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.

An increasing number of Russian banks are now suspending the opening of accounts for new customers, restricting the opening of new foreign currency accounts for existing customers, introducing commissions for keeping foreign currency in accounts, and imposing limits on foreign currency transfers or ceasing to make such transfers abroad altogether.

We continuously monitor the situation with local banks, keep track of updates on the conditions with foreign currency international transfers with European and CIS countries, and maintain a consolidated analytical register, including for banks in Russia that are in the TOP-100 of current Russian financial sector rankings.

We also provide additional comprehensive account opening support to our clients, namely:

• full communication with the bank; 
• clarification of the requirements for the package of documents to be submitted for account opening;
• preparation and verification of the set of documents required for account opening/provision of information on the documents required for account opening;
• completion of all required applications and forms; 
• control over the opening of bank accounts; 
• preparation of the documents for granting access to the online bank and connecting authorized signatories and non-signatories to the online bank.

Should you have any difficulties with international payments, account opening or other related issues, we will be happy to provide you with more detailed information upon request and offer our support.

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:

Previously, we drew your attention to the need to prepare for the transition to the Single Tax Account (STA) and the Single Tax Payment (STP) – we would like to remind you that the new regulations will become compulsory for all taxpayers from 01.01.2023. More information is available here.

However, these are not all the changes that await taxpayers from 2023. 

From 01.01.2023, Federal Law 269 of 05.07.2023 will unite the Russian Pension Fund and the Social Insurance Fund into a new fund – the Russian Pension and Social Insurance Fund. The abbreviated name of the Fund will be the Social Fund of Russia (SFR).

The consolidation of the funds will result in numerous changes to the way insurance contributions are calculated and to the procedure for submitting reports. For your convenience, we have prepared a summary of how to deal with the changes and prepare for them.

New: unified tariff on contributions

One of the changes from 01.01.2023 will be a unified insurance contribution tariff applicable to mandatory pension insurance contributions, mandatory social insurance contributions for temporary incapacity for work and in connection with maternity and mandatory health insurance contributions.

The single tariff for these categories of contributions will be set in the following amount (clause 3 of Article 425 of the Tax Code introduced by Federal Law dated 14.07.2022 N 239-FZ)

1. within the established unified maximum amount of the base for calculating insurance contributions – 30 percent;

2. above the established unified maximum amount of the base for the calculation of insurance contributions – 15.1 percent.

Insurers who now apply reduced tariffs will retain this right. For example, SMEs on payments above the minimum wage are subject to a 15% tariff (for more information, see the client information on this topic).

New: unified maximum insurance contribution base

From 01.01.2023, there will be a unified maximum insurance contribution base (clause 5.1 of Article 421 of the Tax Code).

The unified maximum insurance contribution base is the amount of payments for a year to a particular individual on which insurance contributions are paid at standard tariffs. From 2023 it will be the same for all types of contributions.

The unified maximum insurance contribution base in 2023 will be equal to the 2022 base for pension contributions indexed to the salary growth which will amount to 1,917,000 roubles (RF Government Decree No.2143 dated 25.11.2022.) Thereafter, the base will be indexed annually.

New: insurance contribution tariffs for employment contracts and civil law employment contracts will be the same

From 01.01.2023., payments and other remuneration under employment and civil law employment contracts with foreigners and stateless persons temporarily staying in Russia who are not recognized as insured will be excluded from the list of payments exempt from contributions.

The previous exemption from mandatory social insurance contributions for temporary incapacity for work and in connection with payments under civil law employment contracts will be abolished. 

Thus, the tariffs of insurance contributions for employment and civil law employment contracts will not differ from 01.01.2023.

New: unified information form to be submitted to the new fund (SFR) and a new report to the Federal Tax Service

In order to keep personal accounting records from 01.01.2023, insurers must submit a unified information form (“ЕФС-1”) to the new fund (SFR).

The new form will replace the previously submitted reports (“4-ФСС“, “СЗВ-СТАЖ“, “СЗВ-ТД” and “ДСВ-3”), and will be provided to the territorial offices of the united SFR for periods from 01.01.2023. 

The deadline for submission is the same – the 25th of the month.

The report is made up of sections that have different intervals for submitting data to the new fund (SFR):

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.

On 26 March 2022 the Law No. 67-FZ was adopted, later clarifications of the Ministry of Finance were published – in the Letter No. 03-12-12/1/37761 of 26 April 2022 the Ministry of Finance informed that fr om 1 January 2022 the threshold for recognizing transactions as controlled was raised to 120 million rubles instead of the previous 60 million rubles valid for transactions in 2021. Similar clarifications were also issued later by the Federal Tax Service (No. ШЮ-4-13/6548@ of 27 May 2022).

