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Starting in 2011, amendments to Chapter 25 (“Profit Tax for Companies”) of the Tax Code of the Russian Federation will allow the use of a 0% profit tax by medical and educational organizations. However, the writing of these new regulations makes them applicable for companies starting only in 2012. (This is according to the Letter of the Ministry of Finance of the Russian Federation # 03-03-06/1/110 from February 21, 2011.)

Amendments

At the end of 2011, Federal Law # 395-ФЗ from December 28, 2011 (hereafter – the Law) introduced amendments to Chapter 25 of the Tax Code (the TC) of the Russian Federation. Specifically, Article 284 of the TC was updated with Paragraph 1.1 and Article 284.1 was added. These changes allow for the use of a 0% profit tax rate by medical and/or educational organizations.

To use this tax privilege, an organization must fulfill the following criteria:

1. Hold a license for educational and/or medical activity;
2. Must earn income from educational and/or medical activity, and also from scientific research and/or development activity for not less than 90% of its total profit tax base, (or not to have any revenues at all);
3. Conduct types of educational and/or medical activity included in the list issued by the Government of the Russian Federation;
4. A medical organization must have, continuously during the fiscal period,  at least 50% of its staff as certified specialists;
5. Must have, continuously during the fiscal period, at least 15 employees;
6. Must conduct no activity involving securities or other financial tools based on futures;
7. Submit an application to switch to the 0% profit tax rate not later than November 30th of the year prior to when the rate will be applied.

Application Rules

According to Paragraph 6 of Article 5 of the Law # 395-ФЗ, the above regulation comes into effect starting January 1, 2011 and will remain in force until January 1, 2020. However, companies will not be able to use 0% tax rate for profit tax in 2011. This is pointed out by the Ministry of Finance in its letter. Use of this rate in 2011 is impossible for several reasons.

First of all, the Government of the Russian Federation has not issued a list of types of educational and medical activity eligible for the privileged tax rate.

Second, the Law # 395-ФЗ was published on December 30, 2011, thus companies were not able to submit applications 30 days prior to the beginning of the new year.

Therefore, according to the specialists at the Ministry of Finance, the 0% tax rate may be applied by taxpayers not earlier than 2012.

Similar clarifications were offered by the Ministry in other letters as well (#03-03-06/4/19 from March 14, 2011; #03-03-06/1/117 from March 05, 2011; #03-03-10/10 from February 15, 2011).

This point of view conforms to general principles of tax and budget legislations.

Indeed, the fact that regulation came into effect starting January 1, 2011, does not signify that the new tax privilege may be applied at the same time.

From a legal point of view, this procedure for the introduction of changes is used to eliminate confusion for the use of the privileged tax rate starting in 2012.

Moreover, use of the 0% tax rate will lead to a decrease in income not only for the federal budget, but also for regional budgets (and in the case of redistribution of tax funds on regional level it will also affect local budgets). Budget 2011 does not take into consideration these introduced changes as it was approved prior to amendments coming into effect.

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