On July 10, 2023, Federal Law No. 316-FZ was adopted, introducing a number of significant changes regarding the legal status of foreign citizens in the Russian Federation (hereinafter referred to as “Law No. 316-FZ”).

This law entered into force on July 10, 2023, but provides for separate, later deadlines for the entry into force of a number of provisions (more details below).

According to the new rules, family members of highly qualified specialists (hereinafter referred to as “HQS”) will be required to undergo a medical examination again within 30 calendar days from the date of the decision to extend the validity of the HQS work permit or from the date of entry into the Russian Federation (if they were outside the Russian Federation on the day of such a decision). Previously, family members of HQS were required to undergo a medical examination annually.

In addition, after 180 days from the official publication of Law No. 316-FZ, the following changes will come into force:

The obligation to obtain a work permit within 30 calendar days from the date of the decision to issue (extend) it is introduced.
In the presence of documented valid reasons and a written application from the employer, a work permit may be obtained at a later date, but not exceeding 30 calendar days. After the expiration of the established period, a work permit is not issued, and the decision to issue (extend) it is canceled.

In the event of early termination of an employment or civil law contract, the HQS, as before, has the right to search for another employer or customer of work within 30 working days.
If a new contract has not been concluded upon expiration of this period, the HQS and his family members will be required to leave the Russian Federation within 30 calendar days, and their visas and residence permits (if any) will be considered cancelled.
Before the said changes come into force, HQS and their family members will be given 30 working days to leave.

A HQS who has worked in this capacity in the Russian Federation for at least two years and his family members who have a residence permit will be issued an indefinite residence permit if the following conditions are met:
The HQS and family members reside in the Russian Federation with a residence permit;
during the period of the HQS’s employment, the employer calculated, withheld and transferred taxes to the budget system of the Russian Federation.
It is envisaged to issue a work permit for highly qualified specialists to carry out labor activities in two or more constituent entities of the Russian Federation if the following conditions are met:
work in other constituent entities is provided for by the provisions of an employment or civil law contract for the performance of work (provision of services);
a foreign citizen carries out labor activities in separate divisions of an organization, branches or representative offices of a legal entity or with related parties located in these constituent entities.
A ban on the employer to attract foreign highly qualified specialists to labor activities in the Russian Federation for two years in the event of failure to provide the tax authorities with information on the amounts of personal income tax calculated and withheld by the tax agent in relation to highly qualified specialists after 6 months, as well as if the information provided turned out to be fake or counterfeit.

In addition, from 01.03.2024, the level of wages (remuneration) of highly qualified specialists will increase to 750 thousand rubles per quarter. Before the changes were introduced, the threshold was 2 million rubles/year.

At the same time, Law No. 316-FZ does not cancel the previous reduced wages required to attract highly qualified specialists who are medical, teaching staff, participants in the implementation of the Skolkovo project, and employees of resident companies of special economic zones.

We are closely monitoring the development of the situation and innovations in legislation and will be happy to answer any questions you may have!

We would like to remind you that in order to keep SME status companies with foreign participation should apply the list of required documents for entry into the register.

As for now, SME status is still available for those companies in which foreign participation exceeds 49%.

At the same time the necessary condition for entry is the compliance of both the foreign parent company and the Russian subsidiary with the criteria of small and medium-sized businesses set in the Russian Federation (in terms of headcount and income not exceeding the threshold for medium-sized businesses) – according to the Federal Law of 24.07.2007 N 209-FZ:

• the size of the average number of employees for the previous calendar year does not exceed 250 people (the maximum threshold for medium-sized enterprises);
• The amount of income from business activities in the previous calendar year does not exceed 2 billion roubles (maximum threshold for medium-sized enterprises).

For companies with foreign participation the data for inclusion in the register must be input by the authorized auditing organization in the period from July 1st  to July 5th , 2023.

Expert comment from Olga Grigorieva, CEO of the audit company Sterngoff Audit:

“The authority to confirm information for the SME registry and to submit it to the tax authority is the function of auditing organizations (part 6.2 of Article 4.1 of the Federal Law “On the Development of Small and Medium Entrepreneurship in the Russian Federation”).

That’s why the support from the auditors should be obtained. The auditors will conduct the necessary auditing procedures, check the data of the subsidiary and the parent company, and, in case the criteria are met, the auditing company will submit information to the register.

We submit the information monthly from the 1st to the 5th calendar day of the month. IMPORTANT NOTICE – the status previously obtained must be confirmed annually!”

Organizations which fail to provide information to the tax authority or which no longer meet the SME criteria will be removed from the register annually on July, 10th.

As a reminder, if SME status has not previously been obtained or has been lost, an application for status can be submitted any month.

