RS Q & A Accounting for representative offices of foreign companies

Accounting for representative offices of foreign companies

The Representative Office of a foreign construction company (Turkey) in the Russian Federation.
Does this Representative Office have to keep accounting records and report in accordance with the accounting forms adopted in the Russian Federation?

A Representative Office is a single unit of a legal entity and is not a legal entity itself.

Federal Act No. 402-FZ On Accounting covers economic entities, including entities operating in the Russian Federation, and their representative offices. However, a branch of a company and a representative office operating in the Russian Federation, incorporated according to the laws of a foreign state, shall not keep accounting records under the rules stipulated in Act No. 402-FZ, if, in accordance with the Russian taxation and revenue legislation, they maintain their accounts and/or account for other taxable items under a procedure established by the aforementioned legislation.

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A representative office of a foreign company is engaged in business activities in the Russian Federation and has proprietary rights to movable and immovable property. According to sub-clause 5 clause 1 Article 2 of Federal Law N-402-FZ dated December 6th, 2011 “On Accounting”, representative offices of foreign organisations must adhere to the requirements of this Law, meaning that they are obligated to keep and submit accounting statements. However, sub-clause 2 clause 2 Article 6 of that Law allows foreign representative offices not to maintain accounting records if taxable items are accounted for in full, but the document does not mention anything about not needing to submit accounting statements. Currently, the representative office is keeping tax accounting in full for computation of all taxes subject to payment in the Russian Federation.
Does that mean that the representative office does not have to maintain accounting records?
In that case what should be done with statements for it is impossible to fill them out without keeping accounting records?

Clause 1 Article 4 of Federal Law N129-FZ dated November 21st, 1996 “On Accounting” (hereinafter–Law N129-FZ) specifies that the law applies to all organisations located in the Russian Federation, including branches and representative offices of foreign companies, unless otherwise envisaged by international agreements signed by the Russian Federation.

Based on Clause 2 of the Regulation on accounting record-keeping and accounting statements in the Russian Federation approved by Order N34n of the Ministry of Finance of the Russian Federation dated July 29th, 1998, branches and representative offices of foreign companies located in the Russian Federation may keep accounting records using the rules established in the country where the foreign company is located if such rules do not contradict International Accounting Standards (hereinafter–IAS) developed by the Committee for international accounting standards.

In part 1 Article 2 of Federal Law N402-FZ “On Accounting” dated December 6th, 2011 (hereinafter -Law N402-FZ) a detailed list is specified of economic entities covered by the new law, including branches, representative offices and other structural business units of organisations created in compliance with foreign government laws, international organisations, their branches and representatives located in the Russian Federation, unless otherwise is envisaged by international agreements signed by the Russian Federation.

According to clause 2 part 2 Article 6 of Law N402-FZ a branch, representative office or any other structural business unit of an organisation created in compliance with the laws of a foreign government, located in the Russian Federation has the right not to keep accounting records based on the rules outlined in Law N402-FZ if, in compliance with Russian laws about taxes and duties they keep track of income and expenses and/or other taxable items in a manner determined by the said laws.

Therefore, according to the Tax Code of the Russian Federation a representative office of a foreign company engaged in business activities is obligated to keep accounting records of its income and expenses in accordance with chapter 25 of the Tax Code of the Russian Federation, submit to a tax authority an annual report about its activities in the Russian Federation in the form established by Order NBG-3-23/19 of the Ministry of Taxation dated January 16th, 2004, while also keeping tax accounting for VAT purposes according to chapter 21 of the Tax Code of the Russian Federation and submit a tax declaration. Therefore, it is fair to say that in this sense the representative office of the foreign organisation is adhering to the Russian law on taxes and duties.

However, the representative office of the foreign organisation is obligated to maintain accounting records for its fixed assets. That is to say that according to clause 2 Article 374 of the Tax Code of the Russian Federation, movable and immovable property items considered to be fixed asset items are recognised as taxable items of the property of organisations operating in the Russian Federation through permanent representative offices. However, for the purposes of chapter 30 of the Tax Code of the Russian Federation regulating taxation of property owned by organisations, foreign organisations keep accounting record of taxable items in a manner established in the Russian Federation for accounting-record keeping.

Our experts believe that since in the case at hand it is necessary to keep accounting records for fixed assets only, this means that it will not cover everything, consequently, it will not be possible to prepare accounting statements. It is recommended that this manner of accounting record-keeping be set in the economic entity standard itself; otherwise it will be necessary to prepare accounting statements in full.

According to the explanations given by experts from the Federal Tax Service Department in Moscow outlined in letter N20-12/11390 dated February 14th, 2006, “foreign legal entities, companies and other corporate entities having civil capacity created in accordance with foreign laws, their branches and representative offices created in the Russian Federation fall under the notion of an organisation only for the purposes of the Tax Code of the Russian Federation (clause 2 Article 11 of the Tax Code of the Russian Federation), but not for the purposes of applying laws on accounting. Therefore, it is not obligatory for a representative office of a foreign organisation to submit accounting statements to tax authorities of the Russian Federation based on the forms and in the manner established for Russian organisations.

Prepared by experts of the GARANT Legal Consulting Service
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