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. Last Updated: 07/27/2016

2 Changes Will Raise Tax Bill for Businesses

Western business advisers said Wednesday that the Russian government had unveiled two decisions that will substantially increase the tax burden on many foreign firms.

The two decisions -- at a time when Russian officials have tried to calm foreign investors' anxiety about the tax system -- officially extend to foreign companies a 38 percent wage tax on all salaries of more than $60 per month and a 23 percent value-added tax on property rental.

Deputy Finance Minister Sergei Alexashenko confirmed the two taxes. He said both were "normal" decisions taken to level the tax system for foreign and Russian companies.

In addition, Economics Minister Alexander Shokhin surprised Western business leaders Wednesday by implying that the application of the 23 percent value-added tax to foreign loans entering Russia would not necessarily be abolished.

Word of the value-added tax's application to loans earlier this month caused an uproar within the foreign community that has not yet subsided despite officials' assurances that attempts to collect the tax would quickly cease after an official clarification of the VAT law.

Shokhin said that taxes on foreign loans would be refunded or suspended if the loans were used to purchase equipment. Western advisers said that the statement left open the possibility of taxing loans used for other purposes, such as paying salaries or taxes.

"That's exactly what we were afraid of," said one Western business adviser who asked not to be identified. "He is confirming this tax does exist, and it is a tax which no other VAT system in the world would levy -- a tax on the principal of a loan.

"The people who are making these rules simply do not understand the process of investing in a start-up company."

Alexashenko, however, disagreed with Shokhin in a telephone interview, and repeated earlier assurances that there would be no tax on loans to companies in Russia from Western banks or from Western companies that own part or all of the Russian entity.

"Shokhin said something which I don't really understand," he said.

Shokhin's comments came at a press conference where he stressed Russia's need to stabilize tax and customs rules in order to reach "the turning point" at which foreign capital would start flooding the country.

He called the outcry over the value-added tax on loans an example of "the extent to which foreign investors worry about frequently changing legislation and the problem of worsening conditions for foreign firms."

Potentially the most burdensome of the two new tax directives is one published Tuesday in the government newspaper Rossiiskaya Gazeta and signed by Prime Minister Viktor Chernomyrdin, which makes foreign firms subject to the 38 percent tax on all monthly wages in excess of six times the minimum wage, or about $60.

Fully foreign-owned firms had previously been exempt, according to Steven Sandweiss, a tax consultant with Arthur Andersen.

A second decision, part of a State Tax Service directive published Tuesday in the government daily Rossiiskiye Vesti, subjects all office and apartment rent paid by foreign companies in Russia to the 23 percent value-added tax. Officially accredited representative offices of firms from most developed countries had been exempt for the last year and a half, Sandweiss said.

Alexashenko said that since foreigners living in Russia also use government services, their excess salaries should be subject to the same taxes as Russians'.

"All firms must pay taxes, regardless of whether they are Russian or American," he said.

Of the exemption on rent, Alexashenko said it should never have applied to foreign businesses, only to diplomats.

"I don't know why there was ever an exception. They were just closing a loophole."

But foreign executives wasted little time Wednesday in condemning the tax as another example of legislation that could turn investment away from Russia.

"People are already upset," Sandweiss said, pointing out that the salary tax applies "even if you have losses from your operations here."

The American Chamber of Commerce on Tuesday urged foreign companies not to provide loans to Russian companies until the government issued an official clarification on whether the loans would be taxed.

Shokhin said the Finance Ministry had already written a clarification that is now being reviewed by the government. He said, however, that its main point was that "the tax on investments in Russia will disappear immediately as soon as the transaction becomes a real investment, that is, at the moment when equipment is installed."

But Western accountants said that foreign parent companies regularly loan money to their Russian subsidiaries to finance working capital and other expenses as well as to buy equipment.

Sandweiss said he trusted Alexashenko's assurances that there would be no tax whatsoever on foreign loans and predicted that the new taxes on rent and salaries were likely to cause a bigger uproar in the foreign business community.