The SME registry will be updated on the 10th day of each month (in the period from July 10th to December 10th – on the basis of reporting for the previous calendar year; in the period from January 10th to June 10th – on the basis of reporting for the calendar year before).

It is important to remember that regardless of the month in which the company was entered in the register, its status must be confirmed in the period from 01st to 05th of July of the following year. 

Should all the criteria for SME status be met, it is worth to think on the preferences available to SMEs:

• Reduction of the amount of insurance and social contributions to be paid from the payroll (from 30% to 15% in the part exceeding the minimum wage level); 
• Support measures from the federal authorities, such as a simplified procedure for filing certain forms of tax and statistical reporting, preferential lending for SMEs, reducing the supervisory burden (for example, a moratorium on non-tax audits until 31.12.2023, etc.);
• Support measures from regional authorities (there is a need to check at the place of company registration).

What should be done now:

• Submit a request to the auditing organization for a list of required documents;
• Request necessary documents from the foreign parent company to confirm that the criteria are met;
• Prepare data from the side of russian company.

If you need assistance in preparing of the necessary document package, we will be glad to provide you our support on the issue.

Here is a consolidated overview of the latest developments in double taxation avoidance agreements (DTAAs).

Following a mutual exchange of relevant notes in June-August 2022, the double taxation avoidance agreement between Russia and Ukraine is terminated as of 01.01.2023. Relevant changes should be considered with respect to withholding taxes and other taxes for tax periods beginning on or after January 1st, 2023.

Decree 668 of September 26th, 2022 suspended the double taxation avoidance agreement with Latvia, which had previously suspended DTAA in its turn from May 16th, 2022.

Strictly speaking, the Agreement does not provide for a “suspension” option, it is assumed that it can be terminated or denounced, and The agreement was later denounced by Federal Law No. 40-FZ of 28.02.2023.

As it was – as it has become:

• interest, dividends from Russia to Latvia, paid by Russian tax agent at a rate of 5% to 10% – 20% tax on interest, royalties, 15% tax on dividends;
• it was possible to offset tax paid by a tax agent of one country in another country – now the tax must be paid in both countries as required by local law.

Another country with which the Agreement could be suspended or terminated is Denmark (see information in our Telegram Channel).

A relevant bill has been submitted to the local parliament. If adopted, the changes would come into force on January 1st, 2024. The consequences would be similar to the abolition of the Agreement with Latvia.

At the same time, the Russian Federation has initiated a review of agreements with some “friendly” countries – the United Arab Emirates, Turkey, Malaysia and Oman. In this case, it is announced that the purpose of the revision is to create comfortable tax conditions for attracting direct investments in the Russian economy – thus, favourable changes for investors should be expected in the agreements with these countries.

The latest initiative concerns the suspension of Agreements with “unfriendly” countries (EU countries, Switzerland, UK, USA, Canada, Australia, New Zealand, Singapore, Japan and South Korea). The proposal was made by the Russian Ministry of Foreign Affairs and the Ministry of Finance in response, among others, to Russia’s inclusion in the EU “blacklist”. The initiators proposed that the agreements be suspended unilaterally. The suspension should be based on a Russian presidential decree.

The decree is expected to be signed at the end of June this year. However, no exact dates have been given.

Until the text of the document is published, there is also no complete clarity about the expected effective date of the new rules – according to general logic, the changes should not be applied before 2024, according to the beginning of the new tax period (for profit tax and personal income tax) from which all tax innovations under the Russian Tax Code usually apply.

At the same time, the press release of the above initiative states that in case the proposal of the Ministry of Foreign Affairs and the Ministry of Finance of Russia is supported, the application of reduced withholding tax rates (tax exemptions) in respect of income covered by double taxation agreements will be suspended from the date of issuance of the relevant Decree.

We are following the development of events.

For the purpose of applying the current agreements – we recommend reading the letter of the Federal Tax Service dated March 9th, 2023 No. SY-4-13/2691@ “On Taxation of Foreign Organisations Receiving Income from Sources in the Russian Federation, and the Procedure for Applying the Provisions of DTAAs”.

We remind you that, as before, as before, in order to use the preferences provided by the current DTAA, you must obtain in advance from the counterparty the necessary package of documents (usually a  certificate of residency  and proof of right to income).

We will be happy to answer your questions!

Since Russia has been closely interacting with China in various fields over the past decades, many Russian representatives of small and medium-sized businesses are beginning to actively cooperate with Chinese partners. Russian businessmen who are not aware of the peculiarities of the Chinese mentality may encounter serious difficulties when signing contracts with Asian partners.

