How to choose a tax system for a company in Russia

When registering a Limited Liability Company (LLC or Общество с ограниченной ответственностью, ООО in Russian), it is essential to decide on the tax system under which the future company will operate. The available systems are the general tax system at 20% and the simplified tax system at either 6% or 15%.

Let's examine each of these systems to determine which one is more suitable for starting and developing a business.

General tax system (Общая система налогообложения in Russian).

The general tax system (OSNO or ОСНО in Russian) is universal and, unlike special tax systems, has no restrictions on the type of activity, the number of employees, or the amount of income. It is applied automatically if an application to select the simplified tax system is not submitted within 30 days after registration or if the company no longer meets the requirements for using the simplified tax system.

When choosing OSNO, a company will need to pay:

• VAT (НДС in Russian):

— 20% for а goods and services not included in the preferential 10% and 0% categories;

— 10% for the sale of socially significant goods (e.g., food, medical supplies, children's goods, periodicals, educational and scientific literature) and domestic air transportation of passengers and baggage;

— 0% for goods for export, international cargo transportation and work (services) performed by organizations for pipeline transport of oil and petroleum products, among others.

• organizational profit tax (налог на прибыль организаций in Russian) — 20% (the difference between income and expenses excluding VAT);
• personal income tax for company employees (НДФЛ in Russian):

— 13% if income is paid to tax residents of the Russia (if the total income of a resident since the beginning of the year exceeds 5 million RUB, the excess amount is taxed at a rate of 15%);

— 30% if income is paid to tax non-residents of the Russia.

• tax on property of organizations.

Paying VAT — example:

1. A company purchased goods worth 60,000 RUB including VAT 20% (10,000 RUB).
2. In the same period, the company sold these goods for 100,000 RUB, including VAT 20% (16,667 RUB);
3. The company has the right to reduce the VAT payable by subtracting from it the VAT that was accrued: 16,667 RUB - 10,000 RUB = 6,667 RUB. This amount is what the company will need to pay to the budget.

If the company purchased goods without VAT, it would not be able to make any deductions, as there was no VAT initially.

FYI: previously, the Russian Ministry of Finance submitted a bill to the State Duma that could change the OSNO. This bill will be considered before August 1, 2024. If adopted, the organizational profit tax will be increased from 20% to 25%. Concurrently, the government plans to compensate for the tax increase with various measures to support businesses.

Simplified tax system 6% (Упрощенная система налогообложения 6% in Russian).

The simplified tax system (STS or УСН in Russian) is a special tax regime with certain restrictions:

• income should not exceed 200 million RUB (with a permissible excess up to 265.8 million RUB);
• the residual value of fixed assets should not exceed 150 million RUB;
• the number of company employees should not exceed 130.

A company cannot choose the simplified tax system if it produces excisable goods, or offers banking, insurance, or other financial services.

Additional requirements for applying STS include:

• the share of participation in the company of other legal entities cannot exceed 25%;
• the company must have no branches;
• the transition is possible if, based on the results of the first nine months of the year in which the company submits a notice of transition, its income does not exceed 112.5 million RUB.

A company can switch to STS immediately upon registering or within 30 calendar days from the date of registration. If this deadline is not met, the company can switch to STS only from the next calendar year.

Types of STS:

• income at a rate of 6%: for example, a company received 500,000 RUB into a bank account, it needs to pay 30,000 RUB tax;
• the difference between income and expenses at a rate of 15%: for example, if a company receives 500,000 RUB into its current account, and spends 400,000 RUB on production, the deductible amount is 400,000 RUB, leaving a balance of 100,000 RUB, from which 15% (or 20,000 RUB) must be paid in tax. This type is suitable when expenses are substantial. Furthermore, if the company ends the year at a loss, the tax will be only 1% of the revenue.

FYI: the tax can be reduced by the amount of insurance premiums. For example, if an employee’s salary is 100,000 RUB and insurance premiums are 20-25%, the STS tax can be reduced by this amount, but not by more than 50% of the tax itself.

When switching to STS, a company does not need to pay:

• organizational profit tax (except for the tax paid on income from dividends and certain types of debt obligations);
• tax on property of organizations (except for property in relation to real estate, the tax base for which is determined as their cadastral value);
• VAT (except for VAT paid when importing goods at customs, as well as when executing a simple partnership agreement or a property trust management agreement).

FYI: the bill proposed by the Russian Ministry of Finance also includes changes to the STS. It is proposed to increase the permissible income to 450 million RUB per year and to increase the residual value of fixed assets from 150 million to 200 million RUB. In exchange for these concessions, companies with a turnover exceeding 60 million RUB per year may be required to pay VAT.

How to choose a tax system? Recommendations and tips.

OSNO is advantageous if the company plans to work with large businesses, such as engaging in wholesale trade or cooperating with large network companies. Typically, all large businesses operate under OSNO as they have no other choice due to the imposed limits. Consequently, large companies prefer contractors and suppliers who also use OSNO. This allows them to receive a tax deduction for the amount of VAT required by suppliers and save on taxes. Additionally, OSNO is beneficial if the company is involved in importing goods into Russia, as a tax deduction can be issued for the VAT paid at customs.

STS is usually chosen by small and medium-sized businesses at their inception, as this system is simpler than OSNO. The 6% STS is beneficial at the start, as it simplifies tax payments, especially if there are no immediate plans for active business operations. The 15% STS is advantageous for companies that anticipate significant expenses. To decide between the 6% and 15% STS, it is sufficient to estimate the approximate receipts of funds into the current account and the amount of income generated.

FIY: all these recommendations are advisory in nature; the choice of the tax system ultimately depends on the decision of the company’s founders.