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Location And Taxation

Retaining foreigners under contract for performing jobs or rendering services does not increase an organization’s tax burden if such work or services are performed outside Russia.

If a foreign national works in his own country under contract with a Russian company, and his pay is transferred from Russian bank accounts, he owes no taxes in Russia. This is according to Letter #03-04-06-01/328 from the Russian Ministry of Finance, dated December 12, 2009.

According to Point 2 in Article 209 of the Tax Code, income received from either Russian or non-Russian sources, is subject to Personal Income Tax if the individual is a tax resident of Russia; but for a non-resident, only income from Russian sources is subject to taxation.

Is the payment to a foreign employee of a Russian company, located within Russia, the same as receiving income from a Russian source? At least superficially, it would seem so. However, in reality, it is not.

The Tax Code specifies that compensation for completed work or other duties such as services rendered or work performed outside of Russia are  treated for tax purposes as income received from a source outside Russia.

Thus, the place where the work is performed is the deciding factor. Considering that foreign employees are often not tax residents, they are not obligated to pay PIT to the Russian Treasury.  The foreign citizen only has to pay taxes in his home country according to tax rates there.

Unified Social Tax (UST) and contributions to the Obligatory Insurance Funds are also not applicable to such incomes. This includes payments and other compensation paid to a foreign national for work performed outside Russia under a civil-law contract. 

Moreover, as stated in Paragraph 15, Point 1, Article 9 of Federal Law #212-F3 from July 24, 2009, even foreign nationals temporarily living in Russia are not subject to Obligatory Insurance payments.

Thus, employers face incredible temptation to hire employees from countries that have visa agreements with Russia—for example, Belarus – and in this way avoid paying any insurance payments.

Ministry of Finance Letter #03-04-06-01/328 dated December 29, 2009.

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