Expatriate Taxes

The following addresses a number of questions connected with the taxation of individuals, commonly asked by expatriates and companies in the Russian Federation. It is not intended to address tax or social fund legislation that may apply to a particular Company or Individual, or to provide a definitive answer to a company's payroll situation. This brochure is intended to help you identify factors which may be relevant to you or your company with regard to general procedures for the taxation of expatriates and payroll issues.Due to the rapidly changing economic and political situation in the Russian Federation, readers are advised to obtain updated information before making any decisions.

1. Filing of tax returns and payment of tax liabilities
The tax year in the Russian Federation is the same as the calendar year.
Withholding agents for personal income tax purposes are defined as Russian organizations, individual entrepreneurs and permanent establishments of foreign organizations from which, or as a result of relations with which, an individual receives income.

General Terms
The tax declaration must be submitted no later than April 30 of the year following the tax reporting period. According to the Russian tax code, individuals should file tax returns in the following cases (irrespective of their residency status):
1. If they receive income from individuals who are not tax agents under concluded civil, employment or rent contracts;
2. If they receive income from the sale of personal property;
3. If they receive income from which the tax agents have not withheld tax;
4. If they receive winnings paid by the organizers of lotteries and other risk-based games (in particular, those involving the use of gambling machines), on the basis of the amount of such winnings;
5. If they are tax residents of the Russian Federation who receive incomes from sources located outside the Russian Federation. The tax must be paid no later than the 15th of July of the year following the tax-reporting year.

Departure Tax Return
In the event that a foreign individual stop his/her activities during a calendar year, the income from which is taxable in Russia, and departs from the territory of the Russian Federation, he/she must submit a departure tax declaration no later than one month before he/she leaves Russia. Tax, which is charged on the basis of a departure tax declaration, must be paid within 15 days of submitting this tax declaration.

Preliminary and Final Tax Returns of Self-employed individuals Entrepreneurs, attorneys, notaries and private detectives must file both preliminary and final tax returns. A preliminary tax return should be filed if an individual belonging to one of the above categories has not filed a final tax return for the previous year, in which their estimated annual income is disclosed. A preliminary return should be submitted within one month and five days of the first receipt of income from the corresponding activities, and a final tax return by April 30 of each subsequent year. The preliminary tax equals 100% of the tax payable on the estimated income. Payment for January to June is due by July 15; for July to September by October 15; and for October to December by January 15 of the following year. The difference between preliminary payments and the tax payable, according to the final tax return, should be paid by 15 July of the year following the reporting tax year.

2. Resident status
For tax purposes, an individual is considered to be a tax resident if he/she is present in Russia for more than 182 days in a calendar year. Residents are taxed on their worldwide income. Non-residents are taxed only on their Russian-source income.Russian source income includes income for work or services performed in Russia (regardless of where income is paid from), capital gains from the alienation of property in Russia, interest from deposits in Russia, rent from property located in Russia, and dividends paid on shares held in companies in Russia.

3. Income subject to tax

Employment Income
Employment income consists of compensation, whether received in cash, in kind or in the form of material benefits, including, but not limited to, wages, bonuses and expatriate allowances. Taxable income is determined by subtracting certain deductions.Self-Employment and Business Income

- General Terms

The income of individuals engaged in self-employment activities is subject to income tax. Tax is levied on the individual's annual self-employment income, which consists of gross income decreased by documentarily confirmed expenses associated with the performance of the self-employment activities.
The deductibility of expenses is determined in accordance with the same list of expenses used to determine the tax base for corporate profits tax. For more information see Section 4 (Deductions).
The business losses of self-employed persons may not be carried forward to future years.

- Simplified System of Entrepreneurship

The new chapter of the tax code, effective from 1 January 2003, changes the rules for the taxation of entrepreneurs working under the simplified system of accounting and taxation. From 1 January 2003, Personal Income Tax, VAT, Sales Tax and Property Tax are being replaced with a unified tax for those entrepreneurs using the simplified system. An entrepreneur may opt to pay the unified tax at a rate of either 15% on profits (calculated as gross income net of expenses) or 6% on gross income.
As individuals do not pay income tax from entrepreneurial income received under the simplified system, they should not file income tax returns with regard to this income. Instead, they should file unified tax returns established under the simplified system.

