Daniel Klein’s Legal Line
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I own a company that imports building materials into Russia. We are based in Central Europe, but I’d like to set up a warehouse and sales office in Russia. In order to do this, I understand that I must establish a subsidiary or some sort of limited liability company locally. I do not expect that I will have significant business in the first few years of operations but would like to minimize my tax burden as well as administrative costs and paperwork. Do you have any suggestions for how I might do that?
Dear Construction Materials Importer,
If your revenues do not exceed about $1.1 million US, Russia has a special tax registration format available for individual entrepreneurs and companies with limited shareholder liability, known as the simplified system of taxation (SST). It is tailor-made for small businesses that want to minimize their tax and administrative burdens. When applied to companies, SST status is generally only available for OOOs and ZAOs (in English, LLCs and closed shareholder companies, respectively).
You may want to set up a company in which you are the sole shareholder. Since a parent company is not permitted to be a 100 percent shareholder in a local Russian entity (the maximum cannot exceed 25 percent), the best strategy is probably for you to own all the shares personally.
When the Russian government reformed its tax codes in the early 2000s, it realized the value of low tax rates in promoting investment and encouraging compliance among the business community. As a result, today corporate taxes in Russia are an attractive 24 percent, and income taxes are among the lowest in the world at a flat 13 percent. Employer taxes to be paid on employee wages start out at 26 percent, ratcheting down to 10 percent and eventually to 2 percent once an employee’s yearly income exceeds approximately $25,000.
So while the good news is that taxes are quite low in Russia, the less good news is that bureaucracy makes the running of a company more cumbersome than you might be used to and can exact significant administrative costs. For example, outsourcing accounting and payroll services even for small entities can easily run to several thousands of dollars per month.
Fortunately, the SST regime gives a break to small and medium-sized businesses: Instead of the 24 percent tax rate, theirs is an even lower 15 percent. Furthermore, a revenue-based tax system means that you would be taxed at only 6 percent of your total annual turnover, and the company would not have to account for its expenses, thus limiting the required bookkeeping and attendant costs. It is up to the SST company to choose 15 percent of profits or 6 percent of revenues as a tax basis.
In addition to reduced corporate tax obligations, SSTs are not subject to VAT or property tax, which translates into savings on costs and paperwork as well. Finally, it is also worth mentioning that SST employer taxes are lower, with the highest rate being 14 percent instead of 26 percent.
Daniel Klein is a partner at the law firm of Hellevig, Klein & Usov.