The concept of the place of sale of goods
To the concept of the place of sale of goods, regulated by Art. 147 of the Tax Code of the Russian Federation, should be resorted to if the goods sold are located outside the Russian Federation, or if one of the parties to the contract is a foreign person.
The Tax Code does not contain the concept of the territory of the Russian Federation, therefore, in accordance with Article 11 of the Tax Code of the Russian Federation, the lines of this concept must be referred to other regulations.
This concept is defined by Article 67 of the Constitution of the Russian Federation; in accordance with the provisions, the territory of the Russian Federation includes its constituent entities, internal waters, territorial seas and the airspace located above them.
In accordance with the provisions of Art. 147 of the Tax Code of the Russian Federation, the territory of the Russian Federation is recognized as the place of sale of goods if:
- the goods are located on the territory of the Russian Federation and are not shipped or transported;
- from the beginning of shipment (transportation), the goods are located on the territory of the Russian Federation.
Based on Article 458 of the Civil Code of the Russian Federation, if the contract provides for the seller’s obligation to transfer the goods to the buyer, his obligations are considered fulfilled at the moment of transfer of the goods.
The goods are transferred to their location. If such an obligation is not established by the contract, the fulfillment of the obligation will occur at the time of transfer of the goods to the carrier. Article 39 of the Tax Code of the Russian Federation recognizes the transfer of ownership rights to goods as sale.
The place of sale of goods an important role for VAT tax purposes. According to tax legislation, in order to determine the object of VAT taxation, the place from which the goods are sold must be the territory of the Russian Federation.
Tax legislation recognizes the place of sale of goods that are exported from the Russian Federation in expert mode on the basis of a contract with a foreign person as the territory of the Russian Federation, and if the goods are purchased by a taxpayer on foreign territory and then sold to a Russian consumer - the territory of a foreign state.
Based on Article 146, goods sold on the territory of the Russian Federation are subject to VAT, goods imported into the territory of the Russian Federation in an expert regime are taxed at a rate of 0%.
Sales of foreign goods outside the Russian Federation by a Russian organization
Selling goods without using your own warehouse, when the goods arrive directly from the organization’s supplier to the buyer, is called “transit trade.”
According to paragraph 1 of Article 147 of the Tax Code of the Russian Federation, for the purpose of calculating VAT, the place of sale of goods is the territory of the Russian Federation in the presence of one or more of the following circumstances:
- the goods are located on the territory of the Russian Federation and other territories under its jurisdiction, and are not shipped or transported;
- at the time of the start of shipment and transportation, the goods are located in the territory of the Russian Federation and other territories under its jurisdiction.
Thus, the place of sale of goods for the purpose of applying VAT is determined based on the place where its shipment or transportation began, and does not depend on from which person / to which person (foreign or Russian) such goods are purchased / resold (letter of the Ministry of Finance of the Russian Federation dated November 25. 2015 No. 03-07-08/68446).
As follows from the terms of the question, a Russian organization will purchase from a foreign organization for further resale goods located outside the Russian Federation. Further, the goods will be sold without crossing the borders of the Russian Federation.
In such a situation, from the point of view of Chapter 21 of the Tax Code of the Russian Federation “VAT”, the territory of the Russian Federation is not recognized as the place of sale of goods the object of VAT taxation does not arise, since the organization, when purchasing goods and selling them outside the Russian Federation, does not carry out transactions recognized as an object of taxation (Clause 1 of Article 146 of the Tax Code of the Russian Federation).
Invoices are not drawn up for the sale of goods, transactions on the sale of which are not recognized as subject to VAT taxation (clause 3 of Article 169 of the Tax Code of the Russian Federation, letter of the Ministry of Finance of Russia dated April 12, 2017 No. 03-07-13/1/21711).
The 0% VAT rate does not apply in this situation, since the sale of goods does not meet the conditions listed in subparagraph. 1 clause 1 art. 164 of the Tax Code of the Russian Federation: export of goods in the customs procedure of export (free economic zone, re-export).
In addition, the organization has the obligation to separate accounting in order to ensure the right to deduct “input” VAT when conducting VAT-taxable and non-VAT-taxable transactions. “Input” VAT on “indirect (general business)” expenses can be deducted without distribution in those quarters in which the share of expenses on non-taxable transactions in the total amount of expenses does not exceed 5% (clause 4, clause 4.1 of Article 170 of the Tax Code of the Russian Federation ).
