Russia: Tax & Auditing Requirements
Accounting
For a company, it is mandatory to register at the Russian tax office if it intends to do business for more than 30 days a year. The founder must notify the Tax authority – Federal Tax Service within seven days from the date of opening a bank account. An employee must notify the tax office via their employer within 10 days of being employed. All Russian businesses are required to keep properly recorded accounts for tax and auditing purposes. Given language issues, the complexity of Russian tax bureaucracy and accounting standards, companies are recommended to hire a local accounting firm/specialist to operate accounts and to file taxes.
Accounting requirements are spelled out in Federal Laws No. 402-FZ “On Accounting” and No. 208-FZ “On Consolidated Financial Statements”. There are two standards of accounting in Russia: PBU (Accounting standards code) and IFRS (International Financial Reporting Standards). Accounting entries are recorded in line with the Chart of Accounts and Instructions for application, which have been adopted by the Ministry of Finance. Statutory financial statements to be prepared on a standalone basis include: a balance sheet, statement of financial results, statement of changes in equity, statement of cash flows, and notes to financial statements. The reporting period for tax purposes in Russia is the calendar year from 1 January to 31 December. New Russian businesses who are established before 1 October in any year are required to submit a tax return for that year. Businesses that start after that date submit their first return the following year.
Financial statements are annually submitted to the entity’s owners, the Federal State Statistics Service and the tax authorities. Annual financial statements should be submitted to the Federal State Statistics Service and to the tax authorities within three months after the year end. Russian legislation may also require submissions to other authorities.
Interim financial statements should be prepared on time and submitted to the authorities mentioned in Russian legislation. Furthermore, an entity may establish interim periods at its owners’ discretion. Consolidated financial statements should be prepared according to International Financial Reporting Standards (IFRS) (see Federal Law No. 208-FZ “On Consolidated Financial Statements”) and presented in Russian roubles only. Securities issuers should publish standalone financial statements. Consolidated financial statements must be published. If audited financial statements are published, they should be published together with an auditor’s opinion.
Limited Liability Companies and Joint-Stock Companies need to file reports to the tax authorities every quarter and VAT reports every month.
Representative Office which carry out auxiliary and marketing activity also should submit reports and VAT on their activities and possible income and all reports related to payroll and social taxes to the special Tax inspectorate, which deals only with Representative Offices and Branches. Registered Non-profit organisations must submit their reports and VAT on their activities to the Tax Inspectorate as well.
Taxes
There are two systems: the traditional and the simplified system of taxation.
Traditional system:
- Profit tax of 20%
- VAT of 18%
- Property tax - this varies by region of registration of the entity but is typically ~ 2.2%
Simplified system (only used by companies with less than 60 million RUR (US$1,000,000) in turnover and corporate entities where foreigners own not more than 25 percent of the company):
- No VAT
- Two types of unified taxation – 6% on all revenues or 15% on: revenues minus recognisable expenses
General Taxes:
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Property tax: 2.2%
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Social Security and Welfare Taxes:
Annual salaries of all employees are taxed under the following rules :
- Contributions to the Social Insurance Fund: only the first RUB 670,000 is taxed (at a rate of 2.9%);
- Contributions to the Pension Fund: the first RUB 711,000 is taxed at 22%, and the excess is taxed at 10%;
- Contributions to the Medical Insurance Fund: a 5.1% rate applies to the total salary.
Personal Taxes:
The tax base is formed as follows:
- Tax Residents – all income from Russian sources and from worldwide sources, from which the Russian income tax has not been withheld
- Tax Non-Residents – all income from Russian sources, from which income tax has not been withheld
If the income of a tax resident comes only from salaried employment and the employer withholds the income tax correctly from the salary, the employee is not obliged to submit a tax return form. At the end of the employment, the employer can issue a confirmation of income and tax paid. For self-employed professionals, registered businessmen and recipients of other income it is mandatory to file a tax return.
All foreign nationals with a personal income from Russian and/or foreign sources while resident in Russia must pay Personal Income Tax (NDFL) 13% for residents, and 30% for non-residents, on all income earned during the time spent in the country. Those working for an employer usually have this deducted from the monthly salary and only have to file a tax return in the case of additional income from dividends or salaries abroad. There are some exceptions from these flat rates:
- Foreign nationals employed with a visa for Highly Skilled Specialists pay 13% income tax, irrespective of the tax residence status
- Foreign nationals living in Russia on a visa-free basis and engaged by individuals under a special license to work for personal, home and similar needs pay 13% income tax
- Dividend income for tax residents from Russian and foreign companies (fully taxed at source) is taxed at 13%
- Dividend income for non-tax residents from Russian companies (fully taxed at source) is taxed at 15%
Also, although the Russian Tax Code works on a 12-month period in a calendar year, it is technically required of employers to deduct income tax from a foreign national employee’s salary at the rate of 30% (as opposed to 13%) until the employee has been present in the country, or in the job, for more than 183 days (half-year tax residence principle), even if the contract is for 12 months or more. After this time, the tax rate is reduced in line with the status of a tax resident and the overpaid amount should be refunded to the employee by the employer on behalf of payments made to the Federal Tax Service.
Auditing
A Russian audit requires not only a systematic verification of the accounts, but also a meticulous examination of the procedures and accounting procedures of the enterprise to ensure that the books have been kept in the manner prescribed by the law as per the accounting and tax law.
Auditing requirements are set out in Federal Law No. 307-FZ “On Auditing”. The Ministry of Finance has adopted these standards for auditing. Statutory audits are required every year for standalone financial statements of companies incorporated in the Russian Federation, as well as for consolidated financial statements.
The following entities have their accounting records fully audited by a licensed auditor (article 5 of the Russian Audit Law):
- Listed companies (“AO”, JSC)
- Banks, credit or insurance companies, mutual insurance associations, clearing agencies, commodity and stock exchanges, incorporated investment funds, non-budgetary state funds, holding/management companies of investment funds, unit investment funds or non-state pension funds (excluding non-budgetary state funds)
- Enterprises that have annual revenue in the preceding financial year exceeding 400 million RUB (6.7 million US dollars)
- Enterprises that have total assets at the end of preceding financial year exceeding 60 million RUB. (1 million US dollars)
- If securities of a company are admitted to trading on stock exchange
- If an entity provides or publishes its financial-accounting report to the public (excluding state companies and state non-budget funds)
- In other cases as stipulated by the law
Representative offices and branches of foreign companies with operations in the Russian Federation are not subject to statutory audit requirements.
An auditor’s opinion should be provided to the Federal State Statistics Service:
- along with audited annual financial statements within three months after the year end; or • no later than 10 working days after the date of issue of the auditor’s opinion; but
- no later than 31 December of the year following the audited year.
According to the Tax Code (art. 23), accounting records as well as taxation documents including tax receipts must be stored for 4 years Art23(1)