Free-consulting

Short conclusions

We advise to enter into an additional agreement to prolong the lease term in order to eliminate tax risks.

Rationale

In the stated situation, the lease agreement is deemed valid in accordance with the Russian Civil Code 621.2 which runs that if the lessee continues to make use of property after the expiry of the validity term of the agreement in the absence of objections from the lessor, the agreement shall be deemed to be resumed on the same conditions for an indefinite period of time. Beside that, an agreement entered into for an indefinite period of time is not subject to registration (par. 11 of Information Letter from Supreme Arbitration Court of the Russian Federation of 16 February 2001 No 59 Review of Dispute Resolution Practice Related to Application of Federation Law On State Registration of Title for Real Estate and Transactions with it. Thus, a tax body does not have a possibility to refuse accepting the rent expense due to absence of registration of the lease agreement.  

Under Russian Tax Code 258.1 par. 6, capital investments which have been made by the lessee with the lessor's consent and for which reimbursement is not made by the lessor shall be amortised by the lessee during the term of the lease agreement on the basis of amortisation amounts calculated with account taken of the useful life which is determined for the leased fixed assets or for capital investments in those assets in accordance with the classification of fixed assets which is approved by the Government of the Russian Federation.

Thus, this is a question whether the resumed lease agreement for an indefinite period of time is a new agreement or whether it is a prolonged previous lease agreement. Letters from the Russian Finance Ministry of 3 May 2011 No 03-03-06/2/75, of 20 October 2009 No 03-03-06/1/677 and Letter from the Russian Federal Tax Service Department for Moscow of 13 August 2009 No 16-15/083987 say that if a lessee continues to make use of property after the lease term expires and there are no objections from the lessor, the agreement continues to be value and is deemed entered into for an indefinite period of time and the lessee continues to amortise the capital investments in the leased property until any party declares that the lease agreement is terminated. However, earlier letters from the Russian Finance Ministry of 18 September 2009 No 03-03-06/2/174, from the Russian Federal Tax Service of 13 July 2009 No 3-2-06/76 stated that a resumed lease agreement for an indefinite period of time shall be considered as a new lease agreement.

The court practice could not show similar views either (though regarding civil law disputes rather than tax once). For instance, Federal Arbitration Court of the North-Western District considered that entering into a lease agreement for a new period or its resumption for an indefinite period of time is entering into a new agreement (Resolution of 13 February 2003 No A56-33806/01) but the Moscow District Federal Arbitration Court considered that the lease legal relations are not deemed terminated and that the agreement is not new in accordance with the art. 621.1 (Resolution of 28 July 2003 No KA-A40/4940-03).

Similar disagreements also arise with regard to another questions - whether it is required to register real estate lease agreements entered into for, say, 11 months and prolonged for the same period of time. The Russian Federal Tax Services thinks that at prolongation, the contract that is valid is the previous one which term after the prolongation is more than one year, thus, the prolonged agreement shall be registered (letter of 13 July 2009 No 3-2-06/76). However, the Presidium of the Russian Supreme Arbitration Court concluding that such an agreement is not subject to registration, qualifies it as a new one (par. 10 of Information Letter of 16 February 2001 No 59). The first opinion (supposedly unfavourable for the parties to a lease agreement) allows to, through the second one (supposedly favourable) does not allow to continue amortisation of the inseparable improvements.

Therefore, we consider certain tax risks in the case when the lessee having under-amortised inseparable improvements to the leased property made within the framework of the basic lease agreement, continues to charge amortisation without entering an additional agreement on prolongation of the basic lease agreement.

Short conclusions

1. If the Company decides to claim any part of expense for deduction, a dispute with a tax body will be highly probable and a court decision is unpredictable.

Rationale

1. General provisions

Under Law No 115-FZ article 13.2.30¹, the taxation of income earned by highly skilled professionals permitted to work is regulated by the laws of the Russian Federation on taxes and levies. Beside that, this provision has applied to insurance charged on the income since 2017.

The Russian Tax Code Chapter 25 does not provide for an accounting treatment for the income tax purposes of the payments stated above in the case when these are made with regard to employment of highly skilled expatriates.  Therefore, this matter should be considered based on the general provisions of the Code and on the position taken by the regulatory bodies with an account of the court practice on taxation of such payments including the situation when Russian citizens from other cities are employed (particularly, when we take into consideration the recent documentation on the matter). Moreover, in both cases "residential" obligations of an employer towards employees are similar.

2. Income tax

Under Chapter 25 of the Russian Tax Code, a company can reduce income for tax purposes by expenses actually incurred only if:  expenses shall meet the requirements from Russian Tax Code 252.1 but moreover they shall be incurred for the purpose of carrying out activities which are aimed at receiving income and they are other than specified in Russian Tax Code 270. However the list of expenses that can qualify for deduction, when the requirements are met, is open (RTC 264.1.49, RTC 265.1.20.   

Russian Tax Code 270 does not explicitly specify the Company's expenses under question however it is quite sensible that expenses to employ highly skilled expatriates are incurred not only to just receive income but rather to increase revenue of the Company.  

