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Many Russian organizations invite foreign employees for participation in company’s business activity, thus creating an obligation to ensure that the invited employees have housing for the period of stay in the country. This guarantee towards foreign employees is established by Federal Law 115-ФЗ from July 25, 2002 “On the Legal Status of Foreign Citizens in the Russian Federation,” “Regulation for the Provision of Material, Medical and Housing Provision Security for Foreign Citizens for the Duration of Stay in the RF.” However, tax accounting for housing expenses may create complications.

In the opinion of the Russian Ministry of Finance (MinFin), expenses for providing housing for foreign employees required by labor contracts may be recorded in an amount not exceeding 20% of gross payroll. This position is substantiated by following: According to Article 255, Paragraph 4 of the Tax Code of the RF, payroll expenses include the cost of accommodation provided to employees in accordance with Russian legislation. In the Ministry’s opinion, this norm does not include expenditures incurred by the organization to fulfill the abovementioned Law #115-ФЗ and the Regulation. According to Article 131 of the Russian Labor Code, in-kind labor compensation may not exceed 20% of employee’s salary. In the Ministry’s opinion, this restriction must also be used in accounting of expenses for tax purposes.

However, The Federal Arbitration Court of Moscow Region ruled that foreign employee housing/rent expenses may be accounted for by the taxpayer specifically on the basis of Article 255, Paragraph 4 of the Tax Code of the RF, by virtue of the fact that, according to Russian legislation, the responsibility of providing housing to a foreign employee is placed on the employer.

The Ministry views housing expenses for the rent of foreign employee as a component part of salary expressed in kind. While calculating payrolls, it is necessary to remember that the labor compensation amount is considered fixed if the amount is predetermined by the labor contract. Therefore, if the labor contract determines a specific amount as housing expense/allowance for an employee, this payment may be qualified as a salary component and can be taken into account as payroll expense.

However, it is necessary to remember the following: according to Article 131 of the Tax Code, the share of payroll paid in kind must not exceed 20% from gross payroll. However, if a Russian organization invites a foreign employee and provides housing, these expenses are directed not for personal needs of this employee, but with the purpose of maintaining business activity. This notwithstanding, the tax authority has refused to let organizations declare expenses for the housing of foreign employees. The court rejected the tax inspection’s reasoning and pointed out that housing expenses are not analogous to expenses for goods and services for employee’s personal needs.

Based on the reasoning that housing expenditures prescribed by labor agreement are considered a salary component, it is necessary to take into account that, in accordance with Article 255 of the Tax Code, payroll expenses include any payments to employees in specie or kind as prescribed by Russian legislation and/or labor agreements. Limitations established by Article 131 of the Tax Code may not be used in a fiscal legal relationship.

Conclusions: An organization which invites a foreign employee for work in Russia and pays the cost of a rented property for the employee’s housing in accordance with the conditions of a labor agreement, may declare the expense for tax purposes as follows:

• in the amount not exceeding 20% of employee’s salary (according to the explanation by the Ministry of Finance);

Or

• in full amount (based on Article 255 paragraph 25 of the Tax Code, substantiated by judicial opinion). However, this may be challenged by tax authorities.

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