Currently, the global real estate market continues to grow. According to experts, in the first quarter of 2014 the volume of direct investments in commercial real estate in the world reached $ 130 bln., increasing by 23% as compared to the last year's result for the same period. Immeasurably increased interdependence of different national economies is related to the formation of economic space, where the geography of investment location is determined by taking into account the global environment.
Foreign entities operating in the RF or entering into relationship with its residents, to one extent or another can acquire various tax obligations. To know how to deal with such situations, the RF Tax Code has special provisions for foreign entities, although in some cases it is difficult to establish certain rules that foreign entities should have and could fulfil.
As such, for example, is the situation in which a foreign entity that does not operate in the Russian Federation through a permanent representative office sells real estate in Russia.
Let’s consider 4 possible options of sale of real estate.
The income from the sale of real estate situated in the RF refers to the income of foreign entity from sources in the RF and is subject to withholding tax. The tax on income received by a foreign entity from sources in the RF is calculated and withheld by the Russian company, which pays the income to the foreign entity upon each payment of income, in the currency of payment of income. The amount of tax withheld on the income of foreign entities is transferred by the tax agent to the federal budget in the currency of the RF.
Exception is, in particular, the case when, in accordance with international treaties (agreements) income is not taxable in the RF provided that the non-resident submits a confirmation to the tax agent.
It should also be taken into account that when determining the tax base for income from the sale of real estate in the RF the amount of such income may be subject to deduction of the costs under the procedure provided for by the tax legislation of the RF.
The costs incurred by the foreign entity will be accounted for by the tax agent in determining the tax base, if by the date of payment of such income the tax agent withholding tax on such income will be presented by the foreign entity the documented data on such costs.
According to the explanations of the Ministry of Finance of Russia for a foreign entity to determine the costs, i.e. the value of acquisition by it of real estate, the following can be used:
The situation considered in this point as an example is very common in the business environment. Similarly to the Option 1 in this situation the subject of the profits tax arises as income of the foreign entity from sources in the RF, which are subject to the withholding tax.
However, if the taxpayer is a foreign entity receiving income from sources in the RF not related to a permanent representative office in the RF, the obligation to determine the amount of tax, deduct this amount from the taxpayer’s income and to transfer of tax to the budget rests with the Russian organization or the foreign entity operating in the RF through a permanent representative office paying this income to the taxpayer.
In view of the above it can be concluded that, despite the appearance of the subject of profits tax, the tax agent is not obliged to pay the profits tax. The specified position is supported by the Federal Tax Service in its explanations. However, the exemption of the taxpayer from the obligation to calculate and pay is not provided for by the tax law, as well as by the mechanism of payment of tax under these conditions. However, the legislator said that the tax is considered established if all the conditions of tax establishment, including the procedure for payment of tax are provided for. Acts of legislation on taxes and fees should be formulated so as everyone knew exactly what taxes (fees), when and how it shall pay. Taking also into account that all irremediable doubt, contradictions and ambiguities of legislative acts on taxes and fees shall be interpreted in favor of the taxpayer it can be concluded that in this situation there is no obligation to pay the profits tax.
Similarly to the options described above in this situation the subject to the profits tax arises as income of the foreign entity from sources in the RF, which is subject to the withholding tax.
However, if the taxpayer is a foreign entity receiving income from sources in the RF not related to a permanent representative office in the RF, the obligation to determine the amount of tax, deduct this amount from the taxpayer’s income and to transfer of tax to the budget rests with the Russian organization or the foreign entity operating in the RF through a permanent representative office paying this income to the taxpayer.
However, in this situation the income of the foreign entity is paid by an individual, who is not a tax agent obliged to calculate, withhold and transfer the profits tax levied on income earned by foreign entities non-operating in the RF through a permanent representative office. According to the explanations of the Ministry of Finance individuals, including individual entrepreneurs, are not recognized as tax agents in respect of income of foreign entities, because the obligations of tax agents in respect of such income may be imposed only on Russian companies and permanent representative offices of foreign entities.
However, the Ministry of Finance does not always share the specified position, in particular in its Letter in 2005 it explained that individual entrepreneurs who pay income to foreign entities, are obliged to determine the amount of tax, withhold and transfer it to the budget.
To date, the issue of whether the foreign entity is obliged to independently calculate and pay the tax, received income from sources in the RF not related to a permanent representative office in the RF, if the counterparty is not recognized in accordance with the tax laws a the tax agent for the purpose of the profits tax is not resoled.