Permanent establishment in Russia

    First of all, one should divide the terms - “representative office (of foreign company)” and “permanent establishment”.

    In Russian language these terms have the same noun – [predstavitel’stvo] – that’s why there are a lot of additional problems to understand the difference.

    The term “representative office of foreign company” means a part of company (organization) that is not considered to be a separate legal entity. The head of the representative office is an employee of such foreign company, authorized upon the respective power of attorney to represent the interests of the foreign company in the territory of the Russian Federation. You can treat it like a separate “department” of a foreign company but only with administrative functions.

    As for “permanent establishment” – it is a description of the activity of an office, branch, headquarters, person, agent of foreign company, who carries out business, principal activity of such foreign company. Simple authority of a person to negotiate or conclude contracts in the name of the foreign company may constitute a permanent establishment.

    To form a representative office or a branch in Russia foreign company should pass through the accreditation procedure. As for permanent establishment - it needs no registration, it could not be registered. But it has other consequences – taxation of profit gained by the foreign company through its office/branch/agent in the territory of the Russian Federation.Usually foreign companies form and organize representative office for the performance of the following activities: collection and distribution of information, advertising, participation in exhibitions, marketing, etc. But if foreign company wishes to carry out its principal activity, for example, to produce goods, to perform services in Russia, it shall form a branch. Branch per se is deemed to constitute a permanent establishment. But in practice everything can be otherwise.

    To qualify the activity of a representative office, one should analyze the following:

1. The Tax Code of the

Russian Federation

, especially Chapter 25.

2. The provisions of a tax treaty between the country of the foreign company (organization) and Russia, if any. Should any discrepancies between the provisions of the Tax Code of Russia and the Tax treaty arise, the rules and standards of tax treaties of the Russian Federation shall prevail (Article 7 of the Tax Code of the Russian Federation). Besides, pay attention to the validity of such bilateral agreement – it should be ratified by both states.

    Often tax treaties contain standard provision concerning “the maintenance of a fixed place of business for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character”. The interpretation of activity of a preparatory or auxiliary character differs in different countries.

        3. Case law. The matter is that the laws and conventions usually not only fail to give us an answer, but also make the qualification more complicated. There are a lot of attributes of permanent establishment that were revealed by the courts.

        4. Recommendations and explanations of Federal Tax Service of the Russian Federation (earl. Ministry of Taxation of the

Russian Federation

).

Our lawyers are experienced in tax legislation of the Russian Federation and may help You to find the answer to the question – if the activity of foreign company constitutes a permanent establishment in the Russian Federation or no. Besides, we can give some recommendations based upon the case law and our experience.

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