. Such consideration would allow not only ensuring compliance but enjoying some planning opportunities as well.
Assignment of Russian personnel from Russia is associated with potential adverse tax and old-age pension consequences for the assignees, and also triggers additional requirements and restrictions from the Russian currency control perspective.
Personal Income Tax (PIT) in Russia generally depends on the taxpayer’s tax residency status. An individual is considered a Russian tax resident if he/she is physically present in Russia for a period of 183 days or more during 12 consecutive months. Short-term travel (less than 6 months) outside Russia’s borders for medical treatment or educational activities does not qualify as an interruption to the individual’s presence in Russia.
The day of arrival and day of departure should be included as days in Russia when calculating the number of days a person has been present in Russia when determining an individual’s tax residency status. If a company makes a salary payment locally in Russia, the company should determine the individual's tax residency status on each date of payment in order to apply the appropriate withholding tax rate. Residency is determined on the basis of a 183-day period within the 12-month period immediately preceding the date the income was paid. Consequently, the tax withheld may not be the amount of tax ultimately due.
Final tax liabilities are determined based on the individual’s tax residency status for the reporting calendar year. This status is determined based on a 183-day presence test in the reporting calendar year.
Tax residents are subject to PIT on all their income, irrespective of the country in which it arises; whereas non-residents are subject to PIT only on income sourced in Russia.
Receipt of taxable income triggers tax in Russia unless the taxpayer is protected by relevant provisions of an effective agreement for avoidance of double taxation between Russia and the country of individual’s residence/income source.
Taxable income includes income received in
cash, in kind, and in the form of deemed income. Income in kind is assessed
based on the market price of the goods received or services provided.
Deemed income generally results when:
A 13-percent PIT rate applies generally to all types of income received by a tax resident except for certain types of non-employment income (e.g. deemed income resulting from the interest derived from the use of loans is taxable at the rate of 35 percent);
A 30-percent PIT rate applies generally to all types of income received by a tax non-resident, except for the following rates which specifically apply to particular types of income:
Social security contributions are payable in Russia in the form of mandatory insurance contributions to the Russian Pension Fund, Social Insurance Fund, and Medical Insurance Fund for each employee (personified contributions), as well as via contributions for mandatory social insurance against occupational accidents and diseases.
Insurance contributions are levied on companies, individual entrepreneurs and individuals making payments to other individuals as part of employment relations and under civil contracts for the provision of services or the performance of work, and under other specific types of contracts. Contributions are also levied on self-employed individuals, including individual entrepreneurs, notaries and lawyers. No mandatory contributions are payable by employees.
Payments subject to personified contributions and rates
Insurance contributions are payable on remuneration and other payments to individuals under employment and civil contracts. Some forms of compensation are exempt from insurance contributions, including business trip expenses, temporary disability allowances, employee dismissal expenses (excluding compensation for unused paid vacation days), professional development expenses, and some others.
For 2016, personified contributions with regard to individuals engaged under employment contracts are payable at the rates provided in the table below subject to an annual remuneration threshold established for contributions to the Pension Fund and the Social Insurance Fund. The threshold is subject to annual revision by the Russian government.
Rates on remuneration
up to the threshold
Rates on remuneration in
excess of the threshold
|Pension Fund||RUB796,000||22 percent||10 percent|
|Social Insurance Fund||RUB718,000||2.9 percent||-|
Medical Insurance Fund
|n/a||5.9 percent||5.1 percent|
Employers which have work places with hazardous and dangerous conditions of work are required to pay additional contributions to the Russian Pension Fund. The rate of the additional contribution varies from 0 percent to 8 percent depending on the rating of the working conditions determined according to special assessment procedure. If the employer does not perform working conditions assessment, the additional contribution is payable in 2016 at the rate of 9 percent or 6 percent depending on the type of the employer.
A foreign national’s contributions are paid in full on the remuneration they earn in Russia based on their Russian permanent or temporary residence permit.
