Incentives to Foreign Companies Subject to Profit Tax

The Russian Ministry of Finance believes that bonuses paid by a Russian company to its foreign customers for completing certain conditions of business agreements are subject to profit tax. This position of the Ministry is reflected in the Letter #03-03-06/1/555 from October 17, 2012.

According to the Ministry, the abovementioned bonuses fall within the purview of Article 309, Subparagraph 1 of the Russian Tax Code. This subparagraph includes a list of financial revenues received by foreign companies from sources in the Russian Federation which are to be classified as profits and are subject to profit tax withheld at the source. The list also includes profits unrelated to business activity. If bonuses are paid by an organization which is a tax agent, accordingly, it is obligated to withhold the profit tax and pay it to the state.

At the same time, in withholding taxes from a foreign organization, it is necessary to take into account any double taxation treaty between Russia and the appropriate foreign state that may be in effect.