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6.1 Tax System in the Russian Federation attention

6.6.1 Description of the Tax System

The legislation of the Russian Federation on taxes and levies comprises the Tax Code and Federal Laws adopted in accordance with it. The Tax Code establishes general taxation principles in the Russian Federation including:

  • types of taxes and levies in the Russian Federation;
  • grounds on which obligations to pay taxes and levies are based (amended, terminated) and the procedure by which these obligations are to be fulfilled;
  • rights and obligations of taxpayers, tax authorities and other participants in relationships regulated by tax and levies legislation;
  • forms and methods of tax control;
  • responsibility for tax violations; and
  • procedure for appealing against the actions (or inactions) of the tax authorities and their officers.

The legislative authorities of St. Petersburg may introduce only taxes and levies which are stipulated by the Code. When establishing taxes, the legislative authorities of St. Petersburg may determine the following elements of taxation:

  • tax allowances;
  • the tax rate, within limits established by the Tax Code;
  • procedure and deadlines for paying a tax; and
  • reporting format for a given tax.

6.1.2 Tax Authorities

The tax authorities of the Russian Federation are the Ministry of Taxes and Levies of the Russian Federation and its territorial administrations in the Russian Federation. The tax authorities have the right to:

  • require taxpayers to submit documents that support the calculation and payment of taxes;
  • carry out tax reviews in the procedure established by the Tax Code;
  • withdraw documents testifying that tax violations have been committed;
  • summon taxpayers to the offices of the tax authorities to provide explanations in connection with their tax payments;
  • suspend transactions in individuals' bank accounts or seize taxpayers' property;
  • inspect any warehouses, production, commercial or other premises and areas used by taxpayers for profit-making purposes, take stock of taxpayers' property;
  • summon, as witnesses, people who may be aware of circumstances that may be of significance to tax control;
  • file claims with courts of general jurisdiction and arbitration courts regarding the imposition of penalties for violating legislation on taxes and levies, including those imposed on parent (subsidiary or associated) companies in the event that revenues from subsidiary or associated (parent) companies are posted to their accounts; and
  • monitor large expenditure of individuals with regard to its conformity with their income.

Tax authorities are responsible for losses caused to taxpayers as a result of illegal actions (decisions) taken or inactions not taken by them or by their officers.

6.1.3 Registration of Organisation with theTax Authorities

All entities must register with the tax authorities at the place of the entity's location, at the place of location of their branches and representative offices and at the place of location of their immovable property and transport vehicles that are subject to taxation.

A representative office of a foreign legal entity located in St. Petersburg must register with both the St. Petersburg tax authorities and the social insurance funds.

6.1.4 Permanent Establishment of a Foreign Legal Entity

The concept of 'permanent establishment' in the tax legislation of the Russian Federation is applied only to determine the tax status of a foreign legal entity This concept has no legal implications. It is necessary to distinguish between a permanent establishment of a foreign legal entity for tax purposes and a representative office as an independent subdivision of a foreign legal entity in the Russian Federation.

A foreign legal entity is required to file a tax declaration with the St. Petersburg and Leningrad Oblast Department of the Ministry of Taxes and Levies of the Russian Federation by 15 April following the reporting year.

Foreign legal entities that perform their activities in the Russian Federation through a permanent establishment must accrue and pay taxes themselves.

A permanent establishment of a foreign legal entity in Russia and its head office abroad are a single legal entity, therefore, cash transferred from the head office to the permanent establishment is not subject to any tax.

6.2 Taxes in the Russian Federation and St. Petersburg

The Tax Code of the Russian Federation establishes the following taxes and levies:

  • federal taxes and levies;
  • taxes and levies of the subjects of the Russian Federation (hereinafter referred to as «regional taxes and levies»); and
  • local taxes and levies.

Taxes are paid in Russian roubles only.

6.2.1 Federal Taxes

Federal taxes and levies are those established by legislative acts of the Russian Federation and collected on its entire territory.