The Tax Service also previously published a letter (No. ШЮ-4-13/2724@ of 5 March 2022) on the application of discounted prices that could result in transaction losses if certain legal entities are subject to sanctions. Such circumstances should be taken into account by the tax authorities when considering transactions and price levels.

Another novelty is the non-application of the 40% penalty on unpaid tax (at least RUB 30,000) for transactions in 2022-2023, regardless of the date of the contract (Russian Tax Code, Article 129.3). However, transfer documentation defining the price corridor and level must be available. Please note that the cancellation of penalties does not remove the risk of additional tax charges from the tax authorities.

In addition to updating the lim it and removing the penalty mentioned above, a number of other changes have been spelled out in Law 67-FZ of 26.03.2022.

With the new amendments, the so-called “safe margin” for interest rates in intragroup loan agreements will change between 2022 and 2023. If the interest is within this range (not above the maximum and not below the minimum), the company may recognise it as an expense in full for tax purposes. If the interest rate is outside this range, there is a risk of the expense not being recognised.

Based on the example of the euro (Euro short-term rate), the following interest rate ceilings for liabilities denominated in euro will be established as of 1 January 2022 (for USD or any other currency other than RUB, the values will be equivalent, applying the rates corresponding to the currency, such as SOFR for USD, SHIBOR for CNY, SONIA for GPB):

Minimum: STR rate in EUR +0% (previously stated as + 4% in the Tax Code);

Maximum: STR rate in euros +7% (+5% for SARON rates and contracts in Swiss francs, TONAR and Japanese yen).

For ruble-denominated liabilities, a range of 0 to 180% of the Bank of Russia key rate (previously 75 to 125%) has been adopted.

The interest rate ceilings for debt instruments have also been modified: for loans, overdrafts and intercompany receivables denominated in a foreign currency from 1 January 2022 to 31 December 2023, the maximum rate will be that of 01.02.2022 (86.5032 for euro); interest on liabilities during these two years will be determined at the rate on the last day of the reporting period and must not be higher than the rate on 01.02.2022.

Changes are also made to the calculation of the thin capitalisation rule – the value of liabilities (existing before 01.03.2022) in foreign currency for the purposes of controlled debt is determined at the regulatory rate on the last reporting day, and the rate cannot be higher than the rate set by the Central Bank as of 01.01.2022.

We would also like to point out that as a result of the suspension of tax information exchange between Russia and certain countries, Russian tax residents who are members of an international group of companies will have to send a “Country Report” to the tax authorities upon request. It is currently known that the UK (from 17.03.2022), Germany (from 01.04.2022), USA (from 05.04.2022) have temporarily stopped the exchange of tax information with the Russian Federation.

We would like to draw your attention to the recent changes in tax legislation introducing new rules for charging and paying VAT.

Currently, and until September 30, 2022, there is a procedure for paying VAT on electronic services provided by foreign suppliers, in which the foreign supplier must independently register with the Federal Tax Service of the Russian Federation, obtain a TIN, submit a VAT return and pay it. From 01.10.2022 the Federal Tax Service and the Ministry of Finance presented the former (used until 2019) procedure for the payment of VAT from electronic services. In a letter dated 08.08.2022, the Federal Tax Service also explained the changes to be introduced.

This means that VAT is paid and recovered by the Russian organization receiving the services as a tax agent. At the same time, if a registered foreign provider of electronic services also provides non-electronic services, there is no tax agent liability for Russian buyers. However, the buyer has the right to pay VAT on such services himself (Letter of the Federal Tax Service of the Russian Federation dated 24.04.2019 №СД-4-3/7937). In practice, it is easier and more convenient for a Russian organization buying any services from a foreign supplier to transfer VAT to the Russian budget as a tax agent.

For all payments made to a foreign counterparty before 1 October 2022 under the old rules, the buyer is entitled to reimburse the VAT paid to the foreign seller.

However, these changes do not exempt foreign service providers from having to register with the FTS. The procedure for this action has also undergone changes; now a foreign organization can get registered by opening a bank account.

The principle is set out in Articles 83-84 of the Tax Code as amended by Federal Law No. 120-FZ of 1 May 2022.

The application for registration is completed, certified with an Enhanced Qualified Electronic Signature by an authorized person of the Russian bank and sent to the Federal Tax Service. Once the foreign organization has been registered, the certificate of registration is also sent electronically to the bank.

Banks have been obliged to check the registration status of a foreign client in the Open and Publicly Available Information of the Unified State Register of Foreign Entities and, if no information is available in the register, to send an application for registration.

As a reminder, tax registration and tax payment are different processes. As the regulators have not yet provided any other explanations, we recommend to maintain a conservative stance and continue to file zero VAT returns for foreign entities registered with the FTS, even considering the transition to the tax payment procedure via a tax agent.

We will be happy to answer your questions!