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Reporting Taxes Paid Abroad As Expenses For A Russian Organization

The Tax Service allows organizations to expense taxes paid abroad even if the Tax Code does not include double taxation provisions. Thus, the Tax Authorities are openly defying a higher financial authority (based on the Letter of the Federal Tax Service N ЕД-20-3/1087 from September 1, 2011).

MinFin’s Opinion

The Ministry of Finance (MinFin) has more than once stated that foreign taxes may not be expensed on the basis of Article 264, paragraph 1, sub-paragraph 1, nor Article 264, paragraph 1, sub-paragraph 49 of the Tax Code, due to the fact that Russian taxes may be decreased in such instance when double taxation provisions exist. Thus, for example, profit tax may be lowered by the amount of similar profit taxes paid in a foreign country only if that country has entered into a double taxation treaty with Russia. To receive this tax break, a payer must present the tax inspection with a document confirming payment of such profit tax abroad. In a similar manner, Russian property tax may be decreased by the amount of property tax paid by a Russian organization in a foreign country. However, MinFin does not permit expensing other payments made to foreign states for tax purposes in Russia. In particular, according to MinFin, the following payments are not to be expensed for profit tax purposes:

  • VAT paid in the foreign country for goods or services provided abroad;
  • Other foreign taxes paid by foreign representation offices and branches of Russian organizations.

Comment. We would like to point out that MinFin allows VAT included in bills from foreign hotels to be expensed, either as an autonomous expense, or included in business travel expenses. Tax authorities did not offer any comments on this issue.

FTS’ opinion

The Federal Tax Service has stated that profit tax can be reduced by VAT paid abroad and other taxes accounted for as miscellaneous expenses.

Tax Service’s explanation is very logical:

  • taxable base for profit tax is a monetary expression of income which is represented as income decreased by expenses;
  • Expenses must be substantiated (economically feasible) and costs documented (in some cases – losses). Mandatory taxes, even paid in foreign countries, completely fit this definition;
  • Notwithstanding that Article 264, Paragraph 1, Sub-paragraph 1 lists only Russian taxes and fees, the list of other expenses remains open. Therefore taxes and duties paid in a foreign country may be expensed by a Russian organization as miscellaneous expenses based on Article 264, Paragraph 1, Sub-paragraph 49. Incidentally, there are two court rulings supporting this approach.


This official letter will decrease the number of disputes with tax inspectors and, at the very least, will become a powerful argument for recognizing foreign taxes as expenses.

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