1. First results of the application of the ‘Tax on Google’
The so-called ‘Tax on Google’ has been in effect in Russia since 1 January 2017. Under this tax, foreign entities are obliged to pay VAT at 18% on e-services (e.g. sales of software and content) that are provided in Russia. Based on financial reporting for Q1 2017, we have the first information about the success of this new development.
Russia’s Federal Tax Service (the ‘FTS’) has published the first information regarding the application of this tax in Russia. At present, 113 foreign entities that provide e-services are registered with tax authorities in Russia. These companies filed 92 VAT returns, and based on the results for the first quarter of 2017, they paid the totaling around RUB 2 billion. Experts estimate that the introduction of this tax will raise approximately RUB 10 billion by the end of 2017, which is in line with forecasts of one of the authors of the law, Andrey Lugovoy, a deputy in the Russian State Duma from the LDPR party.
This legal development entailed a need for companies to register with tax authorities when supplying e-services to individuals in Russia, because individuals cannot be tax agents for VAT. Companies can register by using the special ‘VAT office for e-companies’ service on the FTS’s website.
The FTS has advised that companies which have failed to submit their VAT returns in time using the ‘My account’ function on the website will be sent reminders that they need to submit same. Even if the company did not carry out any transactions in Russia, if it is registered with the tax authority, it is still obliged to submit ‘zero’ tax returns.
Also, the FTS is planning to turn banks into tax agents in this area; in other words, banks will be vested with the function of assessing, withholding from a taxpayer and paying VAT to the state budget for e-services purchased in Russia. Consideration is also being given to whether to vest the functions of tax agents in mobile phone operators. It is believed that such measures will allow for an increased tax take.
As expected, the new development has raised numerous questions from taxpayers in terms of how these legal provisions apply in practice. The Russian Ministry of Finance (the “Finance Ministry”) and the FTS have issued 16 and 11 letters of explanation respectively regarding the application of the ‘Tax on Google’ in various specific circumstances.
Acsour’s specialists are always ready to give you recommendations on how to apply the ‘Tax on Google’ in practice.
2. Changes in legislation on bankruptcy and the liquidation of legal entities
Amendments regarding the liquidation and bankruptcy of legal entities are coming into force in the near future.
Starting from 28 June 2017:
- Information regarding bankruptcy proceedings will be included in the Unified State Register of Legal Entities (the “USRLE”). The availability of such information will not mean that the company in question can be excluded from the register on the grounds that it is inactive.
- The registering authority equates the exclusion of an inactive LLC from the USRLE to a unilateral refusal to perform its obligations. This will entail the consequences stipulated by the Civil Code.
If the reason behind exclusion from USRLE was bad faith actions on the part of an LLC’s CEO or its members, such persons may be held jointly and severally liable at the request of a creditor.
Starting from 1 September 2017:
- The time limits for winding up an LLC may not exceed one year. The time limits may only be extended by a court and for up to a maximum of 6 months.
- There is a standard application approved by the FTS to be used when a company is excluded from the USRLE. The application is filed by an inactive legal entity, or by creditors or other persons whose rights and legitimate interests are affected by the exclusion. The application may be sent to the registering authority by registered mail, or delivered in person, or sent via the Internet as an electronic document bearing an electronic signature. No such standard application or methods for filing it have previously been approved.
- New grounds have been added for excluding a company from the USRLE further to a decision of the registering authority:
- there is a lack of funds to wind up the company and no possibility to lay such expenses on its members;
- inaccurate information has been recorded in the USRLE (e.g. an incorrect registered address or full name of the CEO, etc.) with respect to the company for more than 6 months.
Please note that, at present, any information that is being or has already been included in the USRLE may be checked by an inspectorate of the FTS if the inspectorate has doubts as to the accuracy of such information or further to an application of interested individuals. If inaccurate information is identified based on the outcome of such a check, a notification will be sent out. In response, the company must, within 30 days, submit accurate information or documents refuting the adverse outcome of the check. Otherwise a record will be made in the USRLE that the information stated in it is inaccurate.
We recommend that you check whether the information regarding your company in the USRLE is accurate and, if required, make all necessary changes. Acsour is ready to help you with this.
3. New rules for controlled transactions
The Finance Ministry has clarified that the date of a loan agreement or of a suretyship agreement is irrelevant: a transaction is not a controlled transaction if income and/or expenses under such agreement relate to 2017.
