A Russian organization and a foreign organization without a permanent representation in Russia entered into contract for the international transport of goods. By order of the Russian organization, the foreign company organized transportation of goods by the means of the company and by outsourcing services to other foreign companies.
What is the procedure for paying profit tax in Russia for profits paid to the foreign company under this agreement?
Does the Russian organization act as a tax agent in regards to VAT in this case?
According to Article 309, Paragraph 1, Subparagraph 8 of the Russian Tax Code (hereafter – TC), profits from international transportation services received by a foreign company (except in cases of business activity in Russia through permanent representation) are qualified as income received from sources within Russia and are subject to income tax.
For the purposes of this Article, international transportation services include any shipping operations via sea and/or river vessels, aircraft or railroad transportation, except in cases when transportation service occurs between points outside of Russia.
According to articles 246, 306, and 307 of the TC, profits received by a foreign company for conducted services, may are liable for income tax only in cases when the services are conducted on the territory of the Russian Federation and it led to formation of permanent representation of this company in Russia.
Therefore, services associated with freight forwarding and handling are subject to income tax in Russia only in the case when the activity of foreign company offering these services leads to forming of permanent representation in Russia. In such case, the foreign company carries out its own tax responsibility.
According to Article 146, Paragraph 1, Subparagraph 1 of the TC, objects of taxation for VAT include transactions for realization of goods (works, services) on the territory of the Russian Federation.
Article 148 of the TC establishes procedures for determining location of realization of works (services) for VAT purposes.
Thus, for services related to transportation of goods, conducted by foreign companies outside of Russia or between points of departure and destination, one of which is located outside of Russia, Russia is not considered as the location of realization of services. Therefore these services are not subject to VAT in Russia.
Transportation services provided by foreign entities that are not registered as taxpayers with Russian tax authorities are recognized as located in Russia if both points of departure and destination are located in Russia. For these services, VAT is calculated and paid by the tax agent who purchased these services from the foreign contractor.
Thus, the Russian organization who purchased services from foreign companies not registered with Russian tax authorities for transportation of goods between departure and destination points on the territory of the Russian Federation, acts as a tax agent and is obligated to calculate and pay into the federal budget the VAT for these services.
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