Q&A about the taxation of foreign representative offices and branches

We decided that it would be a good time to broach the topic of tax accounting just before quarterly reporting.

Nellya Azizova
Head of financial outsourcing department
The Russian Civil Code states that a representative office represents and protects the interests of a parent company. Its director concludes contracts, makes claims and performs other actions on behalf of the legal entity.

A branch performs similar functions but acts as a parent company.

Although the notions of “representative office” and “branch” feature in the Russian Civil Code, it does not include the concepts of “foreign representative office” or “foreign branch”. The Russian Civil Code also provides that only branches are entitled to engage in commercial activities.

The Russian Tax Code makes no distinction between representative offices and branches so any foreign representation registered as a representative office or a branch may conduct business.

Often branches are registered straight away if it is expected that commercial activities will be carried out. And, if what was initially a non-commercial representative office starts engaging in commercial activities over time, it would be a good idea to introduce amendments to its regulations. Not providing for commercial activity in regulations does not exempt from tax assessment so we will consider below everything from a taxation standpoint.

Representative office/branch regulations usually provide for non-commercial activity. However, many accountants mistakenly think otherwise and deduct profit tax from the funding received by representative offices from their parent company, considering such funding as revenue from main activity.

Reporting is determined depending on the type of activity (commercial or non-commercial):

  • VAT and profit tax. Regardless of the type of activity, representative offices and branches must submit VAT and profit tax returns. Non-commercial representative offices submit zero reporting.
  • Property and transport tax returns are submitted to tax authorities if there is an object of taxation regardless of the type of activity.
  • All foreign companies submit salary taxes, personal income tax and statistical reporting regardless of the type of activity.

Representative offices and branches use two methods for calculating profit tax:
  • Direct method. The object of taxation is profit which is the difference between all income attributable to the representative office and all expenses incurred by that representative office, calculated as set out in Chapter 25 of the Russian Tax Code. In other words, income and expenses are calculated as they would be for a Russian company.
  • Deemed method is applicable for companies that provide auxiliary services in Russia. The tax base in such case will be determined using a special procedure known as “deemed method” and will amount to 20% of the expenses incurred for this activity by the permanent establishment (Russian Tax Code Article 307(3)).
The direct method (income minus expenses) or combining methods may not be used to determine the tax base for such activity (Russian Ministry of Taxes Letter N 23-1-10/34-1571 dated May 12, 2004).

All tax reporting must be submitted upon registration with tax authorities. If there is no object of taxation, then zero reporting is provided. Otherwise, tax authorities block settlement accounts and activities in Russia begin on a wrong footing. It is important to remember that a representative office or branch in Russia binds parent companies (legal entities established outside Russia with a branch or representative office in Russia) to comply with Russian accounting and tax laws.


How to handle a change of name for a representative office?

We have encountered an even more difficult task, i.e. when a foreign representative office changes address.
Tax authorities require, in such case, to liquidate the representative office in one city and register it in another city. However, a substantial registration fee needs to be paid for registration of a representative office so we insisted that this was the very same representative office whose actual location has changed. In this case, the tax office, with which the representative office was formerly registered, must transfer all information about accrued and paid taxes and contributions to the tax office at the new address.

If only the name changes, changes must be introduced in the Taxpayer Identification Number (INN) Certificate, and it is then sufficient to indicate these new details in primary documents. It is important to note the date from which the company will indicate its new name.

How great is the risk of fines if a representative office provides auxiliary services to third parties and does not pay profit tax?

Any inspection from tax authorities increases the risk of fine. After the introduction of international sanctions against Russia, there have been more and more inspections of branches and representative offices although tax authorities always used to have too high a workload to check these companies too. It is better to pay taxes in full as underpayment will be identified already at the very first inspection.
Is it possible to keep accounting records with scanned documents?

Yes, we do keep accounting records with scanned documents. To ensure efficient document flow, we proceed as follows: (i) first, we ask clients to send us scanned copies, (ii) we check these copies and (iii) if there are no errors, we make document entries. If there are any errors, clients have until the end of the month to make the necessary changes and send us revised documents.

Can a representative office engage in commercial activity?

If the regulations of the representative office specify that the representative office will engage in commercial activity, then yes. However, if this is to be the case, we would recommend opening a branch straight away rather than a representative office.

Can we find accounting policy sample freely available?

Yes, there are sources that offer such documents although in very general terms. That is why we recommend engaging expert methodologists who will be able to draw up a very detailed document meeting all particular needs of each individual company.

We recommend drawing up documents properly from the very beginning: correcting improperly issued documents in a timely manner, as well as those received from suppliers and reporting persons. We also recommend verifying whether primary documents and their notes are duly completed, as well as briefing employees working with primary documents and expense reports.