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Circumstances of the place of sale of goods
The rules for recognizing the place of sale of goods are established by the provisions of Art. 147 Tax Code of the Russian Federation. The main role in the issue of confirming the circumstances that the territory of Russia cannot be recognized as a place of sale is played by the presence in the rules of tax law of a list and procedure for providing evidence in accordance with which this decision is made.
The corresponding legal position is commented on in the letter of the Ministry of Finance of Russia dated May 16, 2005 N 03-04-08/119. Since the provisions of Art. 147 of the Tax Code of Russia do not contain a list of necessary documents to confirm the fact that the goods were sold outside of Russia; the list of documents specified in Art. 148 Tax Code of the Russian Federation.
In paragraph 4 of Art. 148 of the Tax Code of the Russian Federation defines the procedure in accordance with which the place of sale (services) of work is established for the purpose of calculating VAT.
Also, this norm contains a list of documents that include a contract with foreigners or Russian persons, as well as documents by which the fact of performance of work or provision of services can be established.
The similar nature of those considered in the provisions of Art. 147 and 148 of the Tax Code of the Russian Federation of legal relations makes it possible to use the above documents, as well as various transport and accompanying documents for goods, as evidence of the place of sale of the goods or the fact that the goods were not sold within the territory of the Russian Federation.
In confirmation of the legality of applying the provisions of Art. 148 of the Tax Code of the Russian Federation (list and procedure for submitting documents), the FAS of the Central District also spoke out, setting out its position in the Resolution dated May 30, 2007.
If goods are transferred between structural divisions of one legal entity, such a transaction will not be subject to VAT.
From July 1, the rules for VAT deductions when “exporting” services will change
From July 1, 2021, VAT amounts on purchased goods (work, services) used to provide services (perform work), the place of sale of which is not recognized as the territory of the Russian Federation, can be deducted. However, this rule will not apply to services exempt from taxation on the basis of Art. 149 of the Tax Code (Federal Law of April 15, 2021 No. 63-FZ). For such services, input VAT is not deductible, but is taken into account in the cost of purchased goods (work, services).
In addition, the procedure for calculating the proportion of taxable and non-VAT-taxable transactions for the deduction of “input” tax has been clarified. In particular, for these purposes, operations subject to taxation include operations for the sale of work (services), the place of implementation of which in accordance with Art. 148 of the Tax Code of the Russian Federation does not recognize the territory of the Russian Federation (with the exception of operations provided for in Article 149 of the Tax Code of the Russian Federation).
Please note that these amendments in no way mean that work (services) sold outside the Russian Federation are now subject to tax. They only make it possible to take into account input VAT on acquisitions used to provide them.
Elena Orlova, tax consultant at AKG BUSINESS PROFILE, comments:
Let us recall that before the amendments, VAT on the performance of work and provision of services, the place of sale of which, in accordance with Article 148 of the Tax Code of the Russian Federation, is not the territory of Russia, could only be attributed to expenses.
With the introduction of amendments to Art. 171 of the Tax Code of the Russian Federation, taxpayers have the right to claim for deduction VAT amounts on purchased goods (works, services) and at the same time exclude the possibility of reducing taxable profit by the amount of “input” VAT.
In addition, Law No. 63-FZ introduced amendments to paragraph 4 of Art. 170 of the Tax Code of the Russian Federation, establishing that from July 1, 2019, for the purposes of applying clauses 4 and 4.1 of Art. 170 of the Tax Code of the Russian Federation, transactions subject to taxation include operations for the sale of work (services), the place of implementation of which is not recognized as the territory of the Russian Federation (with the exception of operations exempt from VAT on the basis of Article 149 of the Tax Code of the Russian Federation).
Thus, since, according to these changes, the performance of work (provision of services), the place of implementation of which is not the territory of the Russian Federation, refers to taxable operations, the amount of VAT on expenses for such operations is taken for deduction, subject to other requirements established by Chapter. 21 of the Tax Code of the Russian Federation for the application of deductions, but on the condition that these operations are not mentioned in Art. 149 of the Tax Code of the Russian Federation, that is, the implementation of such operations does not require separate accounting of the amounts of “input” VAT.