It is highly recommended that this sensible idea is documented in relevant policies and regulatory papers of the Company. It would be still more reasonable to support the idea with figures where the production and financial performance of the Company has improved due to the activities of the highly skilled expatriates.  

Such expenses as, for example, accommodation services for highly skilled expatriates can be recognised as legal or information or advisory or other services (RTC 264.1.14, 264.1.15); and the other payments as "other" production and (or) selling expenses as provided for in RTC 263.1.49.

We also find it possible to claim for deduction rental payments during three months after termination of employment if there is sufficient evidence that the payments are necessary to attract highly skilled expatriates (they would never come without such payments). Such a situation is at least possible as evidenced by a case happened at an employee's mutually agreed resignation (refer to Definitions of Supreme Court of the Russian Federation of 23 September 2016 No 305-KG 16-16457 approved by the Chamber for Commercial Disputes of the Supreme Court of the Russian Federation). However, it is more than probable the tax body will not agree the expenses are economically justified and the expenses should be subject to justification in the court.

Moreover, under the position taken by the Russian Federal Tax Service agreed with the Russian Finance Ministry, if a collective or labour contract with a foreign employee provides for monetary compensation for accommodation (rather than payment for accommodation itself) such payments shall be considered as employee benefits which, under RTC 270.29, shall not be taken into account for income tax purposes (par. 2 of letter from the Russian Federal Tax Service of 12 January 2009 No BE-22-3/6 Accounting for Expenses of an Organization related to Provision of Residential Premises to Foreign Employees for Taxation Purposes). The regulatory bodies have recently approved their opinion: letter from the Russian Finance Ministry of 14 November 2016 No 03-03-06/1/66710 says that compensation of expenses on accommodation incurred by an employee cannot be taken into account for income tax purposes of an organization within other expenses related to production and (or) selling.

We suppose tax bodies will apply the opinion to the other payments specified in the request. Thus, a claim to deduct the expenses will highly probable result in a dispute with a tax body. 

We have not found court practice where an employee is paid for accommodation in the form of compensation. And it is a matter of consideration whether the favourable court practice in the case where an organization paid for accommodation could be applied to the requested situation (recent court cases: Resolution of Moscow Arbitration Court of 1 October 2015 on case No A40-6591/15). Otherwise speaking the court decision cannot be predicted.  

Sincerely yours,

Director for Accounting, Taxation and

Legal Consulting Department                                                                                K.V. Vorobieva

Prepared by A.M. Rabinovich

Footnotes:

1 Federal Law of 25 July 2002 N 115-FZ Legal Status of Foreign Citizens in the Russian Federation

Short conclusions

1. Income of citizens of the EEU countries earned from employment in a Russian branch of a Kazakhstan organization shall be taxed at the rate of 13% from the first day of employment regardless of existence (or acquisition by them) of the status of a tax resident of the Russian Federation;
2. Receiving a RF resident status (Certificate of a tax resident of the Russian Federation) is not related with the personal income tax rate for a EEU country citizen employed in Russia;
3. If an employee - citizen of a EEU country receives the status of a tax resident of the Russian Federation in the middle of a tax period, the tax rate shall not be reviewed from the beginning of the year (the tax rate of 13% shall be applied from the first date of employment in a Russian branch of a Kazakhstan organization).

Rationale

1. Under the general personal income tax policies, tax rates for tax residents differ from tax rates for non-residents. Tax residents are deemed individuals who actually stay in Russian at least 183 calendar days during 12 subsequent months (RTC 207.2, RTC 224.1, 3.)

However under RTC 7.1, if an international treaty of the Russian Federation provides for other rules and regulations than the provisions of the Russian Tax Code and regulations applied in their relation, such rules and regulations of international treaties of the Russian Federation.

Par. 4.3 of Resolution of the Constitutional Court of the Russian Federation of 25 June 2015 No-16-P¹says that for an appropriate decision on the personal income tax rate on income of tax non-residents, when choosing regulations of an international treaty, it is necessary to consider not only the provisions of the double tax avoidance treaties with the Russian Federation with a relevant country on avoidance of double taxation, but also the regulations of the Eurasian Economic Union Agreement (signed in Astana on 29 May 2014) (hereinafter referred to as the EEU Agreement). The EEU Agreement provides for an absolute application on individuals who are tax residents of the EEU countries of tax regulations regarding tax rates applied to income earned from employment in other countries - members of the EEU.

The point here is article 73 Personal Income Tax of the EEU Agreement which says that if one country-member in accordance with its laws and regulations and provisions of international treaties have a right to tax income of a tax resident (a person with permanent residence) of another country-member regarding employment in the former country-member, such income shall be taxed in the former country-member from the first day of employment at the tax rates applied for such income of individuals - tax residents (persons with permanent residence) of this former country-member.  

Thus, income of citizens of the EEU countries earned from employment in a Russian branch of a Kazakhstan organization shall be taxed at the rate of 13% from the first day of employment regardless of existence (or acquisition by them) of the status of a tax resident of the Russian Federation. The Russian Finance Ministry is of the same opinion (letter of 21 March 2017 No 03-04-05/16283).

