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When a foreign company conducts activities on the territory of the Russian Federation, it is necessary to determine whether this activity leads to the formation of a permanent representative office or not.
The solution of this issue is necessary for the correct calculation of taxes on the territory of the Russian Federation. The concept of «permanent establishment» has a special meaning in tax legislation, different from the civil law term «representation of a legal entity», defined by Article 55 of the Civil Code of the Russian Federation. This concept, having no organizational and legal significance, establishes the tax status of a foreign organization.
If the activity of a foreign company forms a permanent representative office, then it has tax obligations in accordance with the legislation of the Russian Federation: the income of a foreign organization received through a representative office established in the territory of the Russian Federation is taxed in the Russian Federation.
If the activity of a foreign company does not form a permanent representative office in the territory of the Russian Federation, then only the company’s income received from sources in the territory of the Russian Federation is subject to income tax. The Company is not responsible for calculating and paying VAT (the tax is determined and withheld by tax agents), as well as property tax (with the exception of immovable property).
The assessment of a company as forming or not forming a permanent establishment depends on what kind of activity is carried out on the territory of the Russian Federation and on the documentation of the conduct of this activity.
The concept of «permanent representation» of a foreign company is established by paragraph 2 of Article 306 of the Tax Code of the Russian Federation, which provides that a permanent representation of a foreign organization in the Russian Federation for profit taxation purposes is understood to mean any separate subdivision or other place of activity of this organization through which the organization regularly carries out business activities on the territory of the Russian Federation related to the sale of goods, work construction and installation, provision of services. The exception is the activities of a preparatory and auxiliary nature.
Let ’s give an example:
Foreign companies may be present in the Russian Federation in the form of a representative office of a foreign legal entity or in the form of a branch of a foreign legal entity. It is assumed that the representative office does not carry out commercial activities and is engaged only in servicing the parent company, is a kind of marketing division in the territory of the Russian Federation. Whereas a branch — a structure that engages in commercial activities, enters into commercial contracts and executes on the territory of the Russian Federation — is already a commercial subdivision of a foreign legal entity on the territory of the Russian Federation, which is an independent payer of taxes in the Russian Federation, i.e. the same «permanent representation».
We pay special attention to the fact that in any organizational and legal form, a «permanent representation» may arise for tax purposes from the moment of conducting commercial activity.
It is also necessary to take into account that there is such a thing as a «dependent agent». The presence of a dependent agent on the territory of the Russian Federation leads to the formation of a «permanent representative office».
A dependent agent is a legal or natural person who represents the interests of a foreign organization in the Russian Federation. At the same time , the dependent agent:
Therefore, when deciding on the organizational and legal form of the presence of a foreign company in the Russian Federation, it is necessary to proceed from the planned activity.
Foreign companies can operate on the territory of Russia in the form of representative offices, in the form of branches and in the form of a Russian company with foreign capital.
The activity of a foreign representative office in the territory of the Russian Federation assumes that a foreign company opens a marketing division that promotes products or services of a foreign company, carrying out non-commercial activities aimed at market research, developing a pricing system, forecasting sales, effective interaction with customers and communication support with them. The representative office does not conclude contracts on its own, but looks for clients and transmits information about them to the foreign head office, which, in turn, concludes contracts and executes them.
Opening a branch allows you to sell works and services in Russia on behalf of a separate division of a foreign company, i.e. to conclude contracts and execute them, making a profit in Russia. The branch’s activities are much broader than representative offices.
Due to the imperfection of legislation, we do not recommend using the branch form when conducting trading activities and receiving goods for sale from the parent company. Difficulties arise at the stage of importing goods and recognizing the cost of goods in expenses: tax claims and disputes are possible.
A branch of a foreign company registered in the Russian Federation is part of this foreign company — a separate division. A product that comes from the head office is not considered a product purchased by the branch. This is an internal movement operation within a legal entity. This transfer is not a sale/acquisition, the goods were moved from one warehouse of a legal entity to another, and the ownership of it both belonged to a foreign legal entity and remained owned, only the responsible employee/person for the safety of the goods changed. This leads to questions about the choice of the customs procedure for the import of goods, the payment of customs VAT and its acceptance for deduction. We also believe that the branch is at risk in terms of recognition of expenses, since in fact the costs of purchasing goods were borne by the parent company. This issue should be regulated by the global accounting policy of a foreign company, from which it will clearly follow which expenses and in which country are accounted for.