At the same time, when calculating proportionally the shares of “input” VAT on total expenses used simultaneously in both taxable and non-taxable transactions, the cost of work performed (services provided), the place of sale of which is not recognized as the territory of the Russian Federation (with the exception of operations provided for in Article 149 of the Tax Code of the Russian Federation) is included in the composition of taxable transactions (clauses 2, 4 of Article 170, clause 3 of clause 2 of Article 171 of the Tax Code of the Russian Federation as amended by Law No. 63-FZ).
We also add that the right to deduct amounts of “input” VAT can be exercised by the taxpayer exclusively in relation to those goods (works, services) that are used or intended for implementation from July 1, 2019, operations for the sale of works (services), place of sale which are not recognized as the territory of the Russian Federation.
As confirmation of our position, we can cite the explanation of the Federal Tax Service, reflected in the Letter of 03/07/2006 N MM-6-03 / [email protected] In it, the Federal Tax Service explained the following: according to current practice, when changing the VAT taxation procedure, the taxation procedure that was in effect on date of shipment of goods (works, services).
Source: Press, system "Garant"
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Places of sale of goods in the form of hydrocarbon raw materials
One of the issues related to the application of Art. 147 of the Tax Code of the Russian Federation is to determine the place of sale of goods in the form of hydrocarbon raw materials, the place of production of which is offshore fields.
The territory of the Russian Federation is recognized as the place of their implementation under the following circumstances:
- the goods are located on the continental shelf of the Russian Federation, in the exclusive economic zone or on the bottom of the Caspian Sea in its Russian part, and they are not shipped or transported;
- at the time of the start of shipment or transportation, the goods are located on the continental shelf of the Russian Federation in the exclusive economic zone or on the bottom of the Caspian Sea in its Russian part.
According to the provisions of Article 67 of the Constitution of the Russian Federation, the Russian Federation is endowed with sovereign rights and exercises its jurisdiction in the continental shelf exclusive economic zone, based on federal legislation and international law.
In accordance with paragraph 1 of Art. 147 of the Tax Code of the Russian Federation, the place of sale of goods for VAT purposes is the territory of the Russian Federation in the presence of one or more circumstances (taking into account the features established by clause 2 of Article 147 of the Tax Code of the Russian Federation):
— the goods are located on the territory of the Russian Federation and other territories under its jurisdiction, and are not shipped or transported;
— at the time of the start of shipment and transportation, the goods are located in the territory of the Russian Federation and other territories under its jurisdiction.
The definition of “other territories under the jurisdiction of the Russian Federation” for tax purposes is given in paragraph 2 of Art. 11 of the Tax Code of the Russian Federation. They mean the territories of artificial islands, installations and structures over which the Russian Federation exercises jurisdiction in accordance with the legislation of the Russian Federation and international law.
If the goods are located in any other territories at the time of sale, then regardless of who the buyer and seller are, Russia is not recognized as the place of their sale. In accordance with paragraph 1 of Art. 146 of the Tax Code of the Russian Federation, such transactions are not recognized as subject to VAT taxation.
Documents confirming the location of goods at the time of shipment outside the territory of the Russian Federation can be any documents at the disposal of the selling organization (including transport, shipping or other documents) certifying the fact of the location of goods in the territory of a foreign state at the time of sale (see letters Ministry of Finance of Russia dated July 1, 2015 N 03-07-08/37908, dated February 16, 2009 N 03-07-08/35).
In addition, in paragraph 2 of Art. 147 of the Tax Code of the Russian Federation establishes the procedure for determining the place of sale of goods in the form of hydrocarbon raw materials extracted from an offshore hydrocarbon field, as well as products of its technological processing (stable condensate, liquefied natural gas, a wide fraction of light hydrocarbons). It recognizes the territory of the Russian Federation in the presence of one or more circumstances specified in paragraph 1 of Art. 147 Tax Code of the Russian Federation, or in the presence of one or more of the following circumstances:
— the goods are located on the continental shelf of the Russian Federation and (or) in the exclusive economic zone of the Russian Federation or in the Russian part (Russian sector) of the bottom of the Caspian Sea and are not shipped or transported;
— at the time of the start of shipment and transportation, the goods are located on the continental shelf of the Russian Federation and (or) in the exclusive economic zone of the Russian Federation or in the Russian part (Russian sector) of the bottom of the Caspian Sea.
