How much does it cost to hire an employee in Russia? This is an important consideration for many entrepreneurs.
The most correct answer to this question is: it depends, but of course that is not a very satisfactory answer. Therefore, in this blog post I will list the costs you should take into account when considering hiring staff in Russia.
On This Page
- Employees, not Freelancers
- Required Presence in Russia
- Net and Gross
- Personal Income Tax Rate in Russia
- The Funds
- Lower rates for small and medium-sized enterprises and other groups
Employees, not Freelancers
This blog post is about hiring employees, not self-employed individuals. If you are considering working with a Russian self-employed person, I refer you to my blog post on working with a Russian freelancer from abroad.
Required Presence in Russia
If you want to act as an employer in Russia you will need to be registered in some way with the Russian tax authorities.
If you want to act from the legal personality of your foreign company in Russia you can establish a Representative Office (представительство) or a Branch Office (филиал) in Russia.
Please note that this is a Representative Office or a Branch Office of a Foreign Legal Entity. Russian legal entities can also have Representative and Branch Offices and they also have the same title, but the rules applicable to them are different.
Such a Representative or Branch Office has no legal personality of itself, but acts through the legal personality of a foreign organization. Setting up a Representative or a Branch Office is a complex process. Van Rhijn & Partners can help you with that.
You can also set up a Russian company. The most common Russian legal form is the OOO. For the details about setting up a Russian company I refer you to our blog post on setting up an OOO in Russia.
People with Russian nationality and foreigners with a Russian residence permit can register as a sole entrepreneur (ИП) in Russia. An IP can also hire staff. However, a Russian self-employed person (самозанятый) cannot do so (this refers to someone who has chosen this particular tax system (НПД).
Net and Gross
The term gross wage can cause confusion for foreigners in Russia because contributions to the funds are not included in the gross wage in Russia. In Russia, gross pay is defined as net pay plus income tax.
Personal Income Tax Rate
In my blog post on selling Russian real estate, I described who is a tax resident of Russia.
Until recently (early 2020), you had one flat tax rate of 13% for fiscal residents of Russia. However, in connection with the anti-crisis measures related to the coronavirus, it was decided to introduce a progressive tax rate. But not by much. There is now a 15% rate for people who earn more than 5 million rubles per year gross, but this 15% rate applies only to the amount above 5 million rubles (which is now, February 2022, about 58 139 euros).
This is what applies to fiscal residents of Russia. However, a 30% income tax rate applies to fiscal non-residents. However, if a non-resident becomes a resident after six months, he can get back from the tax authorities the difference he paid as a non-resident and what he would have had to pay as a resident (i.e. 30-13=17%).
Suppose someone earned 100 thousand rubles gross per month as a non-resident, then in half a year his employer had to pay for him 6 x 30 thousand is 180 thousand rubles income tax. After six months, he can then get 17% of 600 thousand is 102 thousand rubles back from the Russian tax authorities. Such a refund is quite a bureaucratic procedure, but in most cases, of course, it is worth it.
A foreign employee in Russia with an HQS work permit (which in most cases obliges the employer to pay a minimum salary of 2 million rubles gross per year, 23 255 euros according to the exchange rate in February 2022) starts paying 13% right away. However, this does not mean that he is therefore a tax resident of Russia.
|Who||Rate Personal Income Tax||Fiscal Resident of Russia|
|Fiscal Resident of Russia||13% of gross salary up to 5 million rubles gross per year15% of amount above 5 million gross per year||yes|
|Fiscal non-resident of Russia||30% of gross wages, but part of this can be reclaimed if the person later becomes a resident||no|
|HQS||13%||Is a resident according to the rule: as soon as he stays in Russia for more than 183 days a year. The fact that he pays 13% does not make him a resident.|
It is sometimes claimed that employer contributions in Russia are low, because after all, you only pay 13% personal income tax. That is not quite correct. In addition to the 13% income tax, Russian employers must pay contributions to ‘the funds’. The extent of these contributions is laid down in Article 425 of the Russian Tax Code.
