Tax News Reporter - Week Ended 22 October 1996

As we announced earlier (Tax Alert 6/96 of 26 July 1996), the Moscow Tax Inspectorate (MTI) now requires a notification of Russian source income (Form 1011 FE), signed as received by the MTI, as the only document which can exempt a Russian legal entity from the obligation to withhold VAT from income paid to a foreign legal entity (Letter of the MTI of 5 June 1996 No. 11-13/11769). On this form, the foreign legal entity must declare the income in section 5 or 6 as "connected with a permanent establishment" i.e. subject to profits tax, although income subject to VAT is not necessarily subject to profits tax. Before the letter of the MTI was issued, it was sufficient to provide a tax registration certificate of the foreign legal entity in order to avoid withholding of VAT. The MTI now appears to have taken the position that, if a Russian legal entity does not hold a copy of form 1011 FE from foreign legal entities to which it is making a payment, VAT should be withheld from those payments. This requirement is effective as of 1 July 1996 and must be applied irrespective of whether VAT has been properly accounted for and paid by the foreign legal entity. In case of failure to withhold, late payment interest may be charged at 0.3% per day. Although this practice may very well be challenged, we recommend Russian companies which have been paying income subject to VAT to foreign legal entities and have not withheld VAT to obtain such forms.

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