Circumstances of the place of sale of goods in the form of hydrocarbon raw materials
In the provisions of paragraph 2 of Art. 147 of the Tax Code of the Russian Federation spells out the rules according to which the territory of Russia is recognized as a place of sale of goods.
However, in addition to this, circumstances must be established in accordance with which the territory of the Russian Federation is recognized as a place for the sale of goods in the form of hydrocarbon raw materials extracted from an offshore field of the specified raw materials,
The main condition for recognizing Russia as a place of sale of these goods is to establish the fact that the goods are located, at the moment when shipment or transportation begins, on the territory of Russia, including other territories that are under the jurisdiction of Russia.
The official position on this issue is the letter of the Ministry of Finance of Russia dated February 12, 2015 N 03-07-08/6287. It addresses the issue of determining the place of sale of goods for VAT purposes. This applies to the above goods purchased by Russia in another state, which are shipped by this foreign supplier to another Russian person.
In this case, the place of sale, the territory of Russia, is not considered, based on which the sale of the specified goods is not subject to taxation (VAT).
In the letter of the Ministry of Finance of Russia dated December 17, 2014 N 03-07-14/65171, for example, an explanation is given of the issue of VAT taxation in the case when the specified group of goods is sold by a Russian taxpayer under a commission agreement with a foreign organization, through another foreign organization that is not worth registered for tax purposes in Russia. In this case, intermediary services of a Russian taxpayer are subject to VAT at the rate of 18%.
Also, when it comes to the sale of goods (the same applies to fixed assets) that are located outside of Russia, the territory is not recognized as the place of sale of such goods.
It follows from this that any sale of goods by an organization registered in the Russian Federation, but located on the territory of another state, cannot be recognized as subject to VAT. This legal position is set out in the letter of the Ministry of Finance of Russia dated March 14, 2013 N 03-07-08/7842).
Author of the article
Letter
12.01.2017
№ 03-07-08/630
Question: About VAT when a Russian organization sells goods to a foreign buyer, the ownership of which is transferred on the territory of the Russian Federation until they are placed under the customs export procedure.
Answer: In connection with the letter on the issue of applying value added tax in relation to goods sold by a Russian organization to a foreign buyer, the ownership of which is transferred on the territory of the Russian Federation until they are placed under the customs export procedure, the Department of Tax and Customs Policy reports that, in accordance with According to the Regulations of the Ministry of Finance of the Russian Federation, approved by Order of the Ministry of Finance of Russia dated June 15, 2012 N 82n, applications from organizations to assess specific economic situations are not considered by the Ministry of Finance and consulting services are not provided.
At the same time, we inform you that in accordance with subparagraph 1 of paragraph 1 of Article 164 of the Tax Code of the Russian Federation (hereinafter referred to as the Code), when selling goods exported under the customs export procedure, value added tax is taxed at a rate of 0 percent, subject to submission to the tax authorities documents provided for in Article 165 of the Code.
According to paragraph 9 of Article 167 of the Code, when selling goods exported from the territory of the Russian Federation in the customs export procedure, the moment of determining the tax base is the last day of the quarter in which the full package of documents confirming the validity of the application of the zero value added tax rate is collected. In case of failure to submit the specified documents within the established 180-day period, value added tax is subject to payment to the budget for the tax period in which the date of shipment of the goods falls.
Thus, when a Russian organization sells goods to a foreign buyer, the ownership of which is transferred on the territory of the Russian Federation before the moment of placement under the customs export procedure, the determination of the tax base for value added tax is carried out in the above order and does not depend on the moment of transfer of ownership of the goods .
With regard to the letter of the Ministry of Finance of Russia dated January 31, 2013 N 03-07-08/1914, mentioned in your letter, this letter explains the procedure for applying value added tax when a Russian organization sells goods, exported from the territory, under an agreement with a foreign person Russian Federation was not carried out.
This letter does not contain legal norms or general rules specifying regulatory requirements, and is not a regulatory legal act. In accordance with the letter of the Ministry of Finance of Russia dated August 7, 2007 N 03-02-07/2-138, the letter sent is of an informational and explanatory nature on the application of the legislation of the Russian Federation on taxes and fees and does not interfere with following the norms of the legislation on taxes and fees in understanding that differs from the interpretation set out in this letter.