For a number of groups, lower rates apply to the funds, which, if you qualify, can save you significantly on your employer costs in Russia.
First, below is an overview of the rules for a company without any exceptions.
The Pension Fund
The largest contribution to the funds is the one to the Pension Fund. According to paragraph 2 sub 1 of article 425 of the Tax Code of Russia, the pension contribution is 22% for the basic premium. If the employee earns more than the basic amount (on which the basic premium of 22% is levied), 10% premium is levied on this amount that exceeds the basic premium. This base amount is re-adjusted upward each year per decree(adjusted for inflation).
In 2022, the base on which 22% pension premium must be paid is 1 565 000 rubles. This is now about 18 197 euros. A lower rate of 10% must be paid on anything more than this amount earned by the employee.
Because of this lower contribution to the Pension Fund, above a certain amount, you could say that Russia has an inverse progressive tax system Despite the fact that the income tax itself has recently therefore now been progressive, albeit to a very limited extent.
Fund for Temporary Disability and Maternity (sub 2)
This premium is for payment of benefits for temporary disability and maternity. The premium amounts to 2.9% of the gross salary.
However, a lower premium must be paid for foreign employees: 1.8% (this does not apply to Highly Qualified Specialists).
As with the mandatory pension contribution, there is also a limit. In 2021, this limit for social security contributions is the amount of 1 032 000 rubles ( 12 000 euros). However, there are not multiple rates. Premium is levied only up to this limit, above which it is no longer levied.
Fund for Compulsory Health Insurance
The employer’s contribution for compulsory health insurance in Russia is 5.1%. There is no limit after which these contributions are no longer due. So, the higher the salary, the more health insurance premium must be paid for an employee.
Lower rates for small and medium-sized enterprises and other groups
When the corona crisis also reached Russia in 2020, the Russian government, as a permanent support measure for small and medium-sized enterprises, halved the contributions to the funds for companies that are included in the Russian register for small and medium sized business have to pay, insofar as the wages they pay are higher than the minimum wage.
Thus, the minimum wage is taxed equally for the funds in all business categories. For the portion of the salary above the minimum wage, SMEs have to contribute less to the funds. Here is an overview of lower contributions to the funds that Russian companies can pay:
|Category||Pension||Compulsory Health Insurance||Temporary Disability and Maternity||Requirement to qualify for exception|
|General rate, without discounts||22% on gross salary up to 1 565 000 rubles, 10% on amount above that||5,1%||2,9% (1,8% for HQS)||none|
|Small and medium-sized enterprises|
22% on minimum wage,10% on everything above it.
In 2022 the minimum wage in Russia is set at the federal level at 13 890 rubles (161 euros), however, subjects are free to set a higher minimum wage in their region. In Moscow, the minimum wage in 2022 is 21 371 rubles (247 euros) and in St. Petersburg it is 21 500 rubles (249 euros).
|5%||0%||To be included in the register for small and medium-sized enterprises|
|Employers who are residents of a Special Economic Zone of the type “Technical and Innovation Activities,” “Manufacturing-Industrial,” or “Tourism Recraternal” (only for employees on Special Economic Zone property)|
20% (was less in previous years)
|5,1%||2.9% (was less in previous years) 1.8% for HQS|
Agreement with authorized state organ to become resident of Special Economic Zone
Accreditation as an IT company, at least 7 employees and at least 90% of revenue from IT
Crew of ships registered in Russia
|0% (until 2027)||0% (until 2027)||0% (until 2027)||To have a ship registered in Russia|
|Employers on the simplified tax system who have one of the activities listed in 427 paragraph 1 sub 5 as their main activity (inter alia, production of clothing) and have an income not exceeding 79 million rubles (over 900 thousand euros)||20%||0%||0%||Depends on the activity|
As demonstrated in this article, there are numerous opportunities in Russia to legally reduce labor costs. It is important to take this into account when setting up your activities in Russia. Van Rhijn & Partners will be happy to help you find the most suitable structure for your Russian activities. We can also take care of the payroll for your Russian entity. Please contact us.