1 In this issue of Tax Alert we will look at the new registration and notification procedures for foreign legal entities set out by the State Tax Service in the recently issued Instruction "On the order of registration for tax purposes of foreign organisations established in accordance with legislation of foreign states, and international organisations" No. VA-4-06/57n of 20 September 1996. The new instruction will be effective as from 15 November 1996.

Different Registration For Different Forms Of Presence

2 For the purpose of tax registration, eight forms of 'presence' of a foreign legal entity ("FLE") in Russia are distinguished, each with a different type of registration and different reporting obligations to fulfill. Currently, the obligation for tax registration arises if a FLE is carrying out activity on the territory of the Russian Federation or if it is holding property situated there. In the former case, the FLE must file profits tax and other declarations and maintain accounting records for tax purposes.

3 Under the new instruction, the forms of presence which trigger an obligation or an option to register are the following:

  • Activity on the territory of the Russian Federation for a period exceeding one month;
  • Activity on the territory of the Russian Federation for a period not exceeding one month;
  • Acting through a 'dependent agent' which is located in Russia;
  • Receipt of 'passive income' (basically dividends, interest or royalties);
  • Property on the territory of the Russian Federation, not connected with activity of a branch;
  • Obligation to pay VAT in case of activity in Russia for a period not exceeding one month;
  • Opening of bank accounts;
  • Accreditation of embassies and other diplomatic representations and international organisations;

4. Any official documents required by this instruction should either be legalised or have an apostille affixed. It is explicitly stated that the tax authorities cannot require documents other than those mentioned in the Instruction in order to register a FLE.

More Than 30 Days Of Activity In Russia

5. If a FLE is planning to carry out activity in Russia through a branch for a period exceeding one month it should register with the tax authorities in the place of its activity within 30 days from the beginning of the activity. This is the 'full' tax registration which already existed under Instruction 34 of the State Tax Service. Under Instruction 34, activity is interpreted in the broadest sense: for the purpose of tax registration it is irrelevant whether or not a Russian profits tax liability arises. This has led to the situation where technically even a one-time visit leads to the obligation to register, although this has not been maximally enforced. The obligation to register fully now only arises if the FLE has been present for more than 30 days. The implication of this new rule may be that activities for a period not exceeding 30 days are not considered to lead to Russian profits tax liability.

6. It is not clear how this period of one month (presumably 30 days) should be counted. The most practical approach would be to consider the accumulated time spent in Russia within one calendar year (=one accounting period for profits tax). Technically, however, a two day visit every month by a representative of a FLE would not lead to an obligation to register under the new instruction, but could lead to a Russian profits tax liability.

Less Than 30 Days Of Activity In Russia

7. If the FLE carries out activity in Russia for a period of less than one month it should notify the tax authorities about Russian source income (form 1011 FE) prior to the commencement of its activity. This form contains details about the nature and size of payments received. Under Instruction No. 34, the notification of Russian source income (form 1011 FE) should be filed within one month after the right to receive such income arises. This means that, technically, the notification form does not have to be filed if:

  • at the moment the activity starts, no details are yet known yet about the payments to be received. The obligation to 'register' cannot be fulfilled, as there is no contract party, contract or income to report. If the activity eventually leads to the receipt of Russian source income, a notification form must be filed on the basis of Instruction 34. This obligation already existed and its purpose is to facilitate subsequent claiming of tax treaty benefits, such as decreased or zero withholding tax rates. Practice shows, however, that filing the notification form is not essential in obtaining treaty benefits; or
  • the activity does not lead to the attraction of any Russian source income. This can be the case if the temporary presence in Russia results in the concluding of import / export contracts (Foreign Trade Contracts) or contracts for services which are physically rendered outside the territory of the Russian Federation.

Different Places Of Activity

8. A FLE must register with the tax authorities in the location where it carries out its activities. If a new branch is set up on the territory of another tax inspectorate, the FLE should register it with the other tax inspectorate (not later than 30 days from the starting of its activity). A new TIN will be assigned.

9. The Russian Federation has three main different administrative levels: federal, regional and local. The regional level consists of "federation subjects", which can be republics, provinces, regions or cities (Moscow and St. Petersburg). The State Tax Service is organised accordingly: each tax inspectorate on a regional (i.e. Federation subject) level now has to determine, within one month, which tax inspectorate will be responsible for dealing with foreign legal entities. This can be one tax inspectorate on a regional level (as is now the case in Moscow and St. Petersburg), but the tax authorities may also choose to allow tax inspectorates on a lower administrative level to deal with foreign legal entities.

10. This means that a foreign legal entity carrying out activity within one federation subject may still fall in the jurisdiction of more than one tax inspectorate, and will have to register accordingly with various tax inspectorates, and file tax declarations with each of these inspectorates. This will effectively prevent consolidation of profits and losses between branches registered with different tax inspectorates. If a FLE has more than 1 place of activity on the territory of the tax inspectorate it has been already registered with, a notification should be filed with this tax inspection. One tax declaration is filed, which makes it possible to consolidate profits and losses of the various branches. This does not apply if several building sites are located on the territory of one tax inspectorate.

Dependent Agents

11. Individuals and organisations representing a FLE and creating a permanent establishment of the FLE should register with the tax authorities within 30 days of the date of issue of a power of attorney in their favour. Usually an agent creates a permanent establishment of a FLE if he:

  • has a power of attorney to act on behalf of the FLE;
  • habitually excercises this power;
  • the agent is not an independent agent, which would generally be the case if, in so doing, he does not "act in the ordinary course of his business".

