Improved Russian Tax Climate

08/27/2001

On July 6, 2001 the State Duma (the Lower House of the Russian Parliament) adopted Chapter 25 of the Second Part of the Russian Tax Code. Chapter 25 was approved by the President on August 6, 2001 and will take effect on January 1, 2002.

The new Chapter 25 provides for significant improvements in the Russian tax regime. The new Chapter 25 permits more deductible expenses, including business traveling expenses, advertising, voluntary insurance and other miscellaneous items. Chapter 25 also improves the procedure for amortization of assets, particularly insofar as companies have broader discretion (i) to buy new assets and treat them as deductible expenses and (ii) to write off obsolete equipment deemed as deductible expenses.

In addition Chapter 25 reduces the general corporate income tax rate from 35% to 24%. While reducing the general rate, however, the new law eliminates a number of tax exemptions. Income tax rates on dividends are 6% for Russian shareholders and 15% for foreign shareholders.

The definition of a "dependent agent" is also much improved. A dependent agent is defined to include a Russian company that may qualify as a "permanent representation" of a foreign company in Russia for tax purposes. The Chapter specifies instances when representation of a foreign company by a Russian dependent agent does not constitute a "permanent representation", for tax purposes, e.g., a Russian stockbroker selling/buying securities for a foreign client on a regular basis.

Finally, the law simplifies the procedures for using a tax exemption under double taxation treaties. To receive a reduction in the amount of taxes paid in the country of its origin under double taxation treaties, a foreign company now only needs to present to the Russian State Tax Authority an incorporation certificate issued by a competent authority abroad and fill out a standard form claiming an exemption under the treaty with that particular country.

In addition to the aforementioned tax cut, it is expected that in the coming fall session, the Parliamentary committee on budget and taxes will recommend further amendments to Part Two of the Tax Code regarding reduction of the uniform social security tax from 35% (current rate) to 30%.

Yevgeniy Tregubenko
Associate, Haynes and Boone, LLP
(Licensed only in New York and Russia)

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