Deputy Director of the Department
O.F.TSIBIZOVA
How to choose the most profitable form of importing goods
Purchasing goods from abroad has long been a common transaction for Russian companies. In this case, just as in the domestic market, a sales contract is drawn up: according to Article 162 of the Civil Code of the Russian Federation, a foreign economic transaction is concluded in simple written form.
The standard way to import goods is to conclude a sales contract. A number of companies, when deciding on a more tax-efficient import of goods, consider it advisable to work through a hidden affiliated foreign counterparty registered in an offshore zone. However, there are other ways to reduce the tax burden when importing, while respecting the business purpose of the transaction.
How to choose the most optimal form of foreign economic transaction and import goods with the most favorable taxation? Let's consider several possible options for the work of a Russian company and a foreign counterparty using the example of companies located in Cyprus and the British Virgin Islands. The choice of these jurisdictions is due to two factors. Firstly, these territories are most in demand in Russian business practice. Secondly, in comparing these two countries, you can see how tax relations are structured in the presence and absence of an agreement on the avoidance of double taxation: Russia has such an agreement with Cyprus, but not with the BVI.
The standard way to import goods is to conclude a sales contract
PURCHASE AND SALE
As we have already said, the usual way of working is a purchase and sale agreement. By doing this, we mean that the foreign company does not operate in Russia through a permanent representative office.
In this case, the Russian company as a tax agent will have to withhold VAT at a rate of 18 percent (clause 1 of Article 146, clause 1 of Article 161, clause 1 of Article 164 of the Tax Code of the Russian Federation). A foreign company will not be able to reimburse this tax.
Income of a foreign company from the sale of goods is not subject to income tax in Russia, since it does not form a permanent representative office in the Russian Federation (clause 2 of Article 309 of the Tax Code of the Russian Federation).
Let's consider the tax consequences of importing goods under a sales contract. First, the foreign company purchases the goods. Then it delivers it to the buyer - a Russian company. The product was purchased at a price of 1000 units, sold for 2000 units. (without VAT).
Tax consequences (Russian company):
• income tax. Not withheld in accordance with paragraph 2 of Article 309 of the Tax Code of the Russian Federation; • VAT. Withheld at a rate of 18 percent. Upon subsequent resale, the buyer has the right to reduce the VAT base by the amount previously paid at customs (clause 3 of Article 171 of the Tax Code of the Russian Federation). Let us remind you that the amount of VAT paid at customs is not always equal to 18 percent of the value of the imported goods. The tax is calculated on the adjusted value of the goods (Order of the Federal Customs Service of Russia dated September 1, 2006 No. 830), which may be higher than the value under the contract. But the entire amount of VAT paid is still deductible. Payable: 360 units. (2000 units x 0.18).
Tax consequences (Cyprus company):
• income tax. Income of a Cyprus company from the sale of goods (except for transactions on the sale of securities and shares/interests, which are exempt from taxation) is taxed at a rate of 10 percent (Article 5 (1) and Section 25 of Part V of the Law of the Republic of Cyprus “On Income Tax” No. 118 (1) of 2002 (The Income Tax Law No. 118 (I)/2002)).
In this case, based on Article 11 (5) “On Income Tax” No. 118 (1) of 2002 (The Income Tax Law No. 118 (I) / 2002), any monetary and non-monetary expenses incurred by the company for the purpose of making a profit are deducted from the income tax base “wholly and exclusively”. Accordingly, expenses associated with the acquisition of goods by a company resident in Cyprus will reduce the income tax base in the Republic of Cyprus.
Payable: 100 units. ((2000 units - - 1000 units) x 0.1);
• VAT. Since the place of supply of the goods is not the Republic of Cyprus, VAT does not arise (sections 7, 8 of the Law of the Republic of Cyprus “On Value Added Tax” 95 (I)/2000 (The VAT Law 95 (I)/2000)).
Tax consequences (BVI company).
In accordance with section 24(1) of the BVI International Business Companies Law, companies registered under this law are completely exempt from taxation in the BVI (since from 1 January 2006 all companies registered in the BVI in accordance with this law We further consider the taxation of a company of this legal form).
