Finding the right tax system for you- Part 2
In our previous article, we examined the more common Russian tax systems. In this article, we’ll look at the options available that could help you save on taxes, but that are only available to a limited number of businesses. We’ll then wrap up the article with some information on how to combine tax systems for maximum effect.
1. Unified agricultural tax (ESHN)
This tax, as its name suggests, applies exclusively to the farming and fishing trade.
ESHN replaces profit tax (personal income tax for sole traders) and property tax, apart from possessions taxable on their property’s cadastral value. As of 2019, it will not be automatically exempt from VAT. To get around this issue, it’s crucial to ask the revenue service for an exemption from VAT. This is because only small businesses are able to get out of paying VAT. The maximum revenue size needed to do so is limited and decreases every year. Due to this, ESHN has lost much of its past appeal for larger businesses. However, when we take into account the lower tax rates, this tax system can still be an attractive prospect.
The ESHN is useful if your revenue from sales of farming products accounts for more than 70% of your total income. The amount of revenue you make is however not restricted. In fishing, there is an additional restriction in that your number of employees cannot exceed 300.
You pay tax on the difference between your revenue and expenditure. The principle is the same as with USN – if you don’t receive any money, you won’t pay any tax. The rate is imposed by regions and ranges from 0% – 6%.
The disadvantages to this tax system lie in the limited number of tax-deductible expenses and the vital need for documented proof of your expenditures.
2. The patent taxation system (PSN)
Only sole traders can use a so-called ‘patent.’ This allows them to not pay income tax and VAT on transfers for patent-related activities.
PSN is in many ways similar to ENVD, as the tax is paid based on imputed income and not your actual income. The only difference is which types of business can use it. You can find the full list of eligible businesses in article 346.43 Russian Federation tax code.
This tax system suits self-employed entrepreneurs well. Just be aware that you are not allowed to employ more than 15 workers and the maximum patent revenue is 60 million roubles a year.
The rate is only 6%. Regions can give various types of business two-year tax holidays.
There aren’t any general rules for PSN, as practically everything about it depends on what region you’re based in: your revenue limits, your company headcount, the type of business, any concessions and imputed income. You’ll therefore need to get to grips with any intricacies of the local law in your region.
We’ll gladly help you with this if you leave us your phone number. We’ll give you a ring and help move your business forward.
Furthermore, the patent taxation system (PSN) has an advantage that none of the other tax systems have: the minimum term for the ‘patent’ is one month, which allows you to use this system as and when the need arises, on the condition that you comply with all the regulations. With all the other tax systems, you’re limited to changing them a maximum of once a year.
There’s one more advantage to PSN – there’s no need to keep a tax record of it. You simply pay up then rest easy. The important thing to remember is to keep a record of individuals if you have employees.
However, this tax system doesn’t come without any pitfalls. The tax man will often say that PSN is a worthy replacement for ENVD. Sadly, this is simply not true. In contrast from ENVD, PSN doesn’t reduce your social contributions. Therefore, when counting up your expenses, it’s important to include all types of social contribution in your total tax burden. This tax system may end up being less advantageous than it seems upon first glance.
3. Tax on professional income (NPD)
This is brand new! NPD is an experimental tax system for self-employed workers. Sole traders without employees can use this, as can individuals who want to make some money as sole traders without having to actually register as one.
This is the most liberal tax system for the ‘little guy’ – there’s no accounting, no social contributions and no cash registers. You pay 4% of the revenue that you receive from individuals and 6% of the revenue received from business entities, and you don’t need to delve into the murky depths of Russian tax law.
This tax system does come with a range of possible access restrictions, regarding both the type of business you own and your revenue. People in trade can forget about NPD. However, if you offer services or carry out work and your revenue doesn’t exceed 2.4 million roubles a year, it’s possible that you’ll be able to take part in this experiment.
For the time being, this tax system is only available in Moscow, Tatarstan, and the Moscow and Kaluzhsky regions. However, there are plans for it to expand into other regions soon.
The disadvantage of this system unsurprisingly stems from one of its advantages: the absence of social contributions obviously means that you won’t be insured. However, if the state of your future pension doesn’t bother you too much, you don’t have to worry about this. If your faith in state aid at pension age has not entirely dwindled away, you can pay your social contributions voluntarily, on top of your NPD of course.
Now, let’s combine them.
Combining different tax systems allows us to take maximum advantage of their benefits.
For example, let’s say you have an auto repair service and an auto parts store. The profit margins from the store are slim, however your revenue from the auto repair is steadily exceeding the profit margins that you submitted to the ENVD tax system. Use the ENVD system for your store accounts and the USN system for your auto repair business. And there you have it! You’ll pay less tax than if you’d switched the entire business over to USN.
Here are more possible combinations:
OSNO + ENVD
USN + ENVD
OSNO + PSN
USN + PSN
PSN + ENVD
ESHN + PSN
ESHN + ENVD
However, combining different tax regimes on one business will make your accounting more complicated. You will most likely require the help of expert accountants if you choose to combine regimes.
A quick summary
Now, let’s run you through a step by step guide on how to choose the best possible system of tax payment for you.
- Put aside your organisational and legal paperwork for a moment and work out which tax systems are available to your business.
- Cross out the options which are unavailable in your region.
- Clarify how much your potential clients need VAT. If your clients are individuals, they won’t need VAT. If you work with other businesses who use the OSNO tax system, they’re more likely to be working with payers of VAT.
- Ascertain your type of business, your budgeted contribution, your profitability and any other business variables. Underline all the tax systems for which you don’t exceed the limits.
- Calculate your potential tax burden for the remaining varieties of tax system.
- Analyse the results and choose the most profitable system of tax payment for you.
Head in a spin from all the demands, restrictions and combinations? Don’t worry! Just call Wagner & Experts and get a consultation at our office on Novy Arbat Street, Moscow. Our specialists can advise you on the best way to combine tax regimes. Leave us your number and start enjoying your tax savings!