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Foreign Company May Enter A Simple Partnership Agreement


In Letter #03-03-06/4/31 from April 7, 2011 the Ministry of Finance addresses the question of whether two foreign companies with representation offices in Russia may enter into a simple partnership agreement and pay profits tax in accordance to Article 278 of the Tax Code (TC).

The Letter points out that simple partnership agreements for purposes of business activity may be concluded only between private entrepreneurs and/or commercial organizations. 

The specifics of calculating profits tax between parties of the above mentioned agreement are described in Article 278 of the TC. According to this article, if one of the participants of a simple partnership is a Russian organization or individual – and a tax resident of the RF, accounting for the partnership must be conducted by the Russian partner, regardless of who administers the affairs of the partnership.

At the same time, according to Article 246 of the TC, foreign companies conducting business activity in Russia through permanent representation and/or receiving profits from sources in the RF are recognized as taxpayers of the RF.

Permanent representation is not formed if, according to a simple partnership agreement, the foreign company does not conduct business activity through a dependent agent or conduct it itself independently, as required after forming a permanent representation.

If the foreign company’s business activity within the framework of the simple partnership agreement does not lead to formation of permanent representation, the profits received from this activity are considered to be profits received from sources in the Russian Federation.

Any double taxation treaties between Russia and the appropriate foreign state are also considered when determining where business activity is taking place and whether permanent representation has been established.

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