Total tax burden:
460 units (360 units + 100 units).
Option for the relationship between a Russian company and a foreigner: import of goods through a foreign agent
ACTIVITY THROUGH AN AGENT
The next option for the relationship between a Russian company and a foreigner: import of goods through a foreign agent (dealer, commission agent) - a non-resident of Russia. Suppose a foreign company cooperates with an agent who is a non-resident of Russia. An international commercial company registered in accordance with the laws of the BVI gives an order to a private limited liability company registered in accordance with the laws of the Republic of Cyprus (we are considering the taxation of a company of this particular legal form, since this form is the most common - like an LLC in Russia). for the purchase of goods and their further sale in Russia. The company's remuneration in Cyprus is set at 5 percent of the contract price. A company registered in Cyprus supplies goods to a Russian buyer.
Tax consequences (Russian company):
• income tax. There is no tax at the source of payment on the territory of Russia (clause 2 of Article 309 of the Tax Code of the Russian Federation);
• VAT. The Russian buyer, as a tax agent, withholds and transfers tax to the budget of the Russian Federation at a rate of 18 percent on the entire cost of the goods (clause 2 of Article 161 of the Tax Code of the Russian Federation). Payable: 360 units. (2000 units x 0.18).
Tax consequences (Cyprus company):
• income tax. A Cyprus company is only subject to agency fees at a rate of 10 percent (Article 5 (1) and Section 25 of Part V of the Cyprus Income Tax Law No. 118 (1) of 2002 (The Income Tax Law No. 118 (I) /2002)). Taxation of income of a BVI resident company in the Republic of Cyprus depends on the presence in its activities of signs of a permanent establishment and/or the implementation of certain types of activities in the territory of the Republic of Cyprus without the formation of a permanent establishment.
Article 5 (2) of the Cyprus Income Tax Law No. 118 (1) of 2002 contains an exhaustive list of activities that give rise to a taxable base in the Republic of Cyprus . In the described situation, the activities of a BVI resident company do not constitute a permanent establishment in the Republic of Cyprus, and the receipt of income from the sale of goods to a Cyprus company does not give rise to withholding tax in the Republic of Cyprus. Accordingly, when a Cyprus company transfers income from the sale of goods to a company resident in the BVI, no withholding tax arises in the Republic of Cyprus.
Payable: 10 units. (2000 units x 0.05 xr 0.1);
• VAT. Sales of goods by a Cypriot company in Russia are not taxed in Cyprus (sections 7, 8 of the Law of the Republic of Cyprus “On Value Added Tax” 95 (I)/2000 (The VAT Law 95 (I)/2000)). In accordance with Table 3 of the Law of the Republic of Cyprus “On Value Added Tax” 95 (I)/2000 (The VAT Law 95 (I)/2000), agency services of a Cypriot company will not be subject to VAT.
Tax consequences (BVI company). The income of international business companies is completely exempt from taxation in the BVI (Article 242 (1) of the BVI Law on International Business Companies). Total tax burden: 370 units. (360 units + 10 units).
The agent can also be a company registered in the BVI. However, due to the fact that Russia does not have a double taxation agreement with the BVI, the agent’s income will be subject to Russian income tax at a rate of 20 percent, and the principal’s income at a rate of 10 percent, which is less favorable.
At the same time, the Russian company itself can act as an agent. If a foreign company cooperates with an agent who is a resident of Russia, then in order to calculate the amount of taxes due on its income, it is necessary to know whether the agent is dependent on the foreign company. The definition of a dependent agent is given in paragraph 9 of Article 306 of the Tax Code of the Russian Federation. This is a person who, on the basis of an agreement with a foreign organization, represents its interests in Russia, operates on the territory of Russia, has and regularly uses the authority to conclude contracts or agree on their essential terms on behalf of the foreign company.
When working with a dependent agent, a foreign company is considered as having a representative office in Russia (Clause 9, Article 306 of the Tax Code of the Russian Federation). And the income of a foreign company received through a permanent representative office is subject to income tax at a rate of 24 percent (clause 1 of Article 284 of the Tax Code of the Russian Federation).
