March 2005
Permits for foreign firms' non-Russian employees blocked
Policy change cuts option to work through third parties
A recent change in migration authorities’ policy is posing a dilemma for branches and representatives of foreign companies doing business in the Russian Federation, reports Evgeny Kuzmenko, of our Yuzhno-Sakhalinsk office.
In late November, migration officials stopped issuing work permits to foreign citizens who enter Russia under business visas, Kuzmenko explains. Before that time, a longstanding policy prevented branches and representatives of foreign organizations from applying for such visas and permits. However, they could act through a Russian third party to obtain business visas and then work permits for their non-Russian employees.
With the changed policy, a third party cannot get work permits for individuals if it does not have a direct labor relationship with them, Kuzmenko says. Russian subsidiaries of foreign companies can obtain work visas for non-Russian employees, he observes.
It is difficult to predict when and how the Russian Federation government will resolve this dilemma, with Kuzmenko predicting that it may require court action by a foreign company.
New
division of profits tax cuts out local budgets
Regions now permitted to reduce their rates by 13.5%
As of Jan.
1, the Russian Federation divvies up the tax on profits in a new way — cutting
out local governments, reports Elena Iourkina, of our Moscow office.
Now, 6.5 percent of the proceeds of the profits tax will go to the federal
budget, while 17.5 percent will go to the appropriate regional budget,
she explains.
The new law, passed in July, permits regional authorities to reduce the profits tax rate in their regions by as much as 13.5 percent. Iourkina adds that the new law increased the tax on dividends paid to Russian taxpayers (both individuals and organizations) by as much as 9 percent.
Unified
Social Tax drops to 26%
Employers
had paid 36.5% before Jan. 1
Starting Jan. 1, the Russian Federation reduced its Unified Social Tax to 26 percent for most taxpayers, reports Elena Iourkina, of our Moscow office. Before Jan.1, the rate had been 36.5 percent for employers and individual entrepreneurs on amounts they paid individuals for work or rendered services or for rights under a copyright contract, she notes.
Iourkina explains
that the new rates divide tax proceeds among the federal government
(20 percent), the social insurance fund (3.2 percent), the
federal compulsory medical insurance fund (.8 percent), and the regional
compulsory medical insurance fund (2 percent).
Royalties to foreign licensors not subject to VAT
Tax ministry
concludes ‘sales’ don’t
take place in Russia
The Russian Federation Ministry for Taxes and Levies issued a letter last fall concluding that license payments — including trademark royalties — to foreign licensors are not subject to the Russian value-added tax. Denis Marchenko, of our Yuzhno-Sakhalinsk office, comments that the RF Tax Code applies the VAT only to sales of goods in Russia.
“Goods are considered sold in Russia if they are located in Russia, are not loaded or transported and/or are located in Russia at the moment of commencement of loading or transportation,” he notes. Thus, as the ministry concluded, payments to foreign licensors are not sales of goods in Russia, and not subject to the VAT, he explains.
Far
East has changed much in our firm's decade there
Challenges
remain, but business climate has improved
Russin & Vecchi is celebrating its 10th anniversary of service in Russia’s Far East, notes Natalia Prisekina, director of our Vladivostok office. With that office’s opening in 1995, Russin & Vecchi became the first international law firm to open an office and maintain a full time presence in the region.
“Those 10 years have brought major changes to Primorye’s business climate,” Prisekina reports, “The decade also brought challenges for clients who have needed our help in dealing with difficulties particular to Russia’s Far East,” she notes. “Rapidly changing and sometimes uncertain federal, regional, and local legislation—and Primorye’s sometimes-poor business climate—have posed particular difficulties,” Prisekina explains. She elaborates further that the severe economic downturn in 1998 and subsequent fiscal crisis inflicted large losses on foreign investors in the region.
“Another challenge has involved the widely held perception—which some said was well founded—among prospective investors that corruption and crime made Primorye too risky. Primorye’s new regional government, understanding that perception can become reality, is making a significant effort to improve the business climate for foreign investors. Success in that effort will take time, because problems have accumulated for years.”
She observes that areas needing improvement include informational transparency, education of foreign investors about legal and practical issues in the region, local business conditions, infrastructure, and access to capital. “Other aspects for improvement involve investors’ trust—trust in law enforcement agencies to protect investor interests and trust in Russian management,” Prisekina comments.
Nonetheless, gradually but steadily, Russia’s Far East is attracting more investors—from South Korea, Japan, the United States, and elsewhere. Regional development is becoming more predictable. Consequently, the association of foreign firms doing business in the region has tripled its membership from the 25 it had just a few years ago, she reports.
Prisekina concludes: “Primorye continues to show tremendous economic potential in its industries—including fishing, forestry, transportation, tourism, and high-tech business like telecommunications—and in its prospects to become a major transit route for oil and gas.”
She adds, “While helping clients try to make the most of that potential, the lawyers in our Russian Far East office take pride in maintaining the same professional standards—including those of the American Bar Association—that clients expect from lawyers in the world’s leading commercial centers.”
© 2005 Russin & Vecchi, LLP