The following federal taxes are currently levied;

a) income tax (profit tax) of entities;

b) value-added tax;

c) excises on certain types and groups of goods;

d) tax on stock and commodity exchange operations;

e) customs duty;

f) fees for reproducing mineral resources;

g) fees for using natural resources;

h) individual income tax;

i) taxes remitted to the road funds;

j) state duty;

k) tax on inherited and donated property;

l) levy for using the names «Russia» or «Russian Federation» and words and word combinations formed on the basis of these names;

m) tax on the purchase of foreign currency banknotes and payment documents expressed in foreign currency;

n) gambling tax

o) payment for using water sources;

p) charges for issuing a licence and the right to produce and sell ethyl alcohol, and products containing alcohol and spirits; and

q) tax on certain means of transportation.

6.2.2 Regional and Local Taxes Levied in St. Petersburg

Regional taxes and levies are those established by the Tax Code and due to be paid on the territories of the appropriate subjects of the Russian Federation.

Local taxes and levies are those introduced by the Tax Code and due to be paid on the territories of the appropriate municipal formations. Regional and local taxes and levies in St. Petersburg are established and enter into force by the laws of St. Petersburg.

The following regional and local taxes and levies are currently levied in St. Petersburg:

a) tax on property of entities;

b) sales tax;

c) tax on property of individuals;

d) land tax; and

e) advertising tax.

Taxes, Page 2

6.2.3 Profit Tax

Profit tax is levied on an entity's gross profit reduced (increased) in accordance with the currently accepted procedure for its computation. Expenses deducted from the taxable base must comply with a special lisi adopted by the Government of the Russian Federation, If the expenses do not comply with the list, they may not be deducted from the entity's taxable profit.

Some expenses are only deductible for tax purposes within defined limits or standards (e.g. advertising expenses, training expenses, entertainment expenses, etc.). If an entity exceeds the limits established for these types of expenses, they also may not be deducted from the entity's taxable profit.

The current profit tax rate for all taxpayers in St. Petersburg (including foreign legal entities performing their activities in St. Petersburg through representative offices) is 30%. Pursuant to legislation, a reduction in the income tax rate will come into effect in 2001, namely rates of 29% in 2001 and 2002, and 28% in 2003.

A higher tax rate of 33°4 is applied to income generated by stock exchanges, brokerages, banks and insurance companies and also through agency activities. No further reduction to the rate is stipulated by legislation for these categories of businesses.

Profit may be distributed in the form of dividends among shareholders after profit tax has been paid.

6.2.4 Value-Added Tax

Value-added tax (VAT) is an indirect tax. VAT is levied on turnovers from the sale of goods, work and services as well as on imported goods brought into the Russian Federation. VAT subject to be paid to the budget is considered to be the difference between tax amounts received from customers and tax amounts paid to suppliers and/or customs authorities.

VAT is applied at a rate of 20% on most goods and services. Certain items, such as food and goods for children, are subject to a rate of only 10%. Goods imported into Russia are taxed for VAT at the time customs duties are paid.

Fixed assets (other than excisable goods) imported by a foreign investor as a contribution to the charter capital of a legal entity at the time it is being created are not subject to import VAT.

Foreign legal entities which carry out business activities in the Russian Federation should pay VAT. If the foreign legal entity is not registered with the tax authorities, the responsibility for paying VAT is assumed by the Russian legal entity To do this, the Russian legal entity must withhold the VAT amount when making a payment to the foreign legal entity and then remit the VAT to the budget of the Russian Federation.

6.2.5 Excises

The following goods are excisable:

alcohol, spirits, beer, tobacco goods, jewellery oil, gas condensate, natural gas, petrol, vehicles with an operating engine capacity of 2500 cubic cm. When excisable goods are brought into the Russian Federation, the excise is paid to the customs authorities at the same time the customs payments are made.

An excise rate may be set either as a percentage or as a fixed amount in relation to a set volume of excisable goods being sold. For example, the excise rate for jewellery amounts to 5% of its cost, for petrol, from 455 to 585 roubles per tonne. The excise rate for beer is equal to 90 kopecks for one litre, ranges from 19 to 60 roubles per 1000 units for filtered cigarettes, and is seven roubles per 1000 units for non-filtered cigarettes.

