Simplified taxation for small business persons: overview.

C.26.2 Pt 2 of the Tax Code on the simplified system of taxation was enforced on January 1, 2003. Under this system certain companies can elect to pay single tax instead of the most federal, regional and local taxes (including VAT, property and sales taxes). Persons using the simplified system of taxation do not pay the uniform social tax. The obligation to pay pension insurance contributions, VAT on imported goods and state duties remains. Under this regime taxpayers are entitled to elect whether they pay a uniform tax at a rate of 6 per cent on the basis of all revenues or at a rate of 15 per cent on the basis of income.

For the purposes of the simplified system an income is defined somewhat differently from one for the corporate income tax (CIT) purposes. Unlike income for CIT purposes the simplified system income contains a closed list of deductible expenses, which include most business expenses such as rent, salary, interests, business trips, advertisement (within limits established for the CIT), development of new manufacturing processes, VAT and other taxes and duties. Cost of bought fixed assets is deducted from tax liability at the moment when the exploitation of equipment begins.

Companies that elect to be taxed on the income basis are obliged to pay a minimal tax which is 1 per cent of company revenues. The difference between the minimal tax and tax calculated at the rate of 15 per cent of income can be regarded as losses and can increase an amount of total losses of a company. Companies that use income as a basis for taxation can carry forward the company losses earned during the period when a company has been using the simplified system of taxation with income as a tax basis for up to 10 years. However, losses can not decrease a taxable income for more than 30 per cent during each of the subsequent years.

As companies introducing the simplified system do not pay the property tax, such companies used to be a popular structure for holding of assets. This opportunity still remains, however, substantially restricted. Indeed, since January 1, 2003, companies with a total amount of fixed and intangible assets of more than 100 million roubles ($3.2 million) are not allowed to use the simplified system of taxation.

The following categories of companies are not allowed to use the simplified system of taxation:

- companies that have branches or representative offices;
- banks, insurance companies, pension funds, investment companies, stock brokers, pawnshops;
- producers of goods, subject to excise liability;
- persons involved in gambling business;
- companies that participate in share production agreements.

A company will not be allowed to use the simplified system of taxation if:

- direct participation in share capital of this company of other legal entity equals or exceeds 25 per cent;
- number of employees exceeds 100 people;
- an aggregate amount of gross earnings of the company exceeds 15 million roubles (approximately $480,000) for the period from January to September of the preceding year. (Federal law of July 19, 2009 #204-FZ has raised the threshold to 45 million roubles (USD$1.4 million) for the period starting on July 20, 2009 and ending on September 30, 2012.)

In case the total earnings for the whole year exceeded 20 million roubles, or approximately $650,000, (the limit has been lifted to 60 million roubles (USD$1.9 million) by Federal law of July 19, 2009 #204-FZ for two years from January 1, 2010 to September 30, 2012), a company is regarded as using an ordinary system of taxation since the moment when such exceeding took place. For tax purposes income is regarded as acquired at the moment when payment is received and expenses deductible when payment is made, rather than when income is earned. In other words a taxpayer is obliged to use a cash method in calculating its tax liability.

The uniform tax paid by individuals registered as private entrepreneurs and exploiting the simplified system of taxation substitutes the personal income tax (where entrepreneurial activity is involved), sales tax, property tax (on the property used in entrepreneurial activity), the uniform social tax. Before January 1, 2003, the uniform tax paid by private individuals was a fixed payment regardless of the real income of an individual. The amount of such payment was different from region to region as it was established by regional laws. With the enforcement of the new law individuals introducing a simplified system of taxation pay the uniform tax at the same rates and under the same rules as companies.

 

 

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