How can the head of a foreign representative office be reimbursed for personal expenses in a correct manner?

Heads of foreign representative offices are often reimbursed for rent expenses, the use of a personal vehicle, etc.
On the one hand, in the eyes of the government, such reimbursements constitute income and must be taxed (personal income tax). On the other hand – there are legal ways not to pay this tax.

If to withhold taxes - how to do it properly?

Full-time and visiting accountants either forget to withhold the tax or don’t have the employees’ best interest in mind when withholding it.

In the latter case, heads of foreign companies who are:

• Russian citizens
• foreign citizens with the status of Russian residents, and
• foreign citizens with the status of highly qualified specialists

are taxed at a rate of 13%.

If a representative office hires an employee from abroad (without the status of a resident), personal expenses reimbursed to such employees are taxed at 30%.

For example:
Suppose that a foreign representative office decides to pay an additional amount of 50,000 rubles per month to the head of the office who is a non-resident for a monthly apartment payment or rental car.

Normally, a tax in the amount of 15,000 must be withheld from this sum (50,000 *30%), i.e. the non-resident is entitled to receive only 35,000 net.

And so we come to the main question: how do we help the head of a representative office not to “lose” a portion of his compensation?

For this purpose we need to do a proper “gross up” i.e. to calculate the amount of compensation subject to withholding tax in accordance with the following formula:

50 000 / 0,7 (at a rate of 30% Personal Income Tax)
or
50 000 / 0,87 (at a rate of 13% Personal Income Tax)

This amount must be used for taxation purposes so that the head of the representative office can avoid “tax losses”. And this particular amount must be indicated in the Employment Contract as the amount of the compensation/reimbursement.

Can we avoid paying altogether?

We have looked at the approach preferred by accountants. But we are experts not only in accounting but in taxes as well. This is why we are always looking for legal ways to optimize tax-related payments. If our clients can legally avoid paying taxes, we will always advise them how to do it properly.

Having said that, we guarantee that our opinion is confirmed by vast trial experience (i.e. during taxation-related disputes Russian courts actually support the opinion we express).

Thus:
The Tax Code provides for an exemption from the income tax for those compensatory payments that are related to the performance of job responsibilities and are legally justified (under article 217 Tax Code ).

Accordingly, if a head of a representative office is invited to work from another city, the income tax doesn’t have to be withheld: according to the labor laws, the employer must reimburse the employee for relocation and settlement in a new location under article 169 Labor Code b“Settlement in a new location” can be interpreted as provision of an apartment to the employee for the entire period of his/her employment (or a cash reimbursement of the lease costs).

If a foreign representative office formally invites the head of its initiative from abroad, it must guarantee proper financial and medical support to the foreign citizen and provide him/her with a place to live (under item 5 article 16 Federal Act of 25.07.2002 № 115 – FZ ), i.e. it is logical to interpret the duty to “provide a place to live” as the reimbursement of apartment lease expenses.

The Labor Code also provides for the possibility to reimburse expenses related to the use of the employee’s personal property (under article 188 Labor Code). This provision, for income tax avoidance purposes, can be applied to expenses related to the use of a personal vehicle.

The most important thing is to correctly formalize the relevant provisions in the Employment Contract/special Order/Regulations on Compensation.

If you don’t know how to prepare the documents correctly, we are always willing to help. We are even willing to deal with the tax and regulatory authorities on your behalf in case of any problems and tax-related disputes.

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