After registering a company, you need to choose a taxation system. The size of payments, their schedule and accounting method depends on it. In our previous article, we talked about what tax systems exist for sole proprietor in Russia. Today we will talk in more detail about the options for limited liability companies, since this legal form of doing business is the most popular for foreign entrepreneurs in Russia.
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What to consider when choosing a taxation system
Most tax regimes are limited. Here are some parameters you should take into account:
- Type of organization's activity. Special tax regimes (STS, UTII, ESHN) are not available to every business.
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The number of employees and income amount. Some systems set limits on income and headcount.
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Counterparties and business specifics. Think about whether you want to work with VAT payers, open branches or change your field of activity. Choose a taxation system based on your future plans.
OSNO – General Taxation System
General income taxation is universal. Everyone, from mega-corporations to the smallest limited-liability companies, can opt for OSNO. It is the default tax system that most businesses use.
Advantages
This system is flexible. You aren’t restricted by what line of business you’re in and you can expand your business into new areas. You can take on as many new employees as you like, open branch offices, and build a large, varied asset base.
The list of tax-deductible expenses is almost endless, as long as you can prove with documentation that they are of utmost necessity to your business.
If your potential clients are interested in claiming back their VAT, then it’s worth thinking about general income taxation, even if you don’t have a large business. The benefits of working with such clients could outweigh the disadvantages of this tax system.
Disadvantages
Firstly, OSNO assumes the highest possible tax burden. You need to pay a tax on profits (sole traders pay personal income tax instead), VAT, property tax, social contributions, as well as further taxes.
Secondly, the accounting work is particularly time-consuming. Consequently, the cost of your accountancy services increases.
Thirdly, your corporate and personal income taxes are not determined by how much money you’re actually earning. This means it doesn’t matter whether or not your buyers have settled their accounts with you, you still need to pay your taxes. However, you do have the chance to make an allowance for unpaid costs whilst calculating your due taxes.
USN – Simplified Taxation System
Simplified taxation is the most popular tax system for small businesses. It is mainly for sole traders and organisations.
Advantages
If you use this system, you avoid the most ‘harmful’ taxes: VAT and the tax on profits (personal income tax for sole traders). Aside from this, you only have to pay property tax on possessions that are taxable by their cadastral value.
Also, you only need to pay tax on the profits that you actually receive. In other words, if there’s no money, there’s no tax. This rule isn’t completely clear-cut, but we’ll talk about that later on.
If you opt for USN, you only need to carry out accounting once a year, although accounting for other taxes and inpayments does admittedly still need to be done in accordance with general practice.
Disadvantages
A small number of businesses are not eligible for USN. These include:
banks, insurance companies, investment and pension funds, pawnbrokers, gambling businesses, privately practising notaries, lawyers, users of production sharing agreements, producers of excisable goods, professional stock market sellers, extracting and mining natural resources, microfinance organisations and outstaffing agencies.
In addition, to qualify for USN, you cannot have more than 25% of the charter capital of your business in other business entities. Furthermore, you cannot have more than 100 employees in your company. The value of property, plant and equipment cannot surpass 150 million roubles, while business proceeds cannot surpass 150 million roubles a year. A company that is already up and running can switch to USN the following year, as long as its proceeds from the previous 9 months of the current year have not surpassed 112.5 million roubles. Branch offices are unable to do this.
Unified agricultural tax (ESHN)
Only companies engaged in crop production, livestock breeding, fish farming, agriculture and forestry, and companies that provide services to agricultural producers can apply ESHN.
The tax rate is 6%, but in the regions it can be reduced to 0%. Since 2019, enterprises at ESHN are recognized as VAT payers - when selling products and providing services, it is necessary to charge 20% VAT, and then pay this tax to the budget. To apply ESHN your income from agriculture should be over 70%.
Regardless of the chosen taxation system, LLCs must pay:
- insurance premiums and personal income tax from employee benefits
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transport tax
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land tax;
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water tax;
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mineral extraction tax;
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fee for the use of fauna objects and aquatic biological resources
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trade tax (except for ESHN)
If you still have questions or need advice on opening a business in the Russian Federation, you can leave a request in the feedback form or contact our specialists at the contacts below:
Maxim Kuznetsov - vice-president of the RAUIE
investment@raspp.ru
WeChat: maximkuznetsov