Investment Income

Investment income, including interest, dividends and capital gains, is also subject to Russian personal income tax.

4. Deductions
Important Note: Nonresidents are not allowed to reduce their taxable income with any deductions.
Deductions are categorized as standard, social, property and professional tax deductions.

Standard Tax Deductions
Each taxpayer is eligible for a standard deduction of RUR 400 per month (RUR 500 or 3,000 per month for certain categories of disabled individuals, veterans and victims of natural disasters), plus a deduction of RUR 300 per month for each child. However, a taxpayer loses eligibility for these deductions starting from the month in which the taxpayer's cumulative annual income exceeds RUR 20,000.

Social Tax Deductions
Social tax deductions include deductions for certain charitable contributions up to 25% of income, education expenses for oneself and ones children up to RUR 25,000 each, and medical expenses for family members up to RUR 25,000 in total (for certain "expensive" medical services, as defined by a list to be developed by the Russian Government, the RUR 25,000 cap does not apply).

Property Tax Deductions
Income from the sale of real estate owned by a taxpayer for 5 years or more, or from the sale of other property (except securities) owned by the taxpayer for 3 years or more, is exempt from tax.
Gains from the sale of property, other than securities, which does not meet the above minimum holding periods, are taxable on a cost basis approach (deduct related expenses) or, alternatively, the taxpayer can elect to pay tax on the proceeds less a fixed deduction: the maximum fixed deduction will be RUR 1,000,000 in the case of real estate; and RUR 125,000 in case of other property. The taxable base for capital gains from the sale of securities is also calculated based on a cost basis approach and a taxpayer is also entitled to a property deduction of RUR 125,000 if they have owned the securities for less than 3 years, and in the full amount they have owned the securities for longer. However, a deduction can only be granted if a taxpayer cannot provide the authorities with confirmation of expenses. Property tax deductions also include the deduction for expenses on the construction or purchase of a dwelling. The deduction is limited to RUR 600,000. Deductions related to the purchase of a dwelling may only be exercised once. The amount of the unexercised deduction may be carried forward to future years. Mortgage interest paid during the year is deductible in full and the unexercised amount may also be carried forward.

Professional Tax Deductions

Private entrepreneurs, individuals working under civil contracts and individuals receiving authors' fees are able to deduct associated business expenses if these are confirmed by the relevant documents. Furthermore, if an entrepreneur or an individual receiving authors' fees cannot confirm business related expenses, the following professional tax deduction will be given to them: 20% of the total entrepreneurial income for a private entrepreneur and between 20% and 40% of income (depending on the kind of activity) for individuals who receive authors' fees. No fixed deduction is established for an individual receiving income under a civil contract.
5. Tax rates
From 1 January 2003, there will be four rates of 6 %, 13%, 30% and 35%, applicable to different income brackets.A 13% basic flat rate applies to all income for which another rate is not specified, including salaries and other income earned by tax resident individuals.
A flat 30% rate applies to income received by individuals who are not tax residents.
A flat 35% rate applies to income in the form of bank interest exceeding the Central Bank's refinancing rate on RUR deposits and a 9% rate applies to non-RUR deposits, certain insurance pay-outs exceeding the established limits, certain gifts and prizes, and deemed income from low- or zero-interest loans. A flat 6% rate applies to dividends.