Please note that, starting from 1 January 2017, the following transactions are not recognized as controlled transactions:
- suretyships (guarantees) among all Russian entities other than banks;
- non-interest bearing loans granted among Russian related parties.
At Acsour, we are ready to answer to all your questions regarding controlled transactions and transfer pricing.
4. Compensation of the cost of a gym card and of a voucher for a sanatorium is not subject to insurance contributions
The Russian Supreme Court has held that a payment to employees of a voucher for a sanatorium or compensation for an employee’s fitness and gym expenses (if provided for by a collective bargaining agreement or another bylaw) is not subject to insurance contributions. Yet, the conclusion runs counter to the official position of the Finance Ministry and of the Russian Ministry of Labour (the “Labour Ministry”).
The Court considered the following situation: a company’s collective bargaining agreement provided for the compensation of employees’ fitness and gym cards as well as their treatment in a sanatorium. The company did not charge insurance contributions on this compensation, which resulted in a dispute with the Social Insurance Fund. The company won the case. The Court pointed to the following:
– the employment agreements do not contain any provisions regarding such types of compensation; and
- such payments do not depend on an employee’s qualifications, or the complexity and volume of his/her work.
Therefore, the amounts of compensation are not included in the payroll, and are not subject to insurance contributions.
It should be noted, that tax authorities may additionally assess insurance contributions, because they follow the clarifications issued by the Finance Ministry and of the Labour Ministry, which differ from the opinion of the Supreme Court. Such additional assessments, however, may be challenged in court.
At Acsour, we are ready to give you recommendations on how various types of compensation for employees are applied.
5. Compensation of expenses related to business travel
For the first time, the Finance Ministry has clarified that the compensation of expenses related to business trips is not subject to insurance contributions in amounts established by the company.
If an employee’s job requires considerable travel, the company does not have to charge any insurance contributions on the expenses associated with the business trips (e.g. transportation costs, accommodation, and daily allowances). For this purpose, the amount and the fact that the job requires considerable travel should be established in a collective bargaining agreement, internal regulations or an employment agreement. Further, the Finance Ministry has pointed out that such compensation is not subject to personal income tax.Acsour will advise you regarding the expenses of your company in paying such compensation to employees.
Acsour will advise you regarding the expenses of your company in paying such compensation to employees.
6. The lifting of certain sanctions from the Republic of Turkey
The prohibition on the employment of Turkish nationals and on Turkish companies doing certain types of business in the territory of Russia was lifted on 31 May 2017.
A Decree of the Russian President lifted the ban on Russian employers hiring Turkish nationals.
Moreover, restrictions are lifted from the performance of the following types of work by Turkish companies:
- construction, and design and engineering;
- architectural activities;
- tourist services;
- services to governmental and municipal authorities; and
Acsour will help you to gain an insight into all migration issues related to the restored cooperation with the Republic of Turkey.
7. Provisions of Soviet period legislation introduced into the Russian Labour Code
At present, certain pieces of the legislation of the USSR as a whole and one of its republics, the Russian Soviet Federative Socialist Republic, continue to have effect. Certain work has been undertaken with a view to either bringing the relevant provisions into current Russian legislation or to repealing them.
On 18 June 2017, the President of Russian Federation endorsed the law to amend the Russian Labour Code as follows:
- The opportunity is being enacted to set shorter working hours and a shorter week for employees. No such working regime was stipulated earlier.
- An employer is obliged to set such shorter hours at the request of a pregnant woman, one of the parents of a child aged under 14 (or of a disadvantaged child aged under 18), as well as a person who looks after a sick family member based on a medical assessment report.
- No work on weekends and public holidays will be taken into account to calculate overtime, because the work is already being paid at double rate or being compensated by the granting of a day off.
- The procedure has also been specified for paying for work on weekends and public holidays. Payment at double rate is granted for the hours actually worked. If some part of a working day (shift) falls on a weekend or public holiday, the hours which an employee actually worked on such days will be paid at double rate.
- Now, internal work rules or an employment agreement provide for a lunch break not to be granted to an employee whose working day (shift) does not exceed four hours.
The law comes into force on 29 June 2017.
Acsour is always ready to clarify the introduced amendments to the Labour Code.