When is it possible to recognize a Russian company owned by a foreign entity as an SME?
As you probably know, small and medium enterprises (SMEs) have been able to apply since April 01, 2020 a reduced rate of 15% for mandatory social insurance contributions (instead of 30%). For more detailed information about this and other COVID-related support measures, please watch our video.
Many think that Russian companies owned by foreign legal entities can under no circumstances be recognized as SMEs, but this is a misconception. Even Russian companies 100% owned by foreign companies may be recognized as an SME under certain conditions. We therefore recommend checking out whether your company qualifies as an SME and is eligible for the reduced social insurance contribution rate. Please see below for more detailed information.
When is a Russian company recognized as an SME?
A Russian company is deemed to be an SME if the following conditions are met simultaneously:
- The Russian company employs fewer than 250 people;
- The Russian company’s revenue did not exceed RUB 2 billion in 2019;
- The foreign company’s stake in the Russian company does not exceed 49% of the shares in the Russian company’s share capital.
If a Russian company meets the above conditions, it is automatically recorded by the Federal Tax Service in the SME register. Such companies may claim a reduction in social insurance contributions by up to twofold.
What if a foreign company owns more than 49% of a Russian company’s shares?
If a foreign company owns more than 49% of the shares in a Russian company’s share capital established as a limited liability company (LLC), such LLC could still be recognized as an SME, but in this case, the foreign company should also meet the following requirements:
- Its staff headcount for the previous calendar year should be less than 250;
- Its revenue for the previous calendar year should not exceed RUB 2 billion in 2019;
- The foreign company’s place of permanent residence is not a country included in the list of offshore zones approved by Decree No. 108-n issued by the Russian Ministry of Finance on November 13, 2007.
If these conditions are met, then the Russian company may be included in the SME register but not automatically. In this case, the following actions will be required:
- The Russian company must contact and enter into a service agreement with a Russian audit organization. We would be pleased to recommend an audit organization if needed;
- The Russian company will then submit to the audit organization the foreign company’s reporting for the previous year that the foreign company submitted to the tax authorities of its country of registration;
- The audit organization will verify that the data in the foreign company’s reporting as of January 01 of the current year comply with above criteria;
- If the requirements are met, the audit organization should include the Russian company in a special list that the audit organization should forward electronically to the Federal Tax Service from July 01 to July 05. This list must be sent every year.
- The Federal Tax Service will then record the Russian company in the SME register by August 10 of the current year.
We would be pleased to assist in determining whether your company meets the requirements for SMEs and in preparing the documents for inclusion in the SME register.
If you have any questions or would like to discuss the current situation, please write to Anton Kabakov.
Truly yours,