If a foreign company works with an independent Russian agent, its income is subject to income tax at a rate of 20 percent (clause 1 of Article 284 of the Tax Code of the Russian Federation). As you can see, it is more profitable for a Russian company to work through a foreign agent than to act in this role itself.
SIMPLE PARTNERSHIP
Another option is to organize work in the form of a simple partnership. Under a simple partnership agreement (joint activity agreement), two or more persons (partners) undertake to pool their contributions and act together without forming a legal entity to make a profit or achieve another goal that does not contradict the law (Article 1041 of the Civil Code of the Russian Federation).
This form of activity does not lead to the formation of a permanent representative office of a foreigner on the territory of Russia (clause 6 of Article 306 of the Tax Code of the Russian Federation).
But at the same time, the Russian participant must keep records of the partnership’s income and expenses for profit tax purposes (clause 2 of Article 278 of the Tax Code of the Russian Federation). OPINION OF A PRACTITIONER Ilya ANTONENKO,
financial director of the leasing group (St. Petersburg), leading expert of the National Consulting Company: - Working in the form of a joint venture retains the existing tax advantages. If new regulatory legal acts of the Russian Federation come into force, which lead to an increase in the total tax burden on the activities of a foreign investor and a commercial organization with foreign investment compared to the burden in force on the day the financing of a priority investment project began at the expense of foreign investment, such acts are not applied in during the payback period of the project. But no more than seven years from the date of commencement of financing from foreign investments (Article 9 of the Federal Law of 07/09/99 No. 160-FZ “On Foreign Investments in the Russian Federation”). Companies whose authorized capital includes more than 25 percent of foreign investors and have an investment project can take advantage of this benefit.
Let’s assume that a foreign company’s contribution to a partnership could be the provision of goods to a Russian partner, and the Russian partner’s contribution, accordingly, could be the sale of such goods in Russia. Shares - 50 percent each. However, the constant import of goods through a simple partnership may arouse the suspicions of tax authorities and the likelihood that these transactions, on the basis of paragraph 2 of Article 170 of the Civil Code of the Russian Federation, will be recognized as feigned, covering up a purchase and sale agreement.
On the other hand, if a foreign company invests skills related to the provision of services, then this method may find application. An example would be the provision of equipment installation services, which are then sold by a Russian company (the second partner).
Tax consequences (Russian company):
• income tax. According to Article 1048 of the Civil Code of the Russian Federation, profit received by partners as a result of their joint activities is distributed in proportion to the value of the partners’ contributions to the common cause, unless otherwise provided by a contract or other agreement. An agreement to exclude any of the partners from participating in the profits is void. The profit received is taxed for each partner separately in proportion to the share established in the agreement (clause 9 of Article 250, clause 4 of Article 278 of the Tax Code of the Russian Federation), at a rate of 24 percent.
In addition, according to paragraph 2 of Article 284 of the Tax Code of the Russian Federation, income of foreign organizations not related to activities in Russia through a permanent representative office is subject to income tax at a rate of 20 percent. This tax rate will be applied if a BVI resident company acts as a foreign partner, since Russia and the BVI do not have a double taxation agreement. If there is an agreement on the avoidance of double taxation, the income of a non-resident is taxed in his state (clause 1 of Article 312 of the Tax Code of the Russian Federation). Therefore, when the partner is a Cypriot company, all profits received by it will be taxed in Cyprus (and not in Russia) at a rate of 10 percent (Article 7 of the Agreement between the Government of the Russian Federation and the Government of the Republic of Cyprus for the avoidance of double taxation in relation to taxes on income and capital from 05.12.98).
Payable: • Russian company - 120 units. ((2000 units - 1000 units) x 0.5 x 0.24); • company - resident of the BVI - 100 units. ((2000 units - 1000 units) x 0.5 x 0.2);
• VAT. The transfer of a contribution under a simple partnership agreement is not a sale (subclause 4, clause 3, article 39, clause 1, article 278 of the Tax Code of the Russian Federation), therefore there is no VAT when transferring goods. However, VAT paid on import is deductible. Payable: 180 units. ((2000 units - 1000 units xr 0.18).
Tax consequences (Cyprus company):
• income tax. Income from the transaction is taxed at a rate of 10 percent. Payable: 50 units. ((2000 units - 1000 units) xr 0.5 x 0.1);
• VAT. The Cyprus company will not pay VAT arising from the activities of the partnership.