In situations where a foreign company conducts trading activities on the territory of the Russian Federation, we recommend our clients to work according to the scheme of the establishment of a Russian legal entity by a foreign company on the territory of the Russian Federation.
A branch of a foreign company cannot have a separate division, because it is itself a separate division of a foreign company. And if a foreign company plans to operate in another region of the Russian Federation, then it is necessary to register another branch.
Since a representative office (branch) of a foreign organization for tax purposes is included in the concept of «organization» used in the Tax Code of the Russian Federation, therefore, it is recognized as a taxpayer for most types of taxes.
Thus, in accordance with the norms of the Tax Code of the Russian Federation, a representative office of a foreign company is recognized as a payer of income tax, VAT, corporate property tax and some others.
It should be noted that in accordance with paragraph 1 of Article 307 of the Tax Code of the Russian Federation, the object of income tax for foreign organizations operating in the Russian Federation through a «permanent establishment» is income received by a foreign organization as a result of carrying out activities in the territory of the Russian Federation through its permanent establishment, reduced by the amount of expenses incurred by this permanent establishment, determined taking into account the provisions of paragraph 4 of Article 307 of the Tax Code of the Russian Federation.
In accordance with the requirements of the legislation, a foreign company is obliged to provide:
The filing of the declaration and the annual report is carried out regardless of whether the representative office conducts business or not.
Foreign organizations engaged in entrepreneurial activities leading to the formation of a permanent representative office fill out sections 2-9 of the declaration.
Foreign organizations whose activities do not lead to the formation of a permanent representative office in the Russian Federation, sections 2-3 of the declaration are filled in.
Foreign organizations, as well as Russian companies, are recognized as VAT taxpayers who independently pay the tax, just like any Russian company in the manner defined by Chapter 21 of the Tax Code of the Russian Federation.
A representative office (branch), regardless of whether it carries out business activities on the territory of the Russian Federation or not, has an obligation to submit a VAT declaration.
The representative office is obliged to calculate and pay insurance premiums and provide reports on insurance premiums at the place of registration of the representative office as the policyholder.
Foreign representative offices necessarily withhold personal income tax when paying income to individuals and submit a calculation in the form of 6-personal income tax and certificates in the form of 2-personal income tax for each employee.
In addition, information about working employees (SSV-M) is submitted to the Pension Fund on a monthly basis.
If a representative office of a foreign organization has property on its balance sheet that is recognized as an object of taxation by property tax, then it has an obligation to submit a declaration for this tax.
Declarations on transport and land tax are submitted only if a foreign representative office owns a vehicle and a land plot.
If a foreign representative office falls into the sample of Rosstat, then it becomes necessary to submit those reports that Rosstat will notify about.
A representative office or a branch of a foreign organization cannot be considered as a Russian legal entity, since it is an integral part of a foreign legal entity formed in accordance with the norms of the legislation of a foreign state.
It should be noted that at the moment, no regulatory document on accounting provides for the obligation for a representative office of a foreign organization to compile accounting statements.
If a foreign representative office or branch keeps records of income and expenses (and other taxable items) in accordance with tax legislation, it may refuse to keep accounting records and submit the balance sheet to the IFNS. However, nothing prevents a foreign company from keeping records in standard 1C in order to reflect operations and control activities.
When keeping records, it should be borne in mind that to summarize information about all types of settlements with the parent company, you can use account 79 «On-farm settlements».
A branch or representative office may reflect the loss received as a result of activities in the Russian Federation, or it may transfer all expenses incurred to the head office for the formation of its financial result. In any case, the reporting of the head office should include all the performance indicators of the representative office of a foreign company in the Russian Federation.
Accounting can and should be built in such a way as to be able to provide reports to the head office. Often, the forms of these reports have features of accounting standards of the country where the head office is located.
With the help of programmers, you can modify the program or write processing that will allow you to generate these reports automatically.
When keeping records of branches and representative offices, we necessarily study this issue and keep records in such a way as to provide maximum information on the operations of the parent company.
Branches and representative offices of foreign organizations located on the territory of the Russian Federation may form accounting policies in accordance with Russian accounting standards, or based on the rules established in the country where the foreign organization is located, if the latter do not contradict International Financial Reporting Standards.
If a branch conducts commercial activities and receives income on the territory of the Russian Federation, then the preparation of a tax accounting policy is mandatory in accordance with the tax legislation of the Russian Federation.
To register branches and representative offices of foreign companies throughout Russia, documents are submitted to the Interregional Tax Service No. 47. Reporting is submitted at the location of representative offices or a branch of a foreign company.
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