RS Q & A Rep office as a tax agent for foreign nationals

Rep office as a tax agent for foreign nationals

The Russian representative office of a Dutch company employs foreign nationals who have temporary residence permits which allow them to stay in Russia. The employment contracts with these foreign nationals were entered into by the head office in the Netherlands for periods exceeding six months. Some of the foreign nationals have the status of Russian residence while others have not yet acquired this status. All said foreign nationals are paid compensation by the head office.
Does the Russian representative office have to act as an income tax agent for the foreign nationals in question if they are paid compensation by the head office in the Netherlands?

The functions of a tax agent must be performed by Russian organisations as well as by independent units of foreign companies operating in Russia if said organisations directly pay a tax payer or if the tax payer receives income as a result of his/her relations with the organisation. In this case the ‘tax agent’ must calculate the income tax and deduct it from the tax payer’s income.

According to clause 1 of article 207 of the Tax Code of the Russian Federation, personal income tax in Russia must be paid by:

  • natural persons who are tax residents of the Russian Federation;
  • natural persons who are not tax residents of the Russian Federation but who receive income from sources in Russia.

In other words tax residents in Russia must pay personal income tax regardless of where they receive their income from while natural persons who are not tax residents of the Russian Federation must only pay personal income tax if they receive income from a Russian source.

What this means is that until foreign nationals acquire the status of Russian residents (i.e. until their stay in Russia has not exceeded 183 days within a twelve month period), they must only pay taxes in the Netherlands because the Dutch company’s rep office in Russia does not actually pay them any compensation.

However, if a foreign national becomes a tax resident of the Russian Federation he or she must pay personal income tax in Russia regardless of who they are getting their compensation from. In this case tax residents who get paid compensation from sources outside Russia must calculate and pay their income tax on their own based on the amount of their compensation (clause 3 paragraph 1 article 228, clause 2 article 228 of the Tax Code of the Russian Federation). In addition they must submit a tax declaration to the tax authorities they are registered with.

Thus to sum it up, in the situation in question the Russian rep office of the Dutch company is not required to perform the functions of a tax agent for foreign nationals if said foreign nationals are not Russian tax residents and their compensation is paid by the head office in the Netherlands.

Prepared by experts of the GARANT Legal Consulting Service
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