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<td colspan="2"><a href="www.russinvecchi.com"><img src="../graphics/RussinVecchiMasthead2.gif" alt="Russin & Vecchi Celebrates 10 Years in the Russian Far East" width="720" height="94" border="0"></a><img src="images/blue_back.gif" width="280" height="95" align="top"></td>
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<td width="810"><font face="Verdana, Arial, Helvetica, sans-serif" size="2" color="#FFFFFF">Russia
Report. A Quarterly Newsletter.<br>
March 2005</font></td>
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<p><font color="#800000" size="4" face="Verdana, Arial, Helvetica, sans-serif"><strong>Permits for foreign firms' non-Russian employees blocked<BR></strong></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Policy change cuts option to work through third parties</strong></font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">A
recent change in migration authorities’ policy is posing a
dilemma for branches and representatives of foreign companies doing
business
in the Russian Federation, reports Evgeny Kuzmenko, of our Yuzhno-Sakhalinsk
office. They no longer can employ non-Russian citizens legally, he says. </font> </p> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In late November, migration officials stopped issuing work permits to
foreign citizens who enter Russia under business visas, Kuzmenko explains.
Before that time, a longstanding policy prevented branches and representatives
of foreign organizations from applying for such visas and permits. However,
they could act through a Russian third party to obtain business visas
and then work permits for their non-Russian employees.</font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">With the changed policy, a third party cannot get work permits for individuals
if it does not have a direct labor relationship with them, Kuzmenko says.
Russian subsidiaries of foreign companies can obtain work visas for non-Russian
employees, he observes.</font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">It is difficult to predict when and how the Russian Federation government
will resolve this dilemma, with Kuzmenko predicting that it may require
court action by a foreign company.</font> </p>
<p> </p>
<p><font color="#993300" size="4" face="Verdana, Arial, Helvetica, sans-serif"><strong>New
division of profits tax cuts out local budgets</strong></font><br>
<strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Regions now permitted to reduce their rates by 13.5%</font></strong><br>
<br>
<font size="2" face="Verdana, Arial, Helvetica, sans-serif">As of Jan.
1, the Russian Federation divvies up the tax on profits in a new way — cutting
out local governments, reports Elena Iourkina, of our Moscow office.
Now, 6.5 percent of the proceeds of the profits tax will go to the federal
budget, while 17.5 percent will go to the appropriate regional budget,
she explains.</font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The new law, passed in July, permits regional authorities to reduce
the profits tax rate in their regions by as much as 13.5 percent. Iourkina
adds that the new law increased the tax on dividends paid to Russian
taxpayers (both individuals and organizations) by as much as 9 percent.</font></p>
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<td height="219" valign="top" bgcolor="#FFFFCC"><p><font color="#800000" size="4" face="Verdana, Arial, Helvetica, sans-serif"><strong>Unified
Social Tax drops to 26%</strong></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><BR>
<strong>Employers
had paid 36.5% before Jan. 1</strong></font>
</p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Starting Jan. 1, the Russian Federation reduced its Unified Social Tax
to 26 percent for most taxpayers, reports Elena Iourkina, of our Moscow
office. Before Jan.1, the rate had been 36.5 percent for employers and
individual entrepreneurs on amounts they paid individuals for work or
rendered services or for rights under a copyright contract, she notes. </font></p>
<p> </p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Iourkina explains
that the new rates divide tax proceeds among the federal government
(20 percent), the social insurance fund (3.2 percent), the
federal compulsory medical insurance fund (.8 percent), and the regional
compulsory medical insurance fund (2 percent)</font>.<br>
</p>
<h3><font color="#800000" size="4" face="Verdana, Arial, Helvetica, sans-serif">Royalties to foreign licensors not subject to VAT</font><BR>
<font size="2" face="Verdana, Arial, Helvetica, sans-serif">Tax ministry
concludes ‘sales’ don’t
take place in Russia</font></h3> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Russian Federation Ministry for Taxes and Levies
issued a letter last fall concluding that license payments — including trademark
royalties — to foreign licensors are not subject to the Russian
value-added tax. Denis Marchenko, of our Yuzhno-Sakhalinsk office, comments
that the RF Tax Code applies the VAT only to sales of goods in Russia.</font></p> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">“Goods are considered sold in Russia if they are located in Russia,
are not loaded or transported and/or are located in Russia at the moment
of commencement of loading or transportation,” he notes. Thus,
as the ministry concluded, payments to foreign licensors are not sales
of goods in Russia, and not subject to the VAT, he explains.</font></p>
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<p><font color="#800000" size="4" face="Verdana, Arial, Helvetica, sans-serif"><strong> Far
East has changed much in our firm's decade there</strong></font><br>
<strong><font size="2" face="Arial, Helvetica, sans-serif">Challenges
remain, but business climate has improved</font></strong></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Russin & Vecchi
is celebrating its 10th anniversary of service in Russia’s Far
East, notes Natalia Prisekina, director of our Vladivostok office.
With that office’s opening in 1995, Russin & Vecchi became
the first international law firm to open an office and maintain a full
time presence in the region.</font></p> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">“Those 10 years have brought major changes to Primorye’s
business climate,” Prisekina reports, “The decade also
brought challenges for clients who have needed our help in dealing
with difficulties particular to Russia’s Far East,” she
notes. “Rapidly changing and sometimes uncertain federal, regional,
and local legislation—and Primorye’s sometimes-poor business
climate—have posed particular difficulties,” Prisekina
explains. She elaborates further that the severe economic downturn
in 1998 and subsequent fiscal crisis inflicted large losses on foreign
investors in the region.</font></p> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">“Another challenge has involved the widely held perception—which
some said was well founded—among prospective investors that corruption
and crime made Primorye too risky. Primorye’s new regional government,
understanding that perception can become reality, is making a significant
effort to improve the business climate for foreign investors. Success
in that effort will take time, because problems have accumulated for
years.”</font></p> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">She observes that areas needing improvement include
informational transparency, education of foreign investors about
legal and practical
issues in the region, local business conditions, infrastructure, and
access to capital. “Other aspects for improvement involve investors’ trust—trust
in law enforcement agencies to protect investor interests and trust
in Russian management,” Prisekina comments.</font></p> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Nonetheless, gradually but steadily, Russia’s Far East is attracting
more investors—from South Korea, Japan, the United States, and
elsewhere. Regional development is becoming more predictable. Consequently,
the association of foreign firms doing business in the region has tripled
its membership from the 25 it had just a few years ago, she reports.</font></p> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Prisekina concludes: “Primorye continues to show tremendous
economic potential in its industries—including fishing, forestry,
transportation, tourism, and high-tech business like telecommunications—and
in its prospects to become a major transit route for oil and gas.”</font></p> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">She adds, “While helping clients try to make the most of that
potential, the lawyers in our Russian Far East office take pride in
maintaining the same professional standards—including those of
the American Bar Association—that clients expect from lawyers
in the world’s leading commercial centers.”</font></p>
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<td rowspan="2" valign="top"><p><font size="2" face="Arial, Helvetica, sans-serif"><a href="newshome.html">Newsletter
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<td><p><font size="1" face="Arial, Helvetica, sans-serif">© 2005 Russin & Vecchi,
LLP</font></p>
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<td><font color="#FFFFFF" size="2" face="Arial, Helvetica, sans-serif">www.russinvecchi.com</font></td>
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