2. Taking into consideration the abovementioned information, receiving a RF resident status (Certificate of a tax resident of the Russian Federation) is not related with the personal income tax rate for a EEU country citizen employed in Russia.
3. Taking into consideration the information specified in par. 1-2 herein, there are no grounds for reviewing the personal income tax on income earned by Kazakhstan citizens from employment in Russia and for applying other rate other than 13%, the personal income tax rate in case of receiving the status of a tax resident of the Russian Federation by an employee who is a citizen of a EEU country in the middle of a tax period.

1 Regarding verification whether RTC 207.2 and RTC 216 are in compliance with the Constitution due to the claim from a citizen of the Republic of Belarus S.P. Lyarskii.

Short conclusions

The official rate of the Central Bank is used for income rather than for the taxes. The tax shall be assessed in Roubles as multiplication of the income denominated in Roubles by the tax rate. 

Rationale

Under Russian Tax Code 210.1, for the purposes of determining the tax base for personal income tax, account shall be taken of all income of a taxpayer which they have received in monetary form or in kind or which they have acquired the right to dispose of, and of income in the form of material gain as defined in accordance with RTC 212.

Under RTC 223.1.1 when income is received in a monetary form the date of the actual receipt of income shall be defined as the day on which income is paid including the transfer of income to the taxpayer's bank accounts or, on the taxpayer's instructions, to accounts of third parties.

Under RTC 226.3 and RTC 226.6, tax agents shall be obliged to withhold the assessed amount of tax from the taxpayer's income when it is actually paid and to transfer the amounts of tax which have been calculated and withheld no later than the day on which the income is paid to the taxpayer.

RTC 210.5  specifies that income of a taxpayer which is expressed (denominated) in a foreign currency shall be translated into Roubles using the official exchange rate of the Central Bank of the Russian Federation which is established as at the date on which the income is actually received.

Under RTC 225.1, the amount of tax due shall be calculated as a percentage of the tax base corresponding to the tax rate.

Hence, since the tax based is determined in roubles, the amount of the tax due shall be also determined in roubles (rather than in a foreign currency then translated into roubles). Thus, Russian Tax Code 45.5 on translation of the tax amount calculated in a foreign currency as provided by the RTC into the currency of the Russian Federation using the official rate of the Central Bank of the Russian Federation as at the date when the tax is paid shall not apply to personal income tax (that could mean calculation of the personal income tax at the rate as at the date subsequent to the income payment).

Therefore, a tax agent when paying dividends to an individual shall withhold personal income tax as at the date when the dividends were actually paid and shall transfer the tax amount on the date no later than the day on which the income is paid to the taxpayer. When the amount of income denominated in a foreign currency is transferred, the personal income tax shall be determined as multiplication of the rouble-denominated amount of income received by translation into roubles of income denominated in a foreign currency as at the date when income is paid to the shareholder, i.e. on the date when the dividends are transferred to their account or to accounts of third parties following the shareholder's instructions, by a correspondent tax rate.

FinExpertiza consultants

Indeed, since April 7, 2015, limited liability companies and joint-stock companies are entitled to have no seal ¹. Exceptions are as follows:

• The company is to have a seal in accordance with its Charter;
• The company is to have a seal in accordance with a federal law.

In this case, the company was established on April 7, 2015 and it still has a seal.

In this respect, let us consider the issue on seal impressions in source accounting and tax accounting documents.

Article 9 of the Law on accounting ² does not classify a seal impression as an obligatory particular of a source accounting document. Neither does Article 252 of the Tax Code of the Russian Federation regarding the requirements for source accounting documents showing expenditures for taxation purposes.

At the same time, source accounting forms are determined by a company on its own ³. Thus, a seal impression may be an element of a source accounting form approved by a company. This may be evidenced, for example, by a particular space in a document indicated as "seal" or otherwise.

A similar case arises when a company decides to use unified source documents approved by the Russian Federal State Statistics Service (Rosstat); many of these documents also have seal impressions.

Examples of such templates include "Service Acceptance Certificate" (form No КС-2) ⁴, "Shipment delivery note" (form No 1-Т) ⁵, "Cash receipt note" (fоrm No КО-1) ⁶ and some others.

Therefore, if the company maintains a seal (in other words, seal is stipulated by its Charter) after April 7, 2015, we recommend making seal impressions in the documents that provide for such a particular. We believe that absence of a seal impression in other source documents will not be a defect of form.

Footnotes:

1 Paragraph 5 of Article 2 of Federal Law No 14-FZ "On limited liability companies" as of February 8, 1998, Paragraph 7 of Article 2 of Federal Law No 208-FZ "On joint-stock companies" as of December 26, 1995.

2 Federal Law No 402-FZ "On accounting" as of December 6, 2011.

3 In accordance with Part 4 of Article 9 of the Federal Law "On accounting" templates of source accounting documents are determined by the director of the economic entity as advised by an officer authorized to maintain accounting records.

4 Approved by Resolution No 100 of the Russian Federal State Statistics Service as of November 11, 1999.

5 Approved by Resolution No 78 of the Russian Federal State Statistics Service as of November 28.

6 Approved by Resolution No 88 of the Russian Federal State Statistics Service as of August 18, 1998.