Corporate Profit Tax in the Russian Federation



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Corporate Profit Tax in the Russian Federation



One of the most sophisticated taxes is the corporate profit tax regulated by Chapter 25 of the Russian Tax Code. Taxpayers for profit tax purposes are Russian legal entities and foreign legal entities carrying out activities in the Russian Federation through permanent establishments and/or receiving income from sources in Russia. Russian legal entities are taxed on their worldwide income. A permanent establishment of a foreign legal entity (the term “permanent establishment” is used only for tax purposes) is a branch, representation office, division, bureau, agency, any other separate subdivision or some place of activities through which the foreign legal entity regularly carries out entrepreneurial business within the territory of the Russian Federation related to:

- use of subsurface resources and other natural resources;

-  construction and assembly;

- the sale of goods from warehouses (owned or leased by the entity) located in Russia;

- handling of other works, rendering services, etc.

 The basis of taxation for the corporate profit tax is the profit received by the taxpayer: for Russian legal entities it is income received less expenses incurred; for foreign legal entities – income received through a permanent establishment, reduced by those expenses incurred by the foreign legal entity that are related to the permanent establishment’s activities as well as income received from other sources in Russia.

 Chapter 25 of the Tax Code establishes a common maximum rate for calculating tax – 20 percent. This 20 percent rate is split into two components: 3 percent paid to the federal budget and 17 percent paid to the regional budget. Regional authorities may reduce this tax rate to as low as 13.5 percent for certain categories of taxpayers, but this affects only the portion paid to the regional budget. Tax rates on the income of foreign legal entities which are not connected with activities in Russia through a permanent establishment are:

- 20 percent from all types of income with the exception of income received in the form of dividends, income received from the activities related to international transportation and income received from separate debt obligations (state debt obligations);

- 10 percent from activities related to international transportation;

- 15 percent on income received in the form of dividends paid by a Russian entity to a foreign company and dividends paid by a foreign company to a Russian legal entity. In these cases the profit tax is calculated taking into account double taxation treaties between Russia and a foreign state.

In the case of exceptions, according to Chapter 25 of the Tax Code several forms of income are not subject to Corporate Profit Tax. The following one is worth mentioning: funds received by a Russian legal entity without consideration:

- if the transferring party (individual or legal entity) owns more than 50 percent of the share capital of the receiving party (Russian company Parent – Subsidiary);

- if more than 50 percent of the share capital of the transferring party is owned by the receiving party (Subsidiary - Parent).

This exemption applies only if the assets received are not transferred to third parties within one year from the day of receipt (exception - monetary funds received).

Gains received from sales of capital assets are taxed at the standard tax rate (20 percent). Such gains are calculated as gross proceeds less net book value or acquisition cost. The expenses related to sales of the assets are deductible as well.

Taxpayers must submit quarterly tax returns for each reporting period (quarter) and annual returns for the calendar year. Quarterly returns are due within 28 days after the end of the reporting period, annual returns are due by March 28 of the year following the reporting year.

If Russian legal entities have registered separate subdivisions located throughout the territory of Russia, they must file separate tax returns in each tax district where the subdivision is registered. Also Russian companies must allocate taxable profits between the head office and the subdivisions in different regions. The calculation of profit tax is based on the net book value of fixed assets, or at the discretion of the taxpayer, on either the number of employees or the payroll. In this case the calculated profit tax in the part of regional budget is paid at the place of location of the subdivision and the federal part of the tax is paid by the head office.

 

Exercise 2.



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