For companies producing excisable goods from tolled raw materials, the maximum selling prices of similar goods that they produce themselves are used to determine the taxable base. If the company does not produce its own similar goods, market prices used in the particular region for similar goods should be used.

6.2.6 Tax on Stock and Commodity Exchange Operations

Tax on stock and commodity exchange operations is levied on the amount of par value of securities announced by the issuer.

The tax amounts to 0.8% of the par value of issued securities. The taxpayer calculates the tax on his own on the basis of the par value of the issued securities and the appropriate tax rate. The taxpayer remits tax to the federal budget at the same time he submits documents for the registration of the issue. Should the registration of the issue be denied, the tax is not returned.

6.2.7 Customs Duties

Customs duties (customs tariffs) are levied on goods that cross the customs border of the Russian Federation. More detailed information about customs duties is presented in section 11.2 of the guide.

6.2.8 Fees for Reproducing Mineral Resources

Fees for reproducing mineral resources are established as a percentage of the cost of the primary product produced from the mineral resources and sold.

6.2.9 Fees for Using Natural Resources

Fees for using natural resources are established by taking into account the type of natural resource, the amount and quality of its supply as well as the natural, geographical, mining and economic conditions with regard to its handling and development and the level of risk involved.

6.2.10 Individual Income Tax

Individuals who both have and do not have permanent residency in the Russian Federation are required to pay income tax. Individuals residing in the Russian Federation for a period of no less than 183 days in a calendar year are considered to have permanent residency

Individual income tax is levied on the aggregate annual income earned in a calendar year:

  • for individuals with permanent residency in the Russian Federation - from sources both in the Russian Federation and abroad; and
  • for individuals without permanent residency in the Russian Federation - only from sources in the Russian Federation.

In 2000, if an individual's aggregate annual income exceeds 150,000 roubles, the maximum tax rate is applied. In this case, the individual income tax is calculated as follows: 26,000 roubles plus 30% of the amount exceeding 150,000 roubles.

At the present time, a draft law has been prepared to change the tax rates. This draft law is intended to establish a single tax rate of 13% regardless of the size of income.

Foreign citizens residing in Russia in excess of 183 days in a calendar year are required to file tax returns with the tax authorities regarding estimated and actual income earned.

Within a month of arriving in the Russian Federation, a foreign individual is required to file a preliminary tax return on his/her estimated annual earnings. Then, at the end of the year, the foreign individual must file a final tax return on his/her actual annual earnings. If the foreign citizen or individual without citizenship intends to stay in the Russian Federation for more than 183 days in the following calendar year, together with the final tax return, he/she is required to file a preliminary tax return on his/her estimated annual income for the following calendar year.

6.2.11 Taxes Remitted to the Road Funds

Road users tax

The tax is established at the rate of:

  • 2.5% of revenue from selling goods (work, services); and
  • 2.5% of the difference between the selling and purchase prices of goods sold as a result of commercial activities.

Vehicle owners tax

Rates are established depending on the horse power of individual vehicles. In St. Petersburg, the minimum rate is 2.4 roubles per horse power and the maximum rate is 12 roubles per horse power. In 2001, this rate will range from 2.4 roubles to 24 roubles.

Vehicle acquisition tax

Vehicle acquisition tax for legal entities in St. Petersburg is set at 2% of a vehicle's purchase price (excluding VAT and excise tax).

Tax on selling combustive and lubricating materials

Tax on the sale of combustive and lubricating materials (petrol, diesel, lubricants, compressed and liquefied gasses) is paid by entities who sell the above-mentioned materials at a rate of 25% of the amount of sale.

Taxes, Page 3

6.2.12 State Duty

State duty refers to fees charged by authorised authorities or officials for carrying out legal actions or issuing documents.

