Tax aspects to consider when hiring Russian remote employees
Valeria Khmelevskaya
by Valeria Khmelevskaya
Engaging remote employees might be relevant for businesses located in Russia, including those with foreign investments like subsidiaries or branches (e.g. when the relevant employee has left Russia but continues working for a Russian company), as well as for foreign companies hiring employees residing in Russia.
Should the employees from the Russian units relocate, the following tax aspects should be considered.
Russian employer engages remote employees working abroad
Generally, the Russian employer has to withhold personal income tax (PIT) from payments to the employee and remit it to the budget. Should such employee work remotely from abroad, they would be obliged to pay their taxes individually (income for working abroad does not qualify for income from Russian sources). Hence, it is important for the Russian employer to track the whereabouts of their employees so that no PIT overpayments are made. At the same time, the Russian employer has to pay social security contributions, provided that the employee is a citizen of Russia or has a Russian residence permit.
In addition, it is important to check the laws of the country of relocation in order to identify the permanent establishment risks as permanent establishment may lead to corporate tax liability and further obligations for the employer entity.
Foreign employer engages remote employees working in Russia
If foreign companies engage remote employees residing in Russia based on labor agreements, they should review the risks of creation of a permanent establishment and obligations for tax registration in Russia. A permanent establishment might be created, for example, when an employer rents an office or other premises for remote employees where they can meet from time to time or conduct negotiations. Permanent establishment means there is a primarily liability to pay tax on profits. The relevant entity would also need to register with the Russian tax authorities and file tax returns.
Alternatively, foreign companies may engage individuals as independent service providers based on a service agreement. In such a case, the individual should be properly registered either as an individual entrepreneur or as a self-employed person and act independently. The best arguments to prove independence might be that the relevant individual works for several companies, and has several customers. Under this arrangement the permanent establishment related risks might be significantly lower and the provisions of Russian labour law, providing employees with a number of rights and guarantees (e.g. the right to vacation, sick leave, etc) shall not be applied.
The tax aspects will depend on the taxation system applied by the relevant employee (service provider):
PIT / special taxes
VAT
Social security contributions
Tax paid by the relevant employee / service provider
n/a
30% (15.1% on amounts above RUB 1,917,000 - in the exceeding part)
20% (no right to offset for a foreign company without PE)
KBK Accounting is a reputable outsourcing firm and provider of a wide range of services, including tax accounting and bookkeeping, tax advisory, reporting and compliance, HR, and interim management.
GGI member firm KBK AccountingMoscow, RussiaT: +7 495 662 33 30
Auditing & Accounting, Tax
Valeria Khmelevskaya is a Partner, Lawyer and Tax Consultant admitted to practice in Russia. She has over 20 years of experience of consulting in matters of Russian and international tax law. She is also the Deputy Head of the Management Board and the Chair of the Committee for Taxes and Financial Reporting of the German-Russian Chamber of Commerce (AHK) and recommended attorney of the Austrian Foreign Trade Centre Moscow (Advantage Austria). Contact Valeria.