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. Last Updated: 07/27/2016

When Laws Mean Law, Are Profits Really Profit?

There are many types of Russian laws or acts which have the force of law and it can be difficult for foreigners, and sometimes for Russians, to know what order of precedence applies to them. This is particularly important at a time when laws change frequently and contradict one another. The business person trying to work out how they affect his transaction and whether it is still financially viable can become desperate. But there is a hierarchy of laws which does not seem to have been altered by the new constitution. First are zakony, or laws, adopted in the past by the Supreme Soviet and now by the two chambers of the Federal Assembly; next are ukazy, or presidential decrees; then posta-navlenii, or governmental resolutions; then rasporyazhenii, or decisions of the chairman and the vice chairman of the Council of Ministers. Below these is an array of circulars, letters etc. Much has been written in the past few days about resolution No. 336, signed by Prime Minister Viktor Chernomyrdin on April 15, which sets out more precisely the way in which basic wages are to be calculated. Profit tax at the rate of 38 percent (in Moscow) is payable on "excess wages," i.e. the amount by which wages exceed a sum equal to six times the basic wage. The word "profit" in this context is a misnomer, as the tax is paid whether the taxpayer makes a profit or not. The resolution introducing profit tax in December 1991 contained an exemption for 100 percent foreign-owned companies and representative offices of foreign legal entities. In December 1993, President Boris Yeltsin signed decree No. 2270, which increased the minimum wage level for this purpose but did not repeat the exemptions for foreigners. This led to speculation as to whether foreign companies and representative offices would be liable to pay the tax which would greatly increase the costs of employing staff, assuming that they were paid at the rates usually applying in foreign companies. However, comfort was to be found in another presidential decree signed in September 1993, which provided protection for three years for foreign companies and joint ventures from new regulations which had an adverse effect on their terms of operation. The prime minister's resolution purports to clarify the situation. It says that the procedure for calculating basic wages which it contains shall "apply to all enterprises and organizations ... including enterprises belonging fully to foreign enterprises." This is not the same as saying that excess wages profit tax applies to all enterprises belonging fully to foreign investors. Nor does the resolution take precedence over or amend the presidential decrees which granted protection to foreign investors. Marcia Levy, an attorney with Norton Rose, has been practicing law in Moscow for three years.