The system of payment for social, medical and pension insurance has undergone considerable changes, with new laws in force as of January 1, 2010. Prior to the changes a unified social tax was levied for all these purposes. Now the system has been amended so that the contributions to the social insurance fund, pension fund, and compulsory medical insurance funds are paid (hereinafter “employer contributions” or “insurance contributions”) following separate rules for each of these purposes. In this connection the rules on social tax of chapter 24 of the Russian Tax Code have been abolished and replaced by the Law on Insurance Contributions (“On insurance contributions to the pension fund of Russia, social insurance fund of Russia, compulsory medical insurance federal fund, and compulsory medical insurance local funds”, Law No. 212-FZ of 24.07.2009).
These employer contributions go towards funding the following kinds of social welfare programs:
• Social insurance (compensation and paid leave in case of illness, pregnancy, childbirth, and childcare);
• Compulsory medical insurance (free public healthcare);
• Pension insurance (retirement pension).
Employers as well as self-employed entrepreneurs and professionals are liable to pay insurance contributions, the latter both for the people they employ and for themselves.
The pension system is funded by mandatory pension contributions made to the Pension Fund, which manages the state pension system (Law “On compulsory pension insurance” of 15.12.2001 No. 167).
The pension is divided into three parts: a basic part, an insurance part and an accumulative part. Unlike the first two parts, the latter applies only to persons born after 1967. It is inheritable and can be transferred to a licensed non-governmental pension fund.
The system of social security is managed by the Social Insurance Fund (Law of 29.12.2006 No. 255-FZ “On compulsory social insurance in case of temporary disability and maternity”). The details on the required employer’s contributions to this system and the paid-out benefits will follow below.
The system of compulsory medical insurance is managed by the Medical Insurance Fund (Law No. 326-FZ “On compulsory medical insurance” of 29.11.2010). The system provides the (mainly) free healthcare and hospital services.
Contributions to the system of mandatory work-related accident and health insurance
The Social Fund also manages the system of compulsory work hazard insurance (insurance against work related accidents and occupational diseases; Law of 24 July 1998 No. 125-FZ “On compulsory social insurance against industrial accidents and occupational diseases”).
The insurance rates or work-related accidents are differentiated in relation to the perceived occupational risk. But the system does not actually differentiate for individual risk, basing the risk factor on the statistics connected with the main activity as per official classification of the business of the employer. This assignment of risk factor is based on the amount of insurance premiums actually paid in the preceding year to workers of a certain industry.
The rates range from 0.2% to 8.5 % of the salary (total remuneration). For example, a company employing mainly office workers would pay 0.2% (1 class); a company producing steel would pay 1.9% (class 16); and a coal mining company would pay the maximum 8.5% (32 class). A company (legal entity) may, however, apply individual rates for each of its registered subdivisions.
The base for charging the pension, social and medical contributions
According to the law, the insurance contributions are levied from payments and other compensation made in favor of both salaried employees and freelancers (in Russia frequently referred to as civil law contractors, who may work e.g. on contracts for performance of works, provision of services, commissioning contracts, licensing agreements).
The question as to whether payments to members of a company’s board of directors and audit committee should be subject to insurance contributions is still disputed. The Ministry of Finance previously held that since such payments are not made under employment or civil law contracts, they should not be subject to social tax (Letter No. 03-03-06/1/475 of the Ministry of Finance of Russia dated 10.07.2007). The Ministry of Health and Social Development has extended this interpretation (taken in relation to the former social tax) to apply to the insurance contributions under the new law (letters of Ministry of Health and Social Development No. 2519-19 item 6 of 05.08.2010, No. 1145-19 of 07.05.2010, and No. 421-193 of 01.03.2010). However, the Supreme Commercial Court of Russia in a ruling (under the old law) held that such payments should have been subject to social tax (information letter of the Supreme Commercial Court No. 106 of 14.03.2006).
The amount of insurance contributions due in relation to each employee (insured person) is calculated on an accrual basis from the beginning of the year. Each employer (or other payer of the insurance contributions) makes the calculations solely based on the income the employee earns from this same employer during the calendar year, without regard to income that the employee may have earned from another employer (strictly limited to one legal entity even within a group of companies).
The base for insurance contributions in respect of commissioning contracts and licensing agreements is the net amount after deducting the documented expenses, and in the absence of such documentation they are determined as a fixed percentage of income (Law “On insurance contributions” article 8(7)).
The tax base for compensation received in kind is the real cost of the received goods (services) (art. 8(6))Federal law “On insurance contributions”).
Remuneration in favor of individuals under civil law contracts is not subject to insurance contributions for the part due to the social insurance fund (Law on Insurance Contributions art. 9(3)). Individual entrepreneurs, lawyers, notaries and other persons with private practice are required to pay a fixed amount of insurance contributions to the Pension Fund of Russia and the Compulsory Medical Insurance Federal Fund based on a sum of required insurance contribution that the Russian Government sets for each year (art. 14 (1) Law No. 212-FZ). For people born after or in 1967 this value was set as RUR 17,208.25, of which RUR 14,386.32 is contributed to the Pension Fund and RUR 2,821.93 to the Compulsory Medical Insurance Fund.
The insurance contributions for self-employed people must be transferred to the Pension Fund of Russia and the Compulsory Medical Insurance Federal Fund no later than December 31 of the current calendar year (Article 16 (2) Law No. 212-FZ). Self-employed people do not pay disability and maternity leave to the Social Insurance Fund (Article 14(5) Law No. 212-FZ).
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