This chapter outlines the rules for the special tax regimes available for small and medium sized enterprises (SMEs) and certain activities of individual entrepreneurs. These tax regimes are: the simplified system of taxation; taxation by license; taxation of imputed income; and unified agricultural tax. The main rules on taxation of the income of individual entrepreneurs are in the chapter on personal income tax. Other special taxation regimes and rules may also apply, such as the rules of taxation of businesses in special economic zones, among which figure innovation centers. (Regarding taxation of businesses in special economic zones, please, refer to chapter Tax Concessions and Subsidies http://lgl.kn/e6eff)
SIMPLIFIED SYSTEM OF TAXATION
The simplified system of taxation (SST; chapter 26.2 of the Tax Code) is a special beneficial tax regime extended to small and medium size enterprises (as defined in Chapter 26.2.). Unlike the tax on imputed income (see below) it is a voluntary regime for which the taxpayer can opt for.
The simplified system of taxation replaces the normal rules of profit tax, exempts from the liability to charge VAT for services and goods sold, and provides (for certain types of businesses) benefits on employer’s social contributions. Previously companies on SST where exempt from keeping accounting records in accordance with the general rules, but this exemption has been cancelled effective of 2013.
Companies under the SST regime are not payers of value added tax meaning that they do not charge VAT from their clients, however such taxpayers pay normally the VAT charged by their suppliers. They also must pay the VAT charged at customs on imported goods. These companies also follow the normal VAT regime in relation to joint activity agreements (simple partnerships), trust management and concession agreements.
The SST tax regime can only be used by those companies (and individual entrepreneurs), which meet the qualifying criteria set in the law. These criteria are:
- Company (or individual entrepreneur) must be registered in Russia (owners can be foreign)
- To qualify no less than 75% of the company’s shares have to belong private individuals (without regards to nationality) and only 25% can be held by other legal entities.
- The company applying SST is not allowed to have any branches or representative offices.
- Following types of businesses are not eligible:
– Financial companies (as specified in the Tax Code)
– Taxpayers financed by public (state or municipal) funds
– Notaries and advocates
– Manufacturers of excisable goods
– Businesses extracting and trading in minerals
– Businesses engaged in production sharing agreements
- Companies under the SST regime may employ maximum 100 people (on an average during the year).
- Book value of fixed assets (including intangible assets) may amount to a maximum of 100 million rubles (approx.3 million US dollars).
- Sales volume restriction
In addition to the other restricting criteria there are restrictions in regards to the maximum permissible sales volumes for businesses wanting to apply the SST tax regime. The restrictions are two-fold: (i) concerning the sales volumes of a business that wants to transfer to the SST tax regime, and (ii) concerning the right to continue applying the SST regime.
A company may apply for SST if during nine months of a calendar year (preceding the year of entering into the system) its net sales revenue does not exceed 45 million rubles (presently approximately one and a half a million USD dollars).
A newly registered company has the right to apply the SST regime from registration (thus not being restricted by historical sales figures).
An application to transfer to the SST will have to be filed with the local taxation inspectorate between October 1 and November 30 of the year prior to the planned transfer. A newly registered entity has the right to register under SST anytime within 5 days from registration.
The maximum permissible sales volume for companies operating the SST system is 60 million rubles.
- For further qualification criteria we refer to the law (Tax Code art. 346.12).
Once a company has started applying the SST it is not allowed to transfer back to general taxation regime before the end of the tax year unless its revenues surpass the thresholds or other qualification criteria are violated.
In case of surpassing the revenue limits the general rules for taxation will automatically apply from the beginning of the quarter in which a company’s revenues have exceeded 60 million rubles.
Tax base, rates and periods
The taxpayer has a choice between two alternative tax bases and rates for them, these are:
- Taxation of gross revenue at 6% or;
- Taxation of profit 15%.
The Regions of Russia are granted authority to lower the rates in the range of 5 to 15% for various categories of businesses.
SST companies taxed for profit are required to pay a minimum tax in the amount of 1% of revenue even if there is no profit. However, the company can book the thus paid minimum tax as an expense in the next year to the extent that it represents a surcharge compared with the calculated profit tax (this being available also as a loss carryforward provision).
Companies that have chosen gross revenue (as opposed to profit) as the object of taxation may reduce the tax normally due by a maximum of 50 % by deducting amounts corresponding to paid employer’s social contributions.
The tax period is one calendar year. The reporting periods are the first quarter, half-year and three quarters of a year. The tax is paid in quarterly advance installments before the 25th of the first month following the end of the quarter. The advance payments are included into the final annual tax payment (art. 346.21 of the Tax Code).
The taxpayers that have chosen profit as the subject of taxation can deduct expenses from profit according to a closed list of permissible types of expenses which in much correspond to the rules applicable for regular profit taxation.
In particular the following expenses are deductible:
1) Acquisition of Fixed Assets and intangible assets
2) Repair of Fixed Assets (including leased assets)
3) Rental (lease) payments
4) Material expenses (as defined for Profit Tax)
5) Pay-roll costs
6) Mandatory insurance of employees and property
7) VAT paid for supplies and other taxes and dues
8) Interest and banking fees paid
9) Fire, property protection
10) Maintenance of company vehicles and compensation for use of private cars for business trips within certain limits
11) Expenses for business trips
12) Notary fees (within limits)
13) Auditor’s, accounting and legal services
14) Publication of business accounting reports
15) Office supplies
16) Post, telephone, telegraph, and communication services
17) Computer software databases under agreements concluded with the license holder
19) Research and Development
20) Unrecoverable customs payments
21) Remuneration paid under commission and agency contracts
22) Court expenses and arbitration fees
For the complete article, click Taxation-of-Small-and-Medium-Enterprises-(SME)-and-Certain-Activities-of-Individual-Entrepreneurs-in-Russia (2)