How can foreign representative offices save 18% on rent?
The representative offices of foreign companies operating in Russia can achieve substantial savings on office rent and accommodation for their employees.
Although foreign representative offices lack the status of independent economic entities (that is, they are not engaged in business activities designed to generate profit), Russian tax legislation affords them tax benefits. However, they do not enjoy these benefits directly; instead, they accrue to their landlords.
In essence, premises let to foreign citizens or foreign organizations accredited on Russian soil are exempt from VAT (see Article 149, Clause 1 of the Russian Tax Code). The norm is binding; that is, one cannot opt out of it (cf. Chapter 21 of the Russian Tax Code). The Russian Ministry of Finance’s comments in its letter № 03-07-11/45192 dated 5th August 2015 allow for the same conclusion.
In other words: If the landlord has indicated the rental amount inclusive of VAT or issued a faktura bill with VAT listed separately, the foreign representative office is entitled to request either:
- the exclusion of VAT from all documents;
- or a rent reduction equivalent to the tax amount.
The economic effect on the foreign company is the same in both cases: 18% of rent currently being charged.
The example below illustrates how a foreign company accredited in Russia can save on its rent. For instance, the branch of a foreign company rents office premises in central Moscow. The rental expenditure (inclusive of VAT) amounted to 1,116,000 roubles in 2015 and to 1,037,000 roubles in 2016. If the firm had been aware of its right to a tax exemption, the rent for the two years indicated would have amounted to 946,000 and 879,000 roubles, respectively. Thus, over two years the foreign branch could save 329,000 roubles.
In addition, utilities and maintenance on rented premises are also exempt from VAT. Legal precedent confirms this conclusion (decision № KА-А40/2596-10 by the Moscow Federal Arbitration Court dated 22nd April 2010; decision by the Arbitration Court of Appeal № 09АP-26189/2009-АK dated 25th December 2009).
Where does the exemption apply?
Two conditions must be met:
- The relevant foreign state’s legislation must provide for a similar arrangement with regard to Russian citizens and firms accredited in that foreign state.
- An international treaty or agreement of the Russian Federation must provide for this norm.
The list of foreign states eligible for an exemption is extensive. It includes France, Germany, the US, the UK, China, Japan, and dozens of other countries.
Why do some landlords keep still about the tax exemption?
Firstly, tax-exempt operations like these attract the tax authorities’ attention and may trigger more thorough checks of every single tax return.
Secondly, the tax exemption increases the complexity of the landlord’s financial and tax accounting, as the two must now be separated. The method for this separate treatment must be independently defined and recorded in the accounting policy; failing this, the tax authorities could dispute the method used to allocate input VAT.
Thirdly, the landlord must provide documents to the tax inspection to confirm that the premises are being let to a foreign representative office:
- an extract from the registry of branches and representative offices of international and foreign organizations;
- a copy of the certificate of record in the uniform state register of foreign organizations’ representative offices accredited on the territory of the Russian Federation;
- a copy of the rental contract with the foreign tenant.
What must the source documents look like?
Within 5 calendar days from the moment the service is rendered, the landlord must mandatorily provide a faktura bill (Article 168, Clause 3 of the Russian Tax Code), but without charging VAT. It is either marked accordingly or stamped “Exempt from VAT” (Article 168, Clause 5 of the Russian Tax Code).
Similar provisos are required in the rental contract and the relevant bills and job completion reports.
We are happy to answer any questions that may remain.