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. Last Updated: 07/27/2016

THE TAX ADVISER: Tax Liabilities Differ For Staff, Contractors

Dear Tax Adviser:

I am currently in the process of registering a new business in Russia and am curious whether there are any differences from a tax perspective between hiring employees versus concluding contracts with independent contractors. Could you please provide some insight?

Dear Reader:

Unlike most Western countries, Russia has no specific legal guidelines for distinguishing between an independent contractor and an employee. Such a determination will most likely be made based on the formalities relevant to the employment relationship. For example, if the individual is included in a firm's "staff schedule," then the individual is likely to be deemed an employee. The contract itself will also be an important deciding factor. The tax consequences of the two arrangements differ.

Tax on the income of an employee is generally withheld at source by the employer according to progressive rates (in most cases).

In addition, employers must make social fund payments to the four funds based on gross payroll: Pension Fund (28 percent), Medical Fund (3.6 percent), Employment Fund (1.5 percent) and Social Fund (5.4 percent).

An independent contractor, on the other hand, is responsible for filing his own personal income tax return and the company will no longer be responsible for the total 38.5 percent contributions to the social funds. There are three methods of taxation that may apply to an independent contractor: personal income tax, the simplified system of taxation and the tax on imputed income (in Moscow there is currently no tax on imputed income, however, it is expected that this tax system will be implemented in the future). It is also important to keep in mind that an independent contractor, under Russian law, must register as an individual entrepreneur.

If the independent contractor is eligible for the simplified system, this should usually be chosen over the personal income tax system (which taxes the independent contractor on income less allowable expenses) as the tax liability of the contractor will be significantly lower. The total tax liability for an independent contractor who opts to use the simplified system, including social fund contributions is approximately $500.

Glenn Geffner is national managing director of tax services at Deloitte & Touche in Moscow. Please fax any questions to: The Tax Adviser, Deloitte & Touche, 956-5001.