By Dezan Shira & Associates Russia Desk
Foreign invested companies often encounter administration difficulties when first establishing operations in Russia, as the local reporting requirements differ from those in their home country. Reporting back to head office must still be provided in standard corporate protocols, while local mechanisms must also be adopted to be in compliance with Russian laws. Foreign companies establishing a Representative Office (RO) or Branch Office (BO) in Russia may encounter some challenges in adjusting their procedures for getting started.
In this article, we clarify the basic principles of accounting systems and bookkeeping in Russia. As mentioned, the initial phase provides for the preparation of BO or RO reports for the foreign headquarters. This reporting must be prepared in accordance with the rules of the law of the country of the company’s residence. In this case reporting is prepared in the language and in the format approved by your headquarters. Once this is in place, local Russian reporting protocols must then be adopted for Russian domestic compliance.
In previous articles, we explained the procedures for establishing Representative Offices and Branch Offices in Russia. One this has been completed, there are a number of tax registration formalities to be carried out.
Registration with Russia’s tax authorities
All ROs and BOs of foreign companies (except for credit and finance companies) in Russia should be accredited by the Inter District Tax Office #47 in Moscow.
Other Required Accrediting Organizations:
Bank of Russia: Provides permissions to set up banks with foreign funds and ROs/BOs of foreign banks. It also accredits ROs/BOs of foreign credit companies in Russia.
Chamber of Commerce and Industry of Russian Federation: Accredits and approves a number of foreign citizens working in ROs/BOs of foreign legal entities.
Both of the above need to have their protocols completed and will issue sub-licenses to the RO/BO to show this has been done.
Russian RO/BO tax registration
- The Foreign Company has to be registered with the tax authorities at their relevant offices in the area of the RO/BO actual location. This has to be completed within a month from the date of enlisting of RO/BO in the State Registry of Foreign Companies in Russia.
- If required, a corporate seal may be obtained (optional).
- The RO/BO needs to be registered with the Russian Pension Fund, Social Insurance Fund, and Federal Compulsory Medical Insurance Fund within a month from the initial tax registration.
- Obtain Statistic Classification Codes which identify the company in categories in accordance with the Russian Classification of Companies & Enterprises, Russian National Classifier of Economic Activities and other similar issuing bodies. These codes are needed to open bank accounts, to perform tax and accounting reporting, foreign trade procedures and in other commercial activities. These must be obtained within a month from the initial tax registration.
- Open bank accounts.
- Register the RO/BO with other required non-budgetary foundations and statistical authorities.
Registering with Customs
Before Customs’ clearance begins, or while submitting declarations, organizations must provide their local customs office with the documentation required to become a registered foreign trade operator.
For the primary registration, the foreign company needs to provide company’s corporate documents to the customs station of the future clearance procedures. This need to be translated into Russian and certified as true copies.
Documents that approve RO/BO to perform customs operations include certificate of RO/BO accreditation if foreign company can legally act as the customs declarant.
Customs registration is valid for one year – after that period new registration is needed.
Since each customs station has slight differences in requirements for the registration of foreign trade operator, it is required to advice which location is to be used before preparing documentation.
ROs/BOs of foreign companies are considered as payers of Russian VAT, although this can be claimed back. Article 21 of the Russian Tax Code includes tax allowance for ROs/BOs in terms of space rent in case if the same allowance is listed in international agreement. Foreign companies are freed from paying tax on rented offices and building spaces in Russia if the law of the country of company’s residence has same approach to Russian companies accredited to perform activities on its territory or if this standard is specified by international agreement of Russian Federation. For this reason, it is important to establish if any Double Tax Treaty or similar protocol is in force between Russia and the Foreign Companies country of origin.
ROs and BOs are classified as direct tax payers. Concerning VAT, the difference between RO and BO is that BO’s activities provide its company with the profit, so the BO deals with tax-imposed operations such as the selling of goods or services. ROs, however, merely represent the interests of its foreign parent in marketing, establishing partnerships and are not directly involved in transactions (although it may act as a liaison between its foreign parent and a Russian company).
This frees RO from tax imposition, but doesn’t dismiss the need for tax reporting as RO are still considered as a tax payer. Taxmen find it obligatory for the taxpayers to provide tax statements to their local tax authorities even if no business transactions were performed during stated tax period. ROs and BOs need to report VAT declaration electronically according to the approved format not later than the 25th day of each month following the previous tax period.
Customs duty exemption may apply in certain cases of the import to Russia or the Eurasian Economic Union from third countries in cases that include:
- Goods that are imported as a shareholder’s contribution to the authorized capital of the legal entity (the application of duty remission should be approved by Customs Union Commission);
- Goods that are imported as part of international cosmic space research and cosmic space usage (the application of duty remission should be approved by Commission);
- Marine fishery products of member states ships and ships rented by legal entities or private individuals of member states;
- Currency of member states and third countries (except coins and other numismatics);
- Humanitarian aid;
Other duty exemptions may be applied in accordance with the protocols determined with the Eurasian Economic Union, international agreements of the union with third parties, or following the decisions of the Customs Commission. It should be noted that some 40 countries are currently negotiating with the EAEU over Free Trade Agreements and when finalized will affect positively upon imports into Russia.
Cost control management
As the Ruble is currently somewhat volatile, hedging of foreign currencies is provided by most of the banks in Russia. This method helps to protect (insure) funds from negative effects of currency fluctuations. For this purpose, future deals are made on currency markets with different currency pairs. That is often applied while dealing with customs duties that depend on EUR and ESD rates.
General accounting principles and the Russian system
We recommend the following to be in compliance with both good business practice, general accounting principles, and Russian domestic tax and related reporting laws.
- Continuity of business activities (suggesting extension to foreseeable future);
- Separate bookkeeping of assets and its sources;
- Carrying out the same methods of bookkeeping (unless there are reasons to change or upgrade methods);
- Full registration of all facts of business activities throughout the reporting period;
- Accounting treatment of all activities according to the time they took place (independently of the time of arrival of the funds to the account);
- Dual aspect convention (each operation has to be in accordance with both debit and credit);
- Maintaining accounts in one currency (RUB).
One of the most popular software systems for integrated bookkeeping in Russia is 1C: Enterprise. It is used by majority of Russian large and medium companies as well as ROs/BOs of foreign companies. It is compatible with Microsoft (beta-testing mode for Mac OS), and has the option of an English interface.
This system is updated on a regular basis and reflects changes in Russian tax law and reporting requirements. The most common version of 1C costs around 30,000 Rubles for 5 users with yearly maintenance of about 12,000 Rubles. SAP products are also used in Russia as well as bookkeeping and tax reporting via Internet using SBIS products.
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Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Eurasian region. We maintain offices in Moscow and St.Petersburg through our Russian partner firm, as well as our own offices in China, South-East Asia and India. For assistance with Russian issues or investments into Russia and Asia, please contact us at email@example.com or visit us at www.dezshira.com
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