Daniel Klein’s Legal Line
Each month Daniel Klein fields corporate legal questions posed by Passport’s readers. Do you have a Russia-related legal question you’d like Daniel to address? Then tell him about it at firstname.lastname@example.org.
I work for a Western industrial pipe manufacturer that currently imports its products to Russia through an independent agent. We may be interested in establishing our own Russian representative office or Russian subsidiary but are concerned about the potential corporate tax consequences of doing so. At what point does our activity reach the threshold of being taxable?
The Russian corporate tax liability of a foreign entity hinges on whether or not the foreign concern has what known as a “permanent establishment” (PE) in Russia. In other words, do the foreign company’s business activities in Russia consist merely of business promotion, or is the Russian presence a separate revenue-generating operation? Under certain circumstances, a foreign company that sets up a representative office may not be considered to have a PE in Russia.
Put simply, one should ask whether or not the company has a representative in Russia that acts on its behalf and brings in Russian revenue on a continuous basis.
In addressing this question, the distinction between a dependent and independent Russian agent comes into play: Does the agent act like a broker and represent other firms, or does it work exclusively for your company?
In your case, if your local agent represents several pipe manufacturers, then the broker is probably independent, in which case your company does not have a PE.
Another important factor to consider: Does your company keep a local stock of product in a warehouse in Russia? A local stock may be evidence of a PE.
As for your situation, even if your Russian agent is completely independent and doesn’t have a local stock in Russia, it is still recommended that you register some kind of tax presence here. Failure to do so may be seen as tax avoidance and could raise compliance issues, especially if your company is stock listed. Filing a tax presence is a mere formality with the relevant local tax authorities and is not the same as establishing a local company or representative office. And having a tax presence is not necessarily tantamount to owing taxes.
But even if it turns out that you do have a tax liability in Russia, that may not be such bad news. Since Russian corporate taxes are a fixed 24 percent, they may well be lower than the tax rate in the exporting company.
Of course, as every company has its own business model that must be considered individually to determine the specific PE obligations, the above is intended as commentary and not blanket legal advice.
Daniel Klein is a partner at the law firm of Hellevig, Klein & Usov in Moscow and a professor at Pericles Law School.