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Author - Galina Belikova, Partner, Director of Audit Department, Alinga Consulting Group

Some representation offices of foreign companies in Russia encounter situations when the representation office conducts business activity ( i.e. sale of goods) as well as marketing research and advertisement activity, financed by the head office as preparative and supportive activities.

A question arises in this situation: can expenses financed by the head office be taken into account for the purpose of business profit tax?

Tax authorities are of the unanimous opinion that it is necessary to keep separate accounting records for business activity that generates income and activities financed by the head office and that incurred expenses for these types of activity must not be combined (Letter of the Tax Department of Moscow #16-15/026496 from March 24, 2009; Letter of the Ministry of Finance #03-03-04/1/708 from October 24, 2006).

Also, the representation office may incur expenses which may be equally categorized as preparative and supporting activity, as well as gainful business activity. Such expenses may include accumulated depreciation amounts, rent, employees’ salary and other expenses.

These representation offices of foreign companies must separate expenses of gainful and not-for-profit activities.

However, the resulting separated expense accounting may draw a tax inspector’s attention. Therefore, this separation of expenses must be conducted in accordance with previously developed and approved policy providing for logical and proportional distribution of expenses between activity types of the representation office.

If the representation office does not keep separated accounting records in this situation, most likely it will have to defend its case in court.

Judicial decisions on this issue are very few. However, rulings have usually favored the taxpayer (Ruling of the Federal Arbitration Court of Moscow Region # КА-А40/6537-06 from July 25, 2006).

Therefore, if representation office is ready to stand its position in court, there are grounds for taking into account for tax purposes the expenses incurred in the process of preparative and supportive activities. As for those who are not ready to dispute with tax authorities, we suggest keeping separating accounting records for expenses of business operations and non-profit activity.

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