Russian tax: Unified Social Tax overhauled

The Russian president signed a law on 24 July 2009 that will change the principles of social taxation in the country. The Unified Social Tax (UST), currently payable at a regressive rate from 26% to 2%, and administered by the tax authorities, will be replaced by insurance contributions to the State Pension Fund, the Social Security Fund and the Medical Insurance Fund.

The changes come into effect on 1 January 2010.

Although the new law incorporates the major principles of the current social taxation regime, a number of important changes have been introduced:
- Similar to UST payments, companies will continue to be responsible for paying the new insurance contributions. However, a cap has been introduced – annual income exceeding RUB 415,000 will not be subject to the contributions. The government may adjust this figure annually, based on statistical data on average salaries.
- Social contributions will remain at the same level as the UST in 2010, with the total contribution burden amounting to 26%. Starting in 2011, overall contributions will increase to 34%.
- The new system does not affect the obligatory Accident Insurance coverage. Similar to current rules, these contributions will be payable separately to provide additional protection for employees who suffer accidents at work.
- No obligatory Russian state pension, social security or medical insurance contributions will be payable for foreign nationals who stay and work in Russia on the basis of a visa. This amendment significantly decreases the employers' burden, since, apart from Accident Insurance, no contributions will be due on salaries paid to foreign nationals working in Russia.
- The link between social tax obligations and profits tax deductibility, which has resulted in many disputes between companies and the tax authorities, has been eliminated. Currently, under the UST article in the Russian Tax Code, payments that are not deductible for profits tax purposes should not be subject to UST. Although this provision seems straightforward, it has resulted in controversy because of conflicting views on whether certain types of payments (e.g. bonuses) are deductible for profits tax purposes. The new law does not contain this provision.
- Administrative functions for social security will be transferred from the tax authorities to the State Pension Fund and the Social Security Fund, a change that, at least initially, may lead to some difficulties in applying certain provisions of the new law and obtaining clarification.
- The rules for the submission of reports to the competent bodies and data storage have been updated.

The principles of the new social contribution system resemble those of the current social tax regime. From a business perspective, the new rules will have a positive effect on companies that have foreign specialists on their payroll since the move from social taxes to social contributions will result in lower costs in connection with international assignees. However, the overall contribution burden in relation to Russian personnel will increase in most cases.