The simplified tax system in Russia

The simplified tax system (the “STS”) is a unique tax regime in Russia for small and medium-sized businesses that allows them to replace the payment of certain taxes with a single tax at a reduced rate. The STS can be used by both organizations and individual entrepreneurs.

The advantages of the STS are:

·      low tax burden compared to general rules

·      the ability to choose the appropriate object of taxation: “income” with a rate of 6% or “income minus expenses” with a rate of 15% (for more details, see paragraph 3 below)

·      submission of tax returns only once a year and relatively simple tax accounting

·      many types of activities in which the STS can be used

·      operation of the STS in all Russian regions.

The STS replaces the payment of (with some exceptions):[1]

·      the corporate income tax

·      the value added tax

·      the personal income tax for entrepreneurial activity (relevant for individual entrepreneurs).

To use the STS, new companies and individual entrepreneurs must submit the relevant notification to the tax authorities no later than 30 days after the tax registration.[2] It is also necessary to meet certain criteria, namely:

·      the amount of income (revenue) for a year or any reporting period (quarter) should not exceed 150 million rubles (about USD 2.5 million) multiplied by the deflator coefficient (a special indicator approved by Orders of the Ministry of Economic Development, currently at 1.096)[3]

·      the average number of employees should not exceed 100 people[4]

·      the type of activity should not be prohibited for the purposes of the STS (for example, investment funds, professional participants in the securities market, microfinance organizations, pawnshops cannot use the STS)[5]

·      the participation share of other companies in the organization should not, as a general rule, exceed 25%[6]

·      the organization should not have branch offices.[7]

Already existing companies and individual entrepreneurs can also switch to the STS by submitting a notification to the tax authorities no later than 31 December of the current year.[8] The restrictions outlined above also apply.

Please note that foreign companies (including their Russian branches and representative offices) cannot apply for the STS.[9] For a foreign citizen to be registered as an individual entrepreneur, a temporary or permanent residence permit is needed.[10] Because of this, foreign businesses will need to establish a Russian legal entity to use the STS.

When using the STS, it is possible to choose the object of taxation: income or income reduced by the amount of expenses incurred (“income minus expenses”).[11] The list of expenses for the purposes of the STS is exhaustive. The object of taxation can be changed annually.

The tax rate will depend on the object: for income it is 6%, for income minus expenses it is 15%.[12] Reduced rates may be introduced in Russian regions depending on the type of entrepreneurial activity.

For persons who have chosen the “income minus expenses” object, the minimum tax rule applies: if at the end of the year the amount of the calculated tax turns out to be less than 1% of the income received for the year, a minimum tax of 1% of the income must be paid.[13] In addition, the taxpayer with this taxation object has the right to reduce the tax base by the amount of losses (excess of expenses over income) received as a result of previous reporting periods.[14]

Taxpayers who have chosen “income” as the object of taxation are entitled to reduce the calculated tax by the amount of (i) insurance premiums paid from employees' salaries (mandatory pension, social, medical insurance), (ii) temporary disability benefits, and (iii) payments under voluntary personal insurance contracts in favor of employees in case of their temporary disability.[15] The tax can thus be decreased by half, with an actual rate of 3%.

The tax must be paid in advance payments during the year by the 25th day of the month following the end of the quarter (reporting period).[16] The general tax payment deadline is 31 March of the year following the tax period for companies and 30 April of the same year for individual entrepreneurs.[17] The same deadlines are stipulated for filing tax returns.[18]

It should be noted that from 1 July 2022 to 31 December 2027 in Moscow, the Moscow and Kaluga regions, as well as in Tatarstan, an experiment is being carried out to establish an automated simplified taxation system, in which reporting is almost completely gone, and taxes are calculated automatically by the tax authorities. The system provides for increased rates: 8% (for “income”) and 20% (for “income minus expenses”).[19]

Lawyers, tax consultants and accounting specialists of Avakov Tarasov & Partners provide qualified assistance in full legal, tax and accounting support of small and medium-sized businesses in Russia.

[1] Art. 346.11(2, 3) of the Russian Tax Code.

[2] Art. 346.13(2) of the Russian Tax Code.

[3] Art. 346.20 (1.1, 2.1) of the Russian Tax Code; Order of the Russian Ministry of Economic Development dated 28 October 2021 No 654 on Establishing Deflator Coefficients for 2022.

[4] Art. 346.12(3)(15) of the Russian Tax Code.

[5] Art. 346.12(3) of the Russian Tax Code.

[6] Art. 346.12(3)(14) of the Russian Tax Code.

[7] Art. 346.12(3)(1) of the Russian Tax Code.

[8] Art. 346.13(1) of the Russian Tax Code.

[9] Art. 346.12(3)(18) of the Russian Tax Code.

[10] Art. 22.1(1)(e) of Federal Law dated 8 August 2001 No 129-FZ on State Registration of Legal Entities and Individual Entrepreneurs.

[11] Art. 346.14 of the Russian Tax Code.

[12] Art. 346.19(1, 2) of the Russian Tax Code.

[13] Art. 346.18(6) of the Russian Tax Code.

[14] Art. 346.18(7) of the Russian Tax Code.

[15] Art. 346.21(3.1) of the Russian Tax Code.

[16] Art. 346.21(7) of the Russian Tax Code.

[17] Art. 346.23(1), 346.21(7) of the Russian Tax Code.

[18] Approved by Order of the Russian Federal Tax Service dated 25 December 2020 No ЕД-7-3/958@.

[19] Art. 1, 11 of Federal Law dated 25 February 2022 No 17-FZ on Conducting an Experiment to Establish a Special Tax Regime “Automated Simplified Tax System”.