In order to to employ a Russian based in Russia, you must have an entity established in Russia; such as the Russian equivalent of an LLC, namely an OOO (Russian equivalent of the LLC for example).
The amount of money required to establish and run such an entity can be high, a factor which not all companies are prepared for when beginning their operations in Russia.
As a result, it may be a good alternative in such a scenario to hire Russian staff in a freelance capacity, rather than as an employee. Van Rhijn & Partners can assist you in arranging the required, necessary documents for this, so that both parties know what they can expect and can work as effectively in possible. In this blog post I will discuss the possibilities and pitfalls of working with a Russian freelancer.
On this page
Who can work as a freelancer in Russia
Who pays tax when a foreign company hires a Russian freelancer?
How much tax the Russian Freelancer has to pay
Does a Russian freelancer need to be registered as an entrepreneur?
Can you check if someone has registered as an IP?
Can you check whether someone has registered as self-employed?
Other things you need to take into account.
Who can work as a freelancer in Russia
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Many people in Russia do freelance work without registering as an entrepreneur. The Russian fiscal authorities tend to take a pragmatic approach towards such people, in that, so long as they pay Personal Income Tax on their income as a freelancer, they generally aren’t too bothered.
If a Russian individual does choose to register as an entrepreneur, the most logical choice for him would be to become an “Individual Entrepreneur” индивидуальный предприниматель in Russian. Often simply called IP (ИП). I will stick to this acronym in this blog post.
By the way, foreigners with a temporary or a permanent residence permit have the possibility to become an IP in Russia in the same capacity that Russian citizens can.
The word ‘individual’ in the term IP may be confusing as those operating under them don’t necessarily operate alone. According to the law, an IP may have up to 300 employees (in case he applies the unitary agricultural tax). However, in most cases you will find that those working under Russian IPs are indeed operating alone.
Who pays tax when a foreign company hires a Russian freelancer?
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When a foreign company hires a Russian freelancer, the freelancer is required to file his or her own tax return and pay taxes. You can, of course, offer him help with this, which is where Van Rhijn & Partners come in, as will be explained in due course.
How much tax will a Russian freelancer have to pay?
| Type of Registration of Russian Freelancer | Taxation System | Rate and Name of Tax | Restrictions |
| None | General System | 13 % Personal Income Tax | Non mean for systematic entrepreneurial activity |
| Self-employed (самозанятый) | NPD (НПД) | 4% for services to natural persons 6% for services provided to legal persons | Applicable up to a turnover of 2.4 million rubles ($38,448 USD) |
| IP | General System | 13% Personal Income Tax 20% VAT (unless another rate is applicable).See my blog post about VAT in Russia | None |
| IP | Simplified System Variation 1 (taxation of turnover) | 6% of the turnover (unless a different rate is chosen at regional level, as is the case, for example, in the Republic of Kalmykia) | Turnover may not exceed RUB 150 million (approximately $2,17 million USD). The possibility to deduct costs very limited under this variant. |
| IP | Simplified System Variation 2 (taxation of turnover minus the costs) | 15%, unless regionally another rate has been chosen (which is often the case) | Turnover may not exceed RUB 150 million (approximately $2,17 million USD). |
There is no clear answer to the question of how much tax a Russian freelancer has to pay. This depends on:
- Whether he has registered an IP
- Which tax system he chose to apply.
The greatest advantage for freelancers who choose to register as an IP is that they will be eligible to apply the Simplified Taxation System. I have described the Russian simplified tax system in this blog post. It should be noted, however, the previous blog post was written applying the simplified system to an OOO form, not IPs. However, the Simplified Tax System for an IP is broadly the same, but with some key differences for example, the rules of the general system are more lenient for an IP than they would be for an OOO.
Just like for the OOO, the simplified system for an IP comes in two variants. If the Russian IP service provider is providing you with services, it is best for him to choose what I have called Variant 1 in my blog post (turnover tax at a rate of 6%). For the provision of services, this variant is almost always more advantageous and it makes it easier to keep the accounts.
Deductions under Variant 1
In spite of the fact that for variant taxes the turnover is taxed, the IP applying variant 1 of the simplified system may deduct the contributions he has paid to the funds from the amount of tax due. The contributions paid to the funds may be deducted 100% from the tax to be paid if the IP doesn’t have any employees. If he has employees, a maximum of 50% of the contributions to the funds may be deducted from the tax payable. This covers:
- Contributions to the Pension Fund
- Contributions to the Social Security Fund
- Contributions to the Compulsory Health Insurance Fund
How much does an IP have to pay to the funds?