State duties are charged:

  • on claims filed with courts;
  • for notary actions;
  • for state registration of acts of civil status;
  • for documents issued by courts as well as by state authorities and agencies as stipulated by the legislation of the Russian Federation;
  • for reviewing and issuing documents associated with obtaining or giving up one's citizenship in the Russian Federation; and
  • for performing other legal actions established by legislation.

6.2.13 Taxes Inherited or Donated Property

The tax is paid by individuals who inherit property or receive it as a donation. The tax rate is set at 5% to 40 % of the cost of property that is inherited or donated depending on proximity of kinship and actual cost of this property

6.2.14 Levy for Using the Names «RUSSIA» or «RUSSIAN FEDERATION» and Words and Word Combinations Formed on the Basis of These Names

The levy is paid by entities who use this nomenclature or words and word combinations derived from this nomenclature in their names.

The levy is paid at the following rates:

  • for entities performing business activities (except supply and commercial companies) - 0.5% of the cost of sold goods (work, services);
  • for supply and commercial companies -0.05% of the turnover; and and organisations - 100 minimum statutory monthly wages as established by legislation (as at 1 June 2000, this minimum wage is equal to 83.49 roubles, therefore, the levy amounts to 8,349 roubles) and paid annually.

6.2.15 Tax on the Purchase of Foreign Currency Banknotes and Payment Documents Expressed in Foreign Currency

The tax is levied on rouble amounts paid when performing the following transactions:

  • purchasing foreign cash for cash in roubles;
  • purchasing payment documents in foreign currency for cash in roubles;
  • paying out cash in foreign currency from currency bank accounts to individuals, on the condition that this cash was deposited into currency accounts from rouble accounts;
  • purchasing foreign banknotes unsuitable for circulation due to defects from individuals; and
  • paying out cash in foreign currency from rouble card accounts to plastic card holders.

The tax rate is equal to 1% of the taxable base.

6.2.16 Gambling Tax

The tax is levied on the following objects:

  • gambling tables - the minimum annual tax rate is equal to 100 minimum statutory monthly wages (i.e. as at 1 June 2000, 8,349 roubles);
  • slot machines - the minimum annual tax rate is equal to 45 minimum statutory monthly wages (i.e. 3,757 roubles);
  • betting cash windows- the minimum annual tax rate is equal to 1,200 minimum statutory monthly wages (i.e. 100,188 roubles); and for other enterprises, companies
  • cash windows in bookmakers' offices - the minimum annual tax rate is equal to 600 minimum statutory monthly wages (i.e. 50,094 roubles).

6.2.17 Payment for Using Water Sources

A charge is levied on the use of water sources when structures, technical equipment or devices are applied in order to:

  • obtain water from water sources;
  • satisfy hydroelectric water requirements;
  • use defined areas of water sources; and
  • dispose of sewage into water sources,

The rates of payment are established in roubles per 1,000 cubic metres of water taken from the surface of the water source, per 1,000 kilowatt-hours of processed electricity, per one cubic kilometre of the defined area of the water source used and per 1,000 cubic metres of sewage.

6.2.18 Charges for Issuing a License and the Right to Produce and Sell Ethyl Alchohol, and Products Containing Alchohol and Spirits

The charge is levied for the issue of a license granting the right to produce, pour, store and sell ethyl alcohol and alcoholic products, including spirit solutions, the right to purchase, including import, the right to export ethyl alcohol and alcoholic products. The charge ranges from 100 to 15,000 minimum statutory monthly wages.

6.2.19 Tax on Certain Means of Transportation

Cars with an operating engine capacity of more than 2500 cm3 are subject to this tax. The tax is established at an amount ranging from two to three roubles per cm3 of engine capacity. The tax is paid once per year.

6.2.20 Tax on Property of Legal Entities

Fixed assets, intangible assets, low-value and short-lived items, stock and costs included on a taxpayer's balance sheet are subject to property tax (fixed assets, intangible assets, low-value and short-lived items are accounted for at their net book value for taxation purposes.) The tax rate in St. Petersburg amounts to 2% of the average annual value of property. Payments are made on a quarterly basis.