6. Social taxes
Social taxes (Unified social tax (UST), contributions on compulsory pension insurance (pension contributions) and contributions for industrial accident insurance) are paid by employers only; no contributions are due from employees.
Unified Social Tax
Taxable base per employee accrued from the start of the year, Federal Budget Social Fund Medical Fund TOTAL

Federal Regional
Under
RUR 100,000 28% 4% 0.2% 3.4% 35.6%
RUR 100,000 – 300,000 RUR 28,000 + 15.8% of the amount exceeding RUR 100,000 RUR 4,000 + 2.2% of the amount exceeding RUR 100,000 RUR 200 + 0.1% of the amount exceeding RUR 100,000 RUR 3,400 + 1.9% of the amount exceeding RUR 100,000 RUR 35,600 + 20% of the amount exceeding RUR 100,000
RUR 300,000 – 600,000 RUR 59,600 + 7.9% of the amount exceeding RUR 300,000 RUR 8400 + 1.1% of the amount exceeding RUR 300,000 RUR 400 + 0.1% of the amount exceeding RUR 300,000 RUR 7,200 + 0.9% of the amount exceeding RUR 300,000 RUR 75,600 + 10% of the amount exceeding RUR 300,000
Over RUR 600,000 RUR 83,300 + 2% of the amount exceeding RUR 600,000 RUR 11,700 RUR 700 RUR 9,900 RUR 105,600 + 2% of the amount exceeding RUR 600,000
UST consists of four parts payable on a monthly basis to the Federal Budget, the Federal Medical, the Territorial Medical Fund and the Social Fund respectively. The rates of UST are regressive if the employer meets the established requirements.
Otherwise UST is payable at the highest rate.
In 2001 and 2002, according to the Tax Code of the RF the earnings of foreign citizens and stateless persons have not been subject to UST, if the laws of the Russian Federation or the employment contracts of such individuals do not give them the right to a Russian State pension, social insurance or medical insurance benefits.
However, from 2003, this norm of the Tax Code will be abolished and an employer will be obliged to pay UST for foreign individuals.Pension Contributions
Pension contributions are not payable for foreign employees who temporarily stay in the RF, as they are not entitled to a Russian pension.If a foreign employee stays in Russia as a temporary or permanently resident, pension contributions are payable to the Pension Fund of the RF on a monthly basis in two separate parts (insurance and accumulative), depending on the employee's sex and age. Pension contributions are set at the level of 1/2 of the element of the UST payable to the Federal Budget and are deductible from this part of UST. The rules for calculating pension contributions are similar those for UST.
It is important to remember that UST payable to the Federal Budget should be paid in full (2-28 %) for employees for whom the employer does not pay pension contributions.

Contributions for Industrial Accident Insurance
Contributions for industrial accident insurance are payable to the Social Fund. The rates for this kind of social contributions are a flat percentage depending on the industry of the company, and are revised by the Government every year. The current rate ranges from 0.2% to 8.5% of the payroll.

7. Double tax treaties
Foreign taxes, paid by a tax resident in Russia, may be credited against Russian tax payable if the other country of tax residency of an individual has concluded a treaty on the avoidance of double taxation with Russia. The foreign tax credit cannot exceed the Russian tax payable on the same income. To obtain this relief, the taxpayer must present a document, certified by the tax authorities of the foreign state, proving that the foreign tax was paid.
The Russian Federation/USSR has concluded tax treaties with a number of countries. The following are currently in effect:
1. Albania
2. Armenia
3. Austria
4. Azerbaijan
5. Belarus
6. Belgium
7. Bulgaria
8. Canada
9. China
10. Croatia
11. Cyprus
12. The Czech Republic
13. Denmark
14. Egypt
15. Finland
16. France
17. Germany
18. Hungary
19. India
20. Iran (applicable since 2003)
21. Ireland
22. Israel
23. Italy
24. Japan
25. Kazakhstan
26. Kirghizia
27. Lebanon
28. Luxembourg
29. Macedonia
30. Malaysia
31. Mali
32. Moldova
33. Mongolia
34. Morocco
35. Namibia
36. The Netherlands
37. North Korea
38. Norway
39. Philippines
40. Poland
41. Quatar
42. Romania
43. The Slovak Republic
44. Slovenia
45. South Africa
46. South Korea
47. Spain
48. Spain
49. Sweden
50. Switzerland
51. Tadjikistan
52. Turkey
53. Turkmenistan
54. Ukraine
55. The United Kingdom
56. The United States
57. Uzbekistan
58. Vietnam
59. Yugoslavia

Expatriate Taxes