In this review we would like to draw your attention to the important features of concluding contracts between partners from Russia and China, which will help you to avoid a number of mistakes:

1. The only official language in China is Chinese. Thus, it is advisable to sign the text of the contract not in Russian and English, but in Russian and Chinese (the official languages of Russia and China).

If the Chinese partners do not insist on this, this can only mean that they do not intend to register the contract with the Chinese government authorities.

2. The name of a Chinese company registered in China can only be in Chinese, and the English name of the company is not legally valid to the full extent Chinese, as well as Russian, courts do not consider claims if the documents do not indicate the real (registered) company names.

3. It is necessary to check the registration of the Chinese company by requesting from the partner a certificate of registration of a legal entity, and also make sure that its representative has the appropriate authority.

It should be kept in mind that only the legal representative of the company has the right to sign a contract without a power of attorney. This may not always be the CEO of the company. The legal representative must be indicated in the certificate of registration of a legal entity.

If someone else signs the contract on the Chinese side, they are required to present a power of attorney. Therefore, when concluding a contract with a Chinese company, it is worth asking the future partner for a power of attorney confirming the authority of the signatory.

4. It is important to check the registration (legal status) of the Chinese seal.

Each Chinese company generally has one main seal, which is strictly controlled. However, to support various types of activities, companies often produce additional types of seals, including “contract seals.” Having produced such seals, Chinese companies often do not amend the registration documents accordingly or otherwise register their legal status.

In this regard, it is recommended to check whether the Chinese partner’s seal is registered by requesting a certificate from the State Commerce and Industry Administration of the government at the place of registration of the Chinese company. It is quite easy to obtain such a certificate, and falsifying it is dangerous for a Chinese partner.

5. To protect yourself, it is recommended to check the company’s website. The site must have a Chinese version, otherwise there is a high chance of encountering scammers. You should check the domain name registration date and ownership.

6. In order to avoid difficulties with the recognition and enforcement of decisions of Russian courts in China, it is recommended to introduce an arbitration clause and include in it one of the well-known institutional arbitration centers in China, for example, the China International Economic and Trade Arbitration Commission (CIETAC), the Beijing Arbitration Commission (BAC), etc.

On the one hand, this will require additional costs for contacting Chinese lawyers or Russian specialists with experience in representing the interests of parties in Chinese arbitration. On the other hand, this will simplify the issue of recognition and enforcement of the decision under the New York Convention of 1958.

If the Chinese partners do not want to resolve the dispute in arbitration due to the high cost of the procedure, then, in order to avoid difficulties with the recognition and execution of decisions of Russian courts in China, it is better to establish a clause for those disputes, for which this is possible, regarding their resolution in a Chinese state court, since Russian courts readily recognize decisions of Chinese courts.

In this review, we have summarized the rules governing the required notifications and reports that must be filed in the Russian Federation if you have (or are acquiring) a share in a foreign organization.

When creating/acquiring a share in a foreign organization: notification

When a share in a foreign organization arises (or changes), regardless of the size of the share, an individual who is a tax resident of the Russian Federation must file a notification of participation in foreign organizations (on the establishment of foreign structures without forming a legal entity).

This notification must be filed no later than three months from the date of the emergence (change in share) of participation in a foreign organization.

Failure by a taxpayer to submit a notification of participation in foreign organizations to the tax authority within the prescribed period or submission of a notification of participation in foreign organizations containing inaccurate information entails a fine of 50,000 rubles for each foreign organization.

What is considered a controlled foreign organization (CFO)?

A controlled foreign company is a legal entity or a structure without the formation of a legal entity, the place of tax residence of which is a jurisdiction other than the Russian Federation, controlled by a legal entity or an individual who is a tax resident of the Russian Federation.

When creating / acquiring a share in a CFC (controlled foreign organization)

When a share in the CFC arises (changes) the individual must submit a notification of controlled foreign companies to the tax authority at the place of registration during the reporting year, but no later than April 30 of the year following the reporting year. The deadlines for sending an annual notification of a CFC to the Federal Tax Service for individuals are set out in Article 25.14 of the Tax Code of the Russian Federation.

The notification form is set out in legislation.

In addition to the notification form itself, it is necessary to collect a package of documents on the controlled foreign company and its participant. Typically, this list includes:

1. Certificate of registration of the organization and an extract from the trade register;

2. Certificate of the state – tax registrar;

3. Financial statements of the CFC, prepared in accordance with the personal law of such a company for the financial year. In case of its absence, it is necessary to submit other documents that confirm the profit or loss of the company;

4. Auditor’s report on the financial statements of the CFC, if the audit is mandatory or the company voluntarily conducted an audit;

5. Copy of the passport of the CFC participant;

6. Notarized power of attorney in case of notification by a third party.

If the original documents are attached not in Russian, a notarized translation is required.