6.2.21 Sales Tax

Sales tax is levied on the cost of goods (work, services) excluding VAT sold either retail or wholesale for petty cash. In St. Petersburg, the sales tax rate is established at Ó/î.

6.2.22 Individual Property Tax

Tax is levied on residential houses, apartments, summer cottages, garages, other buildings, premises and constructions as well as motor boats, helicopters, air planes and other transport vehicles owned by individuals. Tax is not levied on cars, motorcycles and other self-propelled vehicles and pneumatic vehicles.

Tax on buildings, premises and constructions is paid annually at a rate established by legislative authorities of the subjects of the Russian Federation in an amount from 0.1% to 2% of their book value.

Tax on transport vehicles is charged depending on the engine capacity at a rate from 3% to 10% of one minimum statutory monthly wage per one horse power.

6.2.23 Land Tax

The land tax rate in St. Petersburg ranges from one to 25 roubles per square meter per year depending on the town-planning value of the area.

6.2.24 Advertising Tax

The tax rate is 5% of a Company's expenses for advertising services rendered (excluding VAT). It is paid on a quarterly basis.

6.3 Social Fund Contributions

The following social fund contributions must be paid by employers from payroll accrued:

  • Pension fund - 28.0%
  • Social Insurance Fund - 5.4%
  • Medical Insurance Fund - 3.6%
  • Employment fund - 1.5%
Total: 38.5%

In addition, a 1% contribution to the Pension Fund is withheld from the employee's salary. As of 2000, companies are also obliged to contribute employment accident insurance payments to the Social Fund. The insurance rates depend on the industrial economy category and on the degree of professional risk involved.

Presently legislative authorities are considering the possibility of establishing a single social tax which would replace all the existing mandatory payments to the various funds.

6.4 Withholding Tax

Income paid by a Russian company to a foreign legal entity that does not engage in activities in Russia through a permanent establishment is subject to withholding tax. The withholding tax rate depends on the nature of the income earned. Income generated from freight is taxed at a rate of 6%, dividends and interest at 15% and other types of income are taxed at a rate of 20%

The tax is withheld in the currency of the payment every time a payment is made. Withholding tax may not have to be paid or may be reduced in accordance with the conditions of international double tax treaties concluded between the Russian Federation and other countries.

Taxes, Page 4

6.5 Control Over Transaction Prices for Tax Purposes

Tax authorities have the right to control the accuracy of transaction prices in the following instances:

  • Transactions between related parties;
  • Barter transactions;
  • Foreign trade transactions;
  • When prices deviate by more than 20% from those used by the taxpayer for similar goods (work, services) over a short period of time.

Individuals or entities are regarded as related parties for tax purposes if the relationship between them can directly influence the conditions or economic results of their activities or the activities of entities/persons they represent.

If the tax authorities believe that prices applied by related parties deviate from market prices by more than 20%, the tax authorities may require that taxes or fines be additionally accrued as if the results of these transactions had been assessed on the basis of market prices.

6.6 Free Economic Zones

A free economic zone is an area or areas in St. Petersburg or an area administratively accountable to St. Petersburg where certain resident businesses are provided with tax and other concessions.

This law provides for four different types of zones:

  • production zones;
  • public housing zones;
  • trading and exhibition zones; and
  • other types of zones.

Production zones are aimed generally at the production of consumer and industrial goods for international and domestic markets.

Public housing zones are intended for the creation of housing complexes and buildings.

Trading and exhibition zones are intended for the storing, sorting, packing, marking and processing of import-export goods and for organising exhibitions, fairs and wholesale and retail trade.

The zones may be established at the request of both Russian and foreign companies as well as individual entrepreneurs.

A proposal to establish a zone must be submitted to the Committee on the Economy, Industrial Policy and Investment. This Committee has been authorised by the Administration of St. Petersburg to take decisions regarding the organisation of zones, to establish conditions for granting concessions and to resolve other issues related to free economic zones within the juris-

In addition, a 1% contribution to the Pension Fund is withheld from the employee's salary. As of 2000, companies are also obliged to contribute employment accident insurance payments to the Social Fund. The insurance rates depend on the industrial economy category and on the degree of professional risk involved.

