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How to Avoid High Taxes On Employee Vacation Time

Recent discussions have brought up questions on how to avoid having to pay high amounts of taxes and dues when providing employees with vacation. The ratification of the International Labor Organization’s Convention 132 “On Paid Vacation” (Federal Law #139-FZ dated 07.01.2010) has generated particular interest.

Two Ways to Compensate Workers for Vacation

“The Convention really doesn’t contain anything new,” says Artyom Rodionov, tax expert and editor of the magazine “Adjudicatory Taxation Practices.” “Such a contentious prohibition on accumulating vacation is also in Article 124 of the Labor Code. It prohibits failure to provide vacation time within two consecutive years and Article 9 in the Convention has similar regulations. However, it doesn’t say anything about finding other ways to ‘use up’ one’s vacation time.”

An explanatory note to Law #139-FZ also indicates that the Convention is fully manifested in Russian legislation, therefore ratifying it does not require changing anything in Russia’s Labor Code.

If it is more beneficial for both the employee and employer to put off vacation time and not violate labor legislation (which would lead to serious fines, as stipulated in Article 5.27 of Russia’s Administrative Offenses Code), then there are two ways this could be done. First – write up all the necessary documentation as if the employee were taking their vacation. However, the employee continues to work and receives cash for their vacation time, which they will take later on at their own expense. The benefit here is that 4000 rubles for one employee per year is not subject to insurance premiums (Article 9, Part 1, Point 11 of Federal Law #212-FZ dated 07.24.2009).

However, tax inspectors might discover that the employee was actually at work when they were supposed to be on vacation – for example, by inspecting records of their electronic entrance pass used to enter and exit their place of work. The worst case scenario would be that the inspectors could accuse the company of having the employee work without compensation and charge the company additional profit tax. If labor inspectors find out, then the company will face a fine.

The second method is for the employee to sign an independent work contract with their employer on fulfillment of a particular assignment. Payments according to such contracts do not have the usual 2.9% Federal Social Insurance payment or personal injury insurance premiums deducted from them (Article 9, Part 3 of Federal Law 212-FZ, Article 5, Point 1 of Federal Law 125-FZ dated 07.24.1998). Compensation for expenses related to fulfilling the contract are not subject to insurance premiums at all (Article 9, Part 1, Point 1, Sub-point J of Law #212-FZ).

The risk here is that the tax inspectors might re-classify this agreement as a labor contract and deduct additional premiums. However, in such cases, courts usually rule in favor of the company (for example, Moscow Federal Arbitration Court resolution #KA-A40/8619-09 or Povolzhsky Regional Federal Arbitration Court resolution #A55-14265/2007 dated 06.07.2008).

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