12. Whether or not the last criterion will be fulfilled depends on which, if any, double tax treaty is applicable and is, in many cases, a matter of interpretation. The Instruction states that, in case of doubt, the tax authorities should be consulted in order to assess whether or not a registration obligation exists. It would be fully justified, however, to take the following position: if a FLE is satisfied that a representative cannot be considered to be a dependent agent, either on the basis of Russian legislation or of an applicable double tax treaty, there would be no obligation to register with, or to consult, the tax authorities.

Passive Income

13. A FLE receiving passive Russian source income should notify the tax authorities within 1 month from the moment when the right to receive such income arises. This provision repeats the one set in Instruction 34.


14. If a FLE possesses property in RF not relating to the activity of the FLE through a permanent establishment, it should register with the tax authorities as a potential payer of property tax (a TIN would be assigned in this case). If the property relates to activity of a permanent establishment, this is reported in the property tax return that must be filed yearly. Although the Instruction does not explicitely state this, it can be assumed that once a FLE has registered property in Russia, it should file a property tax declaration.

15. Property tax is levied at a regional level: each Federation subject can set its own rate. If property is located in different regions the FLE must register its property with each applicable tax inspectorate. Therefore it is possible to have two or more Taxpayer Identification Numbers: one relating to a branch and another to the property. This provision could simplify the application of some Double Tax Treaties under which no property tax is due in respect of moveable property if the representative office is not a permanent establishment. It is not clear what the position is with regard to moveable property being transferred from one location to another, for example transport vehicles, vessels etc. under a lease by a foreign lessor to a Russian lessee.

Option to register for Value Added Tax if less than one month activity in Russia

16. A FLE can register for VAT purposes only in order to pay VAT (not face withholding) or receive reimbursement. Only FLEs which carry out activity on the territory ofthe Russian Federation for a period not exceeding one month qualify for this type of registration. As before, only such FLEs are considered as taxpayers of VAT and have the right to set off input against output VAT.

Reimbursement Of Incurred Input VAT

17. This separate VAT registration opens the possibility for foreign legal entities to apply for reimbursement of accrued input VAT if they have one or a few transactions over which output VAT is due. In this situation VAT needs to be accounted for and paid by the foreign legal entity, but a profits tax liability does not necessarily arise. FLEs which use services rendered in Russia have incurred significant amounts of Russian input VAT in the past, which constitute a pure cost to them because they were denied offset or reimbursement. The VAT Instruction allows offset of such amounts only if a FLE has sales subject to Russian VAT and, accordingly, is considered as a "VAT taxpayer". Russian legal entities are allowed to carry forward amounts of excess input VAT over a period of three years, apply for reimbursement or set off the excess amount against other tax liabilities. Although the VAT instruction allows foreign legal entities to offset input VAT only to the extent there is output VAT, we believe that this provision only applies to a limited number of situations and that FLEs generally will be subject to the same rules as Russian legal entities.

Possibility To Reimburse Could Also Apply To Fles Without Presence In Russia

18. It could be argued that the FLE does not physically have to render services on the territory of the Russian Federation in order to benefit from voluntary registration: for VAT purposes, certain services are considered to be rendered on the territory of the Russian Federation if the recipient has a "place of economic activity" in Russia, irrelative of where the services are actually carried out. If the FLE has Russian input VAT also, registration would enable it to offset input VAT against output VAT.

Opening Bank Accounts

19. If a FLE opens any rouble or currency bank account with an authorised bank and has no presence in Russia it should notify the tax authorities in advance. Russian authorised banks should notify the tax authorities in respect of correspondent accounts opened by foreign banks not later than the 20th of every month.

20. The registration form for bank accounts, Appendix No. 4 to the Instruction, should be submitted tp the tax authorities before a bank account is opened in a Russian bank. In the section "Bank Account Information" one of the spaces to be completed is named "Account number". This may create a deadlock if the bank is not yet able to tell which bank account will be assigned to the FLE and can only do so when it receives proof that the FLE has actually complied with its registration requirement.

21. If transactions carried out through an account create a permanent establishment of the FLE which opened the account, additional documents should be presented to the tax authorities in order to be fully registered. It is generally assumed that merely having a bank account in order to carry out a one-time purchase or sale of shares or other securities does not create a permanent establishment, but actively trading through an I-account does. No practice has, however, evolved so far. The consequences can be quite far reaching: in the first case Russian legislation requires 20% tax to be withheld from the gross profit, defined as the difference between the sales and the purchase price of the securities. In the second case, 35% profits tax must be paid over the net profit.


22. Embassies and diplomatic representations may register with the tax authorities in their location for the purpose of claiming tax privileges envisaged by Russian legislation and international treaties. Services rendered to embassies and to diplomats are exempt from VAT.


23. In case of any changes in data related to the registration of the FLE with the tax authorities, or in case of reorganisation of the FLE (i.e. the legal form changes) the tax authorities should be notified. In the latter case a new Taxpayer's Identification Number will be assigned. This is an improvement in comparison with the existing situation, in which even relatively minor changes, such as amending the name of the company, make it necessary to fully re-register.

For further information contact Bauke van der Meer on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: Bauke_van_der_Meer@ru.coopers.com or enter a text search 'Coopers & Lybrand' and 'Business Monitor'

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.