Presently legislative authorities are considering the possibility of establishing a single social tax which would replace all the existing mandatory payments to the various funds.

6.4 Withholding Tax

Income paid by a Russian company to a foreign legal entity that does not engage in activities in Russia through a permanent establishment is subject to withholding tax. The withholding tax rate depends on the nature of the income earned. Income generated from freight is taxed at a rate of 6%, dividends and interest at 15% and other types of income are taxed at a rate of 20%

The tax is withheld in the currency of the payment every time a payment is made. Withholding tax may not have to be paid or may be reduced in accordance with the conditions of international double tax treaties concluded between the Russian Federation and other countries.

6.5 Control Over Transaction Prices for Tax Purposes

Tax authorities have the right to control the accuracy of transaction prices in the following instances:

  • Transactions between related parties;
  • Barter transactions;
  • Foreign trade transactions;
  • When prices deviate by more than 20% from those used by the taxpayer for similar goods (work, services) over a short period of time.

Individuals or entities are regarded as related parties for tax purposes if the relationship between them can directly influence the conditions or economic results of their activities or the activities of entities/persons they represent.

If the tax authorities believe that prices applied by related parties deviate from market prices by more than 20%, the tax authorities may require that taxes or fines be additionally accrued as if the results of these transactions had been assessed on the basis of market prices.

6.6 FREE ECONOMIC ZONES

A free economic zone is an area or areas in St. Petersburg or an area administratively accountable to St. Petersburg where certain resident businesses are provided with tax and other concessions.

This law provides for four different types of zones:

  • production zones;
  • public housing zones;
  • trading and exhibition zones; and
  • other types of zones.

Production zones are aimed generally at the production of consumer and industrial goods for international and domestic markets.

Public housing zones are intended for the creation of housing complexes and buildings.

Trading and exhibition zones are intended for the storing, sorting, packing, marking and processing of import-export goods and for organising exhibitions, fairs and wholesale and retail trade.

The zones may be established at the request of both Russian and foreign companies as well as individual entrepreneurs.

A proposal to establish a zone must be submitted to the Committee on the Economy, Industrial Policy and Investment. This Committee has been authorised by the Administration of St. Petersburg to take decisions regarding the organisation of zones, to establish conditions for granting concessions and to resolve other issues related to free economic zones within the juris- diction of the Administration of St. Petersburg.

The decision to establish a zone shall be adopted in the form of a Law of St. Petersburg. This law approves the Regulations of the zone and describes the conditions under which concessions are granted.

The Governor or other person authorised to initiate a law must submit a draft of the law to the Legislative Assembly of St. Petersburg.

6.6.1 The Procedure for Obtaining Zone Resident Status

Zone resident status may be granted both in an already existing zone and when a zone is being established. When a zone is being established, resident status is granted in accordance with a list stipulated by zone Regulations. This is done after a law establishing the zone has been adopted and a contract with the Administration of St. Petersburg on engaging in business activities in the zone has been signed.

In an existing zone, resident status is granted after a candidate's application has been considered and a contract with him has been concluded.

6.6.2 Tax Privileges for Zone Residents

Privileges for zone residents are stated in the Law of St. Petersburg establishing that zone. Thus, tax privileges are established separately for each zone.

As an example, the tax privileges granted to residents of the Polustrovo and Gavan zones are as follows:

Residents of the Polustrovo Zone are exempted from the following taxes and payments from 1996 to 2000:

  • local profit tax;
  • property tax;
  • vehicle acquisition tax; and
  • local payments for land.

Residents of the Polustrovo Zone, from 2001 to 2005, arc granted a 50% reduction with regard to the following taxes and payments:

  • local profit tax;
  • vehicle acquisition tax; and
  • local payments for land.

Residents of the Gavan Zone arc granted 50% tax exemptions on the following taxes for ten years:

  • local profit tax;
  • property tax; and
  • land tax.


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