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. Last Updated: 07/27/2016

Taxation of Payments to Board of Director Members

UnknownBy Ilya Rybalkin<br>Partner, Hogan & Hartson LLP
In the near future many Russian companies will have to hold general shareholders meetings where, among other things, decisions will be made on paying fees to members of the board.

Under certain conditions the payment of fees to members of the board of directors allows companies to save on profit tax and unified social tax. However in many cases it leads to disputes with tax authorities.

The cause for dispute is a provision of the Tax Code under which payments to individuals are not subject to unified social tax provided they do not reduce the company's taxable profit.

Presently, there are two opposing points of view on this matter: that of the Finance Ministry and that of the Supreme Arbitration Court.

According to Finance Ministry's opinion, the fees of board members, which are decided by a general shareholders meeting, do not reduce the company's taxable profit and should not be subject to unified social tax.

The Supreme Arbitration Court's opinion is contrary to this: The fees of the members of the board of directors should be subject to unified social tax. Accordingly, a company may reduce its taxable profit by the amount of such fees. If the fees of the board members are paid from undistributed profits from previous years, there is no obligation to pay unified social tax.

Meanwhile, the actual availability of undistributed profits from previous years must be confirmed by documents. The Supreme Arbitration Court also notes that the company has no right to choose which tax (unified social tax or profit tax) is used to reduce the taxable base by the amount of fees payable to members of the board of directors. As a matter of practice, regional courts, in general, adhere to the point of view of the Supreme Arbitration Court.


and Ivan Meleshenko
Associate, Hogan & Hartson LLP


If the fees of the members of the board of directors are substantial, the Supreme Arbitration Court's point of view, which allows for the reduction of taxable profit by the amount of fees given, is economically expedient for the company (the profit tax rate being 24 percent). So far as unified social tax is concerned, considering the descending tax rate scale (26 percent through 2 percent), the effective tax burden will be minimal.

The practical use of this option, most likely, would lead to a conflict with a tax authority, which would, in the first place, follow the official point of view of the Finance Ministry. However, the chances of litigation of such a dispute being resolved in favor of the company, with an allowance for the above-said position of the Supreme Arbitration Court, are not bad, according to our reckoning.

Currently, the safest option seems to be to pay fees to members of the board of directors with previous years' undistributed profits, because here the points of view of the Finance Ministry and the Supreme Arbitration Court essentially coincide.

Such payments do not reduce the taxable profit and, therefore, are not subject to unified social tax. However, this option is not optimal from an economic point of view, because, on the one hand, it does not allow the reduction of the profit tax; and on the other hand, the savings on unified social tax are minimal, because of the descending tax rate scale.