American Chamber of Commerce Annual HR Committee Conference HR’s Role in Risk Management: What Keeps You Awake at Night? Friday, October 13, 2006, Moscow

American Chamber of CommerceAnnual HR Committee ConferenceHR’s Role in Risk Management: What Keeps You Awake at Night? Friday, October 13, 2006, Moscow Country Club

Evgeny Reyzman, Partner

Baker & McKenzie-CIS, Limited

Moscow, Russia

Expansion into the Regions of Russia:Labor Law and Practical Issues

©2006 Baker & McKenzie 2

Expansion into the Regions of Russia: Labor Law and Practical Issues

Employers expandinginto the regions:

• Russian companies• Foreign companies with representative

or branch offices• Foreign companies with no corporate

presence in Russia



Options to employ people in Russia

• Under labor contract• Under civil-law services agreement with

individual contractor• Under a civil-law services agreement

with company-provider (intermediary)



Employing individuals in regions under Labor Contract

• Creating work place: lease of premises/ work from home/ “roving commission”

• Separate structural division: registration with local tax authorities

• Special tax registration with Social Funds



Employing individuals in regions under Labor Contract (continued)

• Documenting labor relationships

• Local labor-related rules and additional guarantees/ benefits (e.g. “Northern Benefits”)



• Accounting and tax reporting: additional burden– Individual Income Tax (at place of salary payment)

– Unified Social Tax (UST) (at place of accruing / payment of salary)

– Separate tax reporting of structural division• Transport Vehicles Tax (at place of vehicle registration)

• Company Asset Tax (at place of location)

• Corporate Income Tax (at head office and local office)

• VAT (at head office only)

Employing individuals in regions under Labor Contract (continued)



Civil Law Services Agreement with Individual Contractor

• Registered individual entrepreneur:

Registration with tax authorities

• Individual Contractor with no status of entrepreneur: potential risks



Contracting Registered Individual Entrepreneur: advantages and disadvantages for employing company

Advantages Disadvantages

• No registration with local tax authorities and Social Funds

• No tax agency obligations

• No UST and social insurance obligations

• Free termination of contract under Russian Civil Code with only compensation of actual losses of contractor

• Materially limited opportunities to manage/ control contractor

• VAT applies, unless contractor accepts Simplified Taxation System



Contracting Registered Individual Entrepreneur: advantages and disadvantages for Individuals

Advantages Disadvantages

• Contractor is free to choose more effective taxation system: regular or simplified with Unified Tax 6% on gross income or 15% on net profit

• Contractor is free to arrange work/ work time

• No Labor Code guarantees, materially lower social protection

• Additional registration and tax reporting obligations, possible audits by tax authorities

• VAT applies with regular tax system

• Questionable pension insurance: registered entrepreneurs pay minimal contributions to Pension Fund that are unable to reliably finance funded part of labor pension



Employing individuals in Russia by Company with no local corporate presence• Labor Contract

Russian Labor Code applies

– Documenting of employment

– Registration with local authorities

– Tax problems (permanent establishment and others)

• Registered Individual EntrepreneurMost reliable option

• Employing via intermediariesPossible labor and tax law risks

American Chamber of CommerceAnnual HR Committee ConferenceHR’s Role in Risk Management: What Keeps You Awake at Night? Friday, October 13, 2006, Moscow Country Club

Evgeny Reyzman, Partner

Baker & McKenzie-CIS, Limited

Moscow, Russia

Expansion into Regions:Labor Law and Practical Issues

Documents

American Chamber of Commerce Annual HR Committee Conference HR’s Role in Risk Management: What Keeps You Awake at Night? Friday, October 13, 2006, Moscow