Insurance contributions to the RF Pension Fund - new rates for employers, new rules for foreigners

The new year will see changes to a number of federal statutes regulating insurance contributions (payroll taxes) payable to the state social funds. In particular, Law No. 379-FZ (the "Law") changes the rates of the insurance contributions to the Pension Fund of the Russian Federation, and also applies those contributions to foreign citizens temporarily staying in Russia. President Dmitry Medvedev signed the Law on 3 December 2011; it takes effect from 1 January 2012. Details are given below.

Consequences for employers

Employers will face both a decrease and an increase in their payment burdens. In 2012-2013, they will pay less in insurance contributions into the RF Pension Fund on the compensation paid to their employees and consultants who earn less than a fixed annual maximum (which is RUR 512,000 in 2012, and tentatively RUR 573,000 in 2013). This is because of the reduction of the applicable rate from 26% to 22% (i.e. the combined rate of the insurance contributions to the state social funds will be reduced from 34% to 30%).

On the other hand, employers will have to pay more in insurance contributions for highly-paid employees and consultants whose annual compensation is more than the above-mentioned annual maximum. Employers must pay an additional 10% insurance contribution into the RF Pension Fund for compensation in excess of the annual maximum. Prior to 2012, compensation paid over and above the maximum was exempted from insurance contributions to the RF Pension Fund. This means that, for employers having many well-paid employees, the total payroll tax burden will increase.

A change is also coming in regard to compensation for foreign nationals temporarily staying in Russia. In 2010-2011, such compensation was exempted from insurance contributions to the state social funds. Starting January 1, 2012, employers will also have to pay insurance contributions into the RF Pension Fund on the compensation paid to foreign citizens temporarily staying in the Russian Federation who are working under employment agreements signed for an indefinite term, or for a fixed term of at least six months.

There is an important exception: compensation paid to so-called "highly-qualified foreign specialists" will be exempt from the insurance contributions to the RF Pension Fund and the other state social funds.

Recommended action

• Employers should take into account the new rates of the insurance contributions to the RF Pension Fund when planning their compensation costs for employees and consultants in 2012-2013;
• We recommend that companies hiring foreign employees or consultants (other than highly-qualified foreign specialists) review the term of their contracts to determine whether any insurance contributions to the RF Pension Fund will be payable on their compensation;
• Russian companies, and those foreign companies doing business in Russia through branch offices which employ foreign citizens, should take note that compensation of those foreign citizens who are highly-qualified foreign specialists is exempted from insurance contributions to the state social funds;
• If the additional insurance contributions to the RF Pension Fund substantially increase the tax burden of those foreign companies that operate in Russia through representative offices, we recommend that they think about converting the representative office into a branch office. This will make them eligible to qualify the foreign national employees as highly-qualified foreign specialists.