An employer of foreign nationals who are staying temporarily in Russia on a visa must pay personal contributions to the Pension Fund and to the Social Insurance Fund (unless the employee is employed under an HQS regime).
No personified contributions are payable for expatriates employed under HQS regime.
Mandatory social insurance against occupational accidents and diseases
Apart from the aforementioned personified contributions, employers are required to pay mandatory social insurance contributions against occupational accidents and diseases. These contributions are payable on the total payroll at a flat rate that varies depending on the risk category that the employing company belongs to according to the Russian Social Insurance Fund. The minimum rate is 0.2 percent of payroll; the maximum rate is 8.5 percent.
If employee’s remuneration is subject to withholding at source in Russia, the employee usually does not have additional tax compliance obligations with regard to the earnings.If the local employer was for any reason not able to withhold tax from an employee, the latter must pay the tax based on the tax assessment from the tax authorities or must file a PIT declaration and pay the tax on a self-assessment basis depending on the circumstances.
If remuneration for work in Russia was paid outside of Russia, an employee must file a PIT declaration and pay the outstanding tax on a self-assessment basis. Generally, the PIT declaration should be filed no later than the 30 April of the year following the reporting year the item of taxable income was received and the tax should be paid by 15 July of that year. Specific rules may apply to non-Russian citizens who depart from Russia.
Generally, individual entrepreneurs, Russian legal entities, Representative Offices and Branches of Foreign legal entities registered in Russia and which make payments to individuals, are considered tax agents, and they are required to withhold PIT from the compensation payable to such individuals and remit the associated PIT to the Russian financial authorities.
If PIT was not withheld by a tax agent, the latter must notify the tax authorities and the individuals who received the income that was not subjected to tax withholding. The onus then falls on the individuals to pay outstanding PIT based on a tax assessment issued by the tax authorities (by 1 December of the year following the reporting year). In other cases where an individual received income taxable in Russia, which was not subject to withholding, the individual must file a PIT declaration and pay the outstanding tax on a self-assessment basis.
Insurance contributions are payable on a monthly basis. Generally, employers in Russia should file various reports with the tax authorities, Pension Fund and the Social Insurance Fund on a quarterly basis.
As a general rule, foreign nationals working in Russia are required to have a work permit. There are a few exceptions to this rule, mainly related to certain CIS nationals and other foreign nationals who possess residency permits. Work permits are not always required for the employees of suppliers or manufacturers of equipment imported into Russia for the purpose of installation, supervision of installation or servicing of the equipment.
The standard work permit application process is quite a lengthy and burdensome procedure consisting of several stages. Each stage involves the submission of applications together with an extensive list of documents. Typically, it takes more than four months to obtain an individual work permit. The individual permit is issued for a period of up to one year.
Work permit application for HQS
From the 1st of July, 2010, a simplified procedure of obtaining Individual Permits for HQS came into force. An HQS is a highly-skilled professional who is a foreign employee and has work experience and skills or achievements in a certain area and whose annual salary is generally not less than RUB167,000 per month.
Separately, based on the work permit, a work visa must be obtained.Its procurement also involves several stages, where a certain set of documents should be submitted to the immigration authorities.
Employment under HQS regime, among others, has the following benefits:
Russia has double taxation treaties with 80 countries.
There is a risk that activities of an assignee or an extended business traveler may create a permanent establishment of a foreign employer in Russia.
Russia levy indirect taxes. These taxes are charged by legal entities and some categories of individual entrepreneurs.
Russia has transfer pricing legislation. Generally, it does not apply to employees.
Russian has data privacy law, which includes quite severe requirements. Among other requirements an employer must have a written consent of each employee with regard to their personal data storage, processing and transfer.
Russia has currency control law which applies to both Russian and foreign nationals. Incompliance with Russian currency control rules may trigger severe penalties.
Russian tax law allows some deductions for tax purposes. These are generally not material. The majority of costs incurred by an assignee are not deductible for PIT purposes.