Self-recognition by a foreign organization as a tax resident of the Russian Federation

The long-awaited application form for self-declaration by a foreign company as tax resident of Russia has recently been approved.

In accordance with Article 246.2 of the Tax Code, which came into effect on 1 January 2015, a foreign company is considered to be a Russian tax resident for the purposes of Chapter 25 of the Tax Code concerning the calculation and payment of profits tax in Russia if the place of management of the company is Russia, unless otherwise provided in an international double taxation treaty.

Russian law allows a foreign company to declare itself a tax resident of Russia. This is possible where a foreign company carries on activities in Russia through a subdivision. The self-declaration procedure involves notifying the local tax authority of the company’s Russian subdivision (or of a particular subdivision chosen by the taxpayer if there is more than one) using the standard application form approved by the Federal Tax Service (FTS).

At the option of the company concerned, the status of tax resident of Russia may be acquired either from 1 January of the calendar year in which the Application is submitted or from the date of submission of the Application to the tax authority. The date from which the status of tax resident of Russia is acquired (renounced) has to be stated in the Application. Where an Application is submitted to the tax authorities between 1 and 31 of December of a calendar year, the first profits tax period will be the period from the date of submission of the Application through the end of the calendar year following the year in which the Application was submitted.

Practical concerns

Moscow Interdistrict Tax Inspectorate, which is responsible for registering and administering foreign companies located or operating in Moscow, has yet to issue any guidance or comments on the subject of self-declaration as a tax resident of Russia.

Moreover, it is also unclear at present how declaring one’s self a tax resident of Russia would affect a foreign company’s obligations with respect to other taxes, including value-added tax and assets tax. There is no guidance on the issue of the carryover of account balances or whether accounts need to be maintained in accordance with Russian standards. Another important issue is the basis for self-declaration as a tax resident of Russia in the context of prior tax periods during which a foreign company did not acknowledge the existence of a permanent establishment in Russia.

Businesses should work with their local tax professionals:

• To assess whether it is necessary/advisable for a foreign company to declare itself a tax resident of Russia, including from the point of view of controlled foreign company rules.
• For assistance in organizing the process of the self-declaration of a foreign company as a tax resident of Russia, including relevant communication with the tax authorities, and assistance in resolving practical issues.
• For tax advice on issues associated with the self-declaration of a foreign company as a tax resident of Russia.
• For accounting and reporting in compliance with Russian law.

Endnotes

1. Ernst and Young: “Russia approves application form for self-declaration by a foreign company as tax resident of Russia” , 2016, <http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert–Russia-approves-application-form-for-self-declaration-by-a-foreign-company-as-tax-resident-of-Russia>;
2. Registered with the Ministry of Justice on 2 February 2016;
3. Taking into account amendments proposed by Draft Law No. 953192-6 of 29 January 2016 (the draft law has been submitted for consideration by the Federation Council);
4. Letter No. GD-4-37/5792 of the Federal Tax Service of 8 April 2015.