Mistakes Made by Foreign Companies in Russia-Publication

KNOWING THE LETTER OF THE LAW

Entering a new market always means that a business will have to deal with local legislation, study applicable taxes, deadlines for payment and regulatory reporting, look for information on possible government supporting measures and industry benefits. The dynamic and complex Russian legal system seems very confusing to foreign entrepreneurs. Therefore, Western companies that are just opening their first branch in the country or want to master a new business activity often need step-by-step instructions: in what order, when and to which authorities you need to submit documents to avoid fines and sanctions later. For example, we came across a situation where an entrepreneur was denied registration of a company in the Russian Federation due to failure to appoint the general director. They just did not know it was required. As a result, the businessman lost time and money on paying the state fee.

DOCUMENTING PERMANENT IMPROVEMENTS

One of the most common problems that foreign entrepreneurs face in Russia is the issue of permanent improvements. When a company first enters the market, the first thing it tries to do is rent premises and remodel the space according to its requirements, especially when it comes to opening a brand store or showroom. When concluding an agreement with a landlord, companies usually pay attention to the agreed rates and areas, and do not take into account the refund policy or transferring improvements after expiration of the lease term.

The main problem is that the concept of permanent improvements is not regulated in the legislation, and there is no clear definition of specific repair works included in or excluded from it. Therefore, at the initial stage, the company should determine which of the repairs will be recognized as permanent improvements and will become the tax base for calculating property tax, and which can be written off for maintenance repair. A standard lease generally assumes that all permanent improvements are transferred to the landlord at the end of the lease at no cost. But in practice, for the company, this also means that after the lease ends, it becomes solely liable for paying VAT to the budget on the cost of the transferred permanent improvements, and in addition to this tax burden, it will have to invite an independent assessor to calculate the market value of permanent improvements to form VAT base, if improvements are transferred free of charge. Therefore, even at the stage of concluding a contract, it is necessary to agree with the supplier on the conditions for reimbursing the cost of such improvements.

REFLECTING EXPENSES IN TAX ACCOUNTING

Many foreign companies are surprised by the differences in reporting expenses in tax records and accounting. For example, foreign companies usually report expenses in their own accounting on the basis of invoices (bills), while according to the Tax Code of the Russian Federation, expenses must not only be economically justified, but also documented. Therefore, in Russia, you first need to wait for a consignment note or a signed job completion act from the counterparty, and only after that the expense can be accepted for tax accounting. It can take a long time from the moment the invoice is paid until the confirmation is received, although the modern electronic document workflow significantly reduces the time required for document exchange.

The same problems often arise with advance reports and entertainment expenses, when, to confirm them, employees of foreign companies send a report and, for example, a folio from a restaurant where a meeting was held, without a receipt. These documents are not considered sufficient confirmation, which means that expenses cannot be accepted for recording.

EXERCISING DUE DILIGENCE

Another peculiar feature of Russian legislation, which may turn out to be completely unfamiliar and unusual for foreign entrepreneurs, is checking counterparties in order to exercise due diligence at the stage of concluding contracts. In this case, a foreign entrepreneur risks incurring losses not only at the time of payment for the services of a non-existent, liquidated or rogue company, but also when they decide, for example, to claim a refund of VAT or accept such expenses for tax accounting.

One of the requirements of the Federal Tax Service is to provide regulations and procedures for checking counterparties implemented in the company, especially in cases with large amounts for refunding. An entrepreneur has to report on the measures they have taken to verify their supplier (provide verification reports, including, for example, checking the company for being listed in the registers of bankrupts, disqualified persons and rogue suppliers, participation in legal proceedings, nominee CEO, etc.). In some cases, if a counterparty has been blacklisted by the tax inspectorate, the VAT deducted under such transaction will be discarded by inspectors.

CARRYING OUT CURRENCY TRANSACTIONS

When a company opens a new branch, at first it usually tries to provide it with financial support, for example, in the form of borrowed funds. This is when a foreign business is faced with the requirements of the Russian Currency Control, according to which it is necessary to provide information about the performed currency transaction within specific time limits, and if the transfer amount exceeds the set limits, the contract must be registered first. Failure to comply with the requirements exposes foreign companies to fines (up to RUB 50 thous. in case of legal entities).

As we can see, a successful launch is impossible without strict adherence to regulations, requirements, and deadlines. Therefore, at this stage, you can find a professional consultant or ask an outsourcing company for assistance, so they can tell you about all Russian legal nuances, help to prepare the required documents, and take over interaction with public authorities.

Источник: RBK Pro