Finding the right tax system for you
Every businessman wants to pay as little tax as possible. Russian tax legislation gives you this opportunity. In this article, we’ll explain all the possible varieties of the Russian tax system out there so you can choose which one works best for you.
At the moment, there are seven tax systems in Russia:
- General taxation system (Russian: OSNO)
- Simplified taxation system (USN)
- Unified tax on imputed income (ENBD)
- Unified agricultural tax (ESHN)
- The patent taxation system (PSN)
- Tax on professional income (NPD)
- The tax system for the implementation of a production sharing agreement (CRP)*
*We won’t be discussing the last variant because of its narrow focus: it only applies to the extraction of natural resources.
Are you using CRP? Leave us your number and we’ll tell you how to save on your taxes.
We’ll start our review with the varieties of tax system that are available to most people.
OSNO – General Taxation System
General income taxation is universal. Everyone, from mega-corporations to the smallest limited-liability companies, can opt for OSNO. It is the default tax system that most businesses use.
This system is flexible. You aren’t restricted by what line of business you’re in and you can expand your business into new areas. You can take on as many new employees as you like, open branch offices, and build a large, varied asset base.
The list of tax-deductible expenses is almost endless, as long as you can prove with documentation that they are of utmost necessity to your business.
If your potential clients are interested in claiming back their VAT, then it’s worth thinking about general income taxation, even if you don’t have a large business. The benefits of working with such clients could outweigh the disadvantages of this tax system.
Firstly, OSNO assumes the highest possible tax burden. You need to pay a tax on profits (sole traders pay personal income tax instead), VAT, property tax, social contributions, as well as further taxes.
Secondly, the accounting work is particularly time-consuming. Consequently, the cost of your accountancy services increases.
Thirdly, your corporate and personal income taxes are not determined by how much money you’re actually earning. This means it doesn’t matter whether or not your buyers have settled their accounts with you, you still need to pay your taxes. However, you do have the chance to make an allowance for unpaid costs whilst calculating your due taxes.
USN – Simplified Taxation System
Simplified taxation is the most popular tax system for small businesses. It is mainly for sole traders and organisations.
If you use this system, you avoid the most ‘harmful’ taxes: VAT and the tax on profits (personal income tax for sole traders). Aside from this, you only have to pay property tax on possessions that are taxable by their cadastral value.
Also, you only need to pay tax on the profits that you actually receive. In other words, if there’s no money, there’s no tax. This rule isn’t completely clear-cut, but we’ll talk about that later on.
If you opt for USN, you only need to carry out accounting once a year, although accounting for other taxes and inpayments does admittedly still need to be done in accordance with general practice.
A small number of businesses are not eligible for USN. These include:
banks, insurance companies, investment and pension funds, pawnbrokers, gambling businesses, privately practising notaries, lawyers, users of production sharing agreements, producers of excisable goods, professional stock market sellers, extracting and mining natural resources, microfinance organisations and outstaffing agencies.
In addition, to qualify for USN, you cannot have more than 25% of the charter capital of your business in other business entities. Furthermore, you cannot have more than 100 employees in your company. The value of property, plant and equipment cannot surpass 150 million roubles, while business proceeds cannot surpass 150 million roubles a year. A company that is already up and running can switch to USN the following year, as long as its proceeds from the previous 9 months of the current year have not surpassed 112.5 million roubles. Branch offices are unable to do this.
USN of revenue
If you can stay within these restrictions, you can confidently switch to USN. It is possible to do this at the beginning of the calendar year. New enterprises and sole traders can then start to use the special tax regime as soon as they wish. In order to make the switch, you must notify the authority tax office of your intentions.
There are two varieties of USN: ‘USN of revenue’ and ‘USN of revenue and expenditure.’
The ‘USN of revenue’ requires you to pay a tax of 6% of all received revenue. In addition, regions have the right to enact differentiated rates ranging from 1% to 6%. This will depend on the type of business and the category of taxpayer.
USN of revenue and expenditure
If your proportion of business expenses is high enough, consider USN of revenue and expenditure. Tax will be between 5% and 15% of the difference between your revenue and your expenses. The rates of this tax can differ across regions.
Social contributions in this variety don’t decrease, but they are counted as an expense. However, there are of course certain nuances to this.
There is a finite list of expenses that you can claim upon payment of this tax. Anything that is not listed as an expense in article 346.16 of the Russian Federation tax code is not considered an expense. The list isn’t very short, but it’s still likely that you won’t find all types of expenses on it (for example, employee leasing). Additionally, it’s important to have all documents confirming your expenditure.
A second point to consider is that advances from clients are counted as revenue. This means that your advance payments to your suppliers are not counted as expenses until you receive what you paid for. The solution to this is to not make advance payments at the end of the quarter if you don’t wish to pay a tax on money that’s already been spent.
There is one more issue with this variety: the tax cannot be less than 1% of your total revenue. In other words, a situation in which your tax is larger than your profit is possible. However, in such a case you could claim the surcharge as an expense.
We’ll finish our review of USN on an optimistic note. Regions can adjust the rate to 0% for the first two years for re-registered self-employed entrepreneurs who have started working on special types of business activity.
How we can help you
Are you thinking of switching over to USN and want to save your money by staying up-to-date with all of its nuances and latest developments? Leave us your number and we’ll get in contact and tell you everything you need to know.
The majority of businesses and sole traders use OSNO and USN. Nevertheless, there are many other options that could suit you better.
In the second part of our review, we take a look at the additional opportunities for tax optimization.