Tax Registration of a Foreign Company in Russia

Foreign companies planning to open a representative office in Russia for a lengthy period of time often ask whether tax registration in Russia in connection with activities in Russia automatically results in the creation of a permanent establishment in Russia for tax purposes.

Given the frequency with which this question arises, we believe many companies will find a clarification of the formal distinction between tax registration and creation of PE to be useful.

Tax registration is the company's registration with the Russian tax authorities if certain criteria are met.

For example, foreign companies must register with the Russian tax authorities (and receive a taxpayer identification number -- "TIN") if they operate or intend to operate in Russia through a separate division for a period exceeding 30 days in a calendar year (continually or cumulatively).

If the foreign company operates or plans to operate in Russia for a period less than 30 days, the company is required to notify the Russian tax authorities of its business activities in Russia. However, there is no properly developed system of levying the penalties on a foreign company that fails to notify the tax authorities of such circumstances.

A separate division is defined as any separate place of activity n Russia (located elsewhere than at the main office) with permanent workstations equipped for a period exceeding one month.

The registration requirement is not formally connected to the subsequent tax status of the foreign company in Russia. The mere fact of tax registration is not connected with any existing or potential liability to pay any taxes in Russia. No taxes will be levied on the basis of registration alone, in the absence of the taxable income, taxable property or other taxable items.

Permanent establishment (PE) is a tax status obtained by a foreign company as a result of regular business activities in Russia. PE is created if a foreign company regularly conducts entrepreneurial activities in Russia at some fixed place. Whether a foreign company has or does not have a PE in Russia determines the taxes the company must pay and the applicable tax rates.

Although the tax law does not define "regularity," the tax authorities clarify that one of the characteristics of regularity should be the registration of the company with the tax authorities (or the obligation to register). Therefore, although formally the creation of PE and the obligation to register are not connected in tax law, the tax authorities make every effort to connect them. Hence, once the foreign company has registered with the tax authorities and begun carrying out some commercial activities, the tax authorities will automatically consider such activities as regular, and therefore leading to PE.

The tax authorities must determine whether the activities of the foreign company's representative office are in fact of a commercial nature. Activities of purely preparatory or ancillary nature are not considered commercial in the sense of leading to creation of PE.