Tax consequences (BVI company).
The income of international business companies is completely exempt from taxation in the BVI (Article 242 (1) of the BVI Law on International Business Companies). Total tax burden:
• foreign friend - resident of Cyprus - 350 units. (120 units + 180 units + 50 units); • foreign friend - resident of the BVI - 400 units. (120 units + 180 units + 100 units).
When working with a dependent agent, a foreign company is considered as having a representative office in Russia
REPRESENTATION
Also, a Russian company can import goods through a representative office of a foreign company (branch or subsidiary).
EXPERT COMMENT Alexey ARCHIEREYSKY,
managing partner of a legal entity: - When deciding whether it is more profitable to work as a branch or a subsidiary, you should take into account the future distribution of expenses. If the parent company incurs large expenses in the interests of representative offices, it is more profitable to recognize such expenses when taxing the representative office. Deductions for expenses are recognized “regardless of whether these expenses are incurred in the state where the permanent establishment is located or outside it” (for example, paragraph 3 of Article 7 of the Double Taxation Agreement with Germany). Moreover, this applies to any expenses, including management and administrative expenses, which is especially emphasized in the agreements themselves. And such expenses can be confirmed for the Russian tax authorities using primary documents drawn up in the parent company (decrees of the Moscow federal arbitration courts dated 03/06/06 No. KA-A40/875-06, North-West dated 07/28/03 No. A56-37837/02 districts).
There is also the possibility of proportional distribution of income between the parent company and representative offices in different countries (or one country) (for example, in agreements with Germany, Italy, Belgium, Iceland, Denmark, France, Switzerland). That is, the parent company independently distributes income and expenses between representative offices, based on reasonable economic criteria. In the case of a separate entity, it will not be possible to distribute costs and profits.
So, in this case, the parent foreign company transfers goods to the representative office, and the branch sells them in Russia. Then the income received is transferred to the parent organization.
Tax consequences (Russian company):
• VAT. Payable: 360 units. (1000 units x 0.18 + (2000 units - 1000 units) : 118 x 18);
• income tax. Payable: 240 units. (1000 units x 0.24).
Tax consequences (Cyprus company).
According to Article 36 (3) of the Cyprus Income Tax Law No. 118 (I)/2002, the income of a foreign permanent establishment is not subject to tax in the territory of the Republic of Cyprus. In this case, expenses associated with the activities of a permanent establishment can be deducted from the income tax base in the Republic of Cyprus. Tax consequences (BVI company). The income of international business companies is completely exempt from taxation in the BVI (Article 242 (1) of the BVI Law on International Business Companies). Total tax burden: 600 units. (360 units + 240 units).
EXPERT COMMENT Alexey ARCHIEREYSKY,
managing partner of a legal entity: — It is necessary to note that the design of a permanent establishment cannot be used as a tax optimization tool. The establishment of a representative office depends on the actual presence in a given country and cannot be adjusted by manipulating documents. Nevertheless, illegal manipulations are possible in this case as well. Some examples of such abuses are given in the official comments to the OECD and UN Model Conventions. For example, work on the construction of a facility in another country in stages, with the division of construction stages between different construction companies. At the same time, companies that formally act as independent contractors are in fact structures of one holding company. The duration of each stage of construction is planned for a period of less than 12 months, which does not allow recognizing the existence of a permanent establishment on this basis in relation to each company.
Or another situation is the assignment of responsibilities for carrying out activities leading to the formation of a representative office to various counterparties. Since each of these companies carries out the order once, this does not allow each of them to be recognized as a dependent agent (clause 9 of Article 306 of the Tax Code of the Russian Federation).
Nevertheless, the described methods are extremely risky, since they pursue the sole purpose of tax benefit. And in the recommendations they are mentioned precisely as cases of tax abuse, which are difficult to prove, but this still does not make them legal.
In our opinion, of all the options discussed above (other things being equal), purchase and sale, despite its popularity, is not optimal. It is more profitable for a Russian company to receive goods under a simple partnership agreement through a foreign counterparty registered in a country that has concluded a double taxation agreement with Russia. Of course, provided that the income tax in this country is lower than in Russia, for example in Dominica and Belize.
If there is a double tax treaty, the non-resident’s income is taxed in his state
