Illegal Rentals Cost More Later

One of the many hurdles for companies doing business in Russia is legally renting apartments for their employees. Although there are a great number of apartments available, almost all landlords insist on being paid under the table in cash or in offshore bank accounts so they can avoid taxes. Unfortunately, in most cases the tax liability arising from residential rent payments rests with the company making the payments.

Under Russian law, when a company pays rent it has a duty to ascertain whether it must withhold a portion of the rent and pay this amount as tax. Failure to withhold the amount due is treated as an underpayment of tax by the company and results in the tax still being owed, as well as penalties and fines for late payment. Generally, if the landlord is an individual Russian resident, the company paying rent has an obligation to withhold between 12 percent and 35 percent of the rent. If the landlord is an individual foreign resident, the company must withhold 20 percent. If the landlord is a foreign company without a Russian tax identity number, the company must withhold even more.

Landlords who demand payment in cash or off-shore require receipt of the entire rental amount with no allowances made for withholding. This has created a dilemma for Western companies. Apartments offered by tax-dodging landlords have substantially lower rents than apartments offered by law-abiding landlords because law-abiding landlords pass on taxes to their tenants, while tax-evading landlords have no taxes to pass on. Companies therefore often feel they must choose between seemingly affordable apartments that require under-the-table payments or prohibitively expensive legitimate residential developments. In the overwhelming majority of cases, companies choose the cheaper option. However, the cheaper option is only cheaper if the company does not get caught. If at any time during or after the lease it comes to light that the company paid rents under the table, the resulting liabilities are generally high enough that it would have been cheaper to have rented the expensive housing.

Companies complain that they are forced to take their chances as the price of accommodations in legitimate residential developments are unjustifiable for most expat positions. However, companies that wish to rent affordable Russian apartments do have legal options. One option is to agree to pay the landlord a higher rent than he is asking and to withhold the necessary taxes. To make this affordable, the rent offered after withholding should give the landlord less than the original price so the company and the landlord share the tax burden. Unfortunately, this option is difficult to implement as many landlords are unwilling to compromise for the sake of fairness.

A hassle-free, affordable option is for companies to rent Russian apartments through a legitimate property management company. A legitimate property management company will have a Russian tax identity number, and the presence of this number confirms that the company making payments does not have to withhold taxes. Management companies charge substantially less than residential developments and they often offer value-added services such as coordination of all rental payments and 24-hour maintenance.

However companies choose to address the issue of residential housing, they should be aware that the potential long-term costs of under-the-table payments far outweigh the short-term savings.

Jamison Firestone is an attorney and partner in the Moscow and St. Petersburg law firm Firestone Duncan.