Calculation of the tax base for the CFC

The minimum amount of CFC profit that can be used as a taxable base is 10 million rubles, CFC profit below this amount is not taxed in the Russian Federation and is not subject to declaration.

If the profit of a controlled foreign company exceeds 10 million rubles, it is used as a tax base for calculating income tax and is filled in the 3-NDFL declaration (Sheet B) for individuals. Information on each CFC is submitted separately, the data is not summarized. Declarations must be submitted to the Federal Tax Service as part of the normal procedure for filing declarations along with other sheets of the document.

Particular attention should be paid to determining the date of receipt of profit from the CFC by the controlling person – December 31 of the year following the tax year of the foreign organization. The dates of receipt of profit and reporting on it are clearly presented in the diagram:

Cross-border transfer of personal data: new rules

On 30.12.2022 an extract from the minutes of the meeting of the sub-commission of the Government Commission for Control of Foreign Investment in the Russian Federation (hereinafter the “Sub-Commission”) No. 118/1 dated 22.12.2022 was published on the official website of the Russian Ministry of Finance.

According to the information contained in this extract, the Sub-Commission sets out the conditions that must be complied with in order to obtain permission to carry out transactions involving company shares. In particular, these include:

• independent assessment of the market value of the assets;
• sale of assets at a discount of at least 50% of the market value of the relevant assets as indicated in the asset assessment report;
• establishment of key performance indicators for the new owners;
• availability of an instalment payment for 1-2 years and/or an obligation to make a voluntary contribution to the federal budget of at least 10% of the amount of the transaction.

Please be reminded that our previously published regulations on transactions with limited liability company shares can be found in detail here.

In addition, the Sub-Commission lists conditions that will be taken into account when deciding on issuing permissions to organisations for payment of dividends to foreign participants in cases stipulated by Presidential Decrees No. 95 dated 05.03.2022 and No. 254 dated 04.05.2022, when the payment exceeds 10 million roubles per calendar month or the equivalent of this amount in foreign currency at the official exchange rate of the Central Bank of Russia set on the 1st day of each month. These include, in particular:

Dear colleagues,

We would like to wish you a happy New Year!
May the coming year be peaceful, prosperous and successful!
Thank you for your trust and collaboration.

With deep respect,
Your team of swilar

Earlier we brought to your attention the new requirement for mandatory approval by the Government Commission for transactions with shares in limited liability companies (OOO) (introduced by Presidential Decree No. 618 of 08.09.2022). We would like to remind you that this refers to transactions with OOO shares involving entities from foreign countries that commit unfriendly acts against the Russian Federation.

In the following overview, we have compiled for you information on the procedure for obtaining such a permit (approved by Government Resolution No. 1651 of 19.09.2022).

On 13.10.2022 the Ministry of Finance published official clarifications (letter No. 05-06-14RM/99138 of 13.10.2022) specifying types of transactions covered by the new regulations. According to these clarifications, the following types of transactions will require approval by the Government Commission:

• transfer of a part in the share capital of an OOO to one or more participants of the OOO or to a third party;
• acquisition by an OOO of a share in its share capital;
• withdrawal of a participant from an OOO by disposing of their share in the OOO or by claiming the acquisition of a share in the OOO;
• transfer of a share in an OOO to an investment fund;
• agreement with a commercial organization or individual entrepreneur on delegation of authority of the sole executive body of an OOO;
• agreement on exercising participants’ rights in an OOO;
• contract of convertible loan;
• OOO share pledge agreement;
• OOO share pledge management agreement;
• voluntary reorganization of an OOO in accordance with the legislation of the Russian Federation;
• an ordinary partnership agreement entered into by an OOO;
• agreement of trust management, agency and (or) other agreement on exercise of rights certified by OOO shares;
• other transactions.

We remind that the special procedure established by Presidential Decree No. 618 of 08.09.2022 does not apply to organisations in the financial and fuel and energy sectors.

The Russian Ministry of Finance also clarified that the approval of the Government Commission is not required for transactions executed against the will of an entity as part of the execution of a legally enforceable court decision.

At the same time we would like to draw your attention to the Presidential Decree No. 737 of 15.10.2022 which imposes additional restrictions on residents making payments in cases (1) of reduction of share capital of an OOO, (2) liquidation of an OOO and (3) bankruptcy procedures applied to an OOO.

Under the new regulations, making payments in these cases to entities from foreign countries committing unfriendly acts against the Russian Federation in an amount exceeding RUB 10 million per calendar month will require the use of a C-type special account (for a detailed overview of the use of C-type special accounts, see link) or obtain authorisation from the Russian Ministry of Finance.