The contributions to the funds for an IP in 2020 are set at 40,874 rubles (about $551 USD) plus 1% of his income above 300,000 rubles. The contributions to the funds for an IP without employees are also much lower than those for an IP with employees or those for an OOO. The contributions to the funds for the last two categories are 30% on top of the gross salary!
Does a Russian freelancer need to be registered as an entrepreneur?
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If one systematically derives income from entrepreneurial activities, it is mandatory to register as an entrepreneur in Russia. However, it should be noted that if a person who is not registered as an entrepreneur receives income and files his tax declarations on time and pays 13% income tax, it is unlikely that he or she will get into trouble with this. This is because in such cases he pays more than he would pay as an IP under the simplified system.
The Self-employed
It is possible to register an IP in any Russian region however, only 4 Russian regions currently offer the possibility to register as a self-employed person. The Russian term for this is самозанятый. In these regions it is currently possible to register in this form:
- Moscow
- Moscow Oblast
- Tartarstan
- Kaluga Oblast
From 1 January 2020, the number of Russian in which it is possible to register as a self-employed person will increase significantly. The following regions will be added to the list:
- Saint Petersburg
- Voronezh Oblast
- Volgograd Oblast
- Leningrad Oblast
- Nizhny Novgorod Oblast
- Novosibirsk Oblast
- Omsk Oblast
- Rostov Oblast
- Samara Oblast
- Sakhalin Oblast
- Sverdlovsk Oblast
- Tyumen Oblast
- Chelyabinsk Oblast
- Krasnoyarsk Krai
- Perm Krai
- Nenets Autonomous Okrug
The accounting requirements for this category of self-employed persons are even less stringent than they are for an IP under the simplified system. A self-employed person has to pay the tax on what has been termed ‘professional activities’ (Налог на Профессиональную Деятельность or simply НПД). These are the applicable rates of tax:
- 4% on income from natural persons
- 6% on income from IP and legal entities
Contributions to the funds are not compulsory for the self-employed person.
This tax system is only applicable to people who earn less than RUB 2.4 million ($ 38,448 USD) per year. If the income of a self-employed person exceeds this amount, he loses his right to apply this tax system and, and like an ordinary citizen, he will have to pay 13% income tax. Therefore, if he expects to earn more than 2.4 million rubles per year, it is more advantageous for him to register an IP.
A recent phenomenon
This form of self-employment is a recent phenomenon. As a result, it’s not yet clear what its application will look like in practice and what the practical implications will be either. Prior to the issuance of government guidance to the contrary, some were of the opinion that a self-employed person may not provide services to foreign clients. However, on September 5, 2019, the Russian Ministry of Finance indicated in a letter that such a restriction does not exist ( Письмо Минфина Россиии от 05.09.2019 N 03-11-11/68560).
Can you check if someone has registered as an IP?
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It is possible to verify that someone has registered an IP. You can do this on the same site of the Russian tax authorities, where you can check company information. All information is available free of charge.
Can you check whether someone has registered as a self-employed person?
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It is possible to verify that someone has registered as a self-employed person. You can do this on this site of the Russian tax authorities. To do this you will need the Tax Identification Number (INN) of the person whose status you want to check.
Other things you need to take into account.
If you choose to engage freelancers as an alternative to hiring an employee, you should bear in mind that you will have people who are not necessarily accustomed to formally presenting themselves as entrepreneurs. There are two things that are important in this respect that you might want to compensate them for hiring external help, accounting and currency control.
Accounting
If you, for example, want to hire a chemist as a freelancer, you cannot expect him to have extensive accounting knowledge. Although a great deal of accounting knowledge is not required for filing returns under the simplified tax system. But due to the international aspect of the legal relationship and the fact that foreign currency is used, it is still advisable to outsource the accounting to an external accountant. You can hire Van Rhijn & Partners for this. We take care of the bookkeeping, so that ‘your self-employed person’ can focus on his field of expertise and you can also be sure that the necessary taxes are paid.
Currency control
Depending on the bank the freelancer has his account at, currency control may be a very cumbersome task . Like bookkeeping, this is also a task you can relieve him off by hiring external help. This way the freelancer can focus on his own work.
How can we help you?
Van Rhijn & Partners can draw up a bilingual agreement between you and the Russian freelancer. This is advantageous for both parties. If the self-employed person regularly receives foreign currency (i.e. in US dollars), he will have to present a Russian-language contract to the bank as part of the currency check. It is in your interest to ensure that it is laid down that the self-employed person will treat the information that you make available to him in a confidential manner.
If you have any questions or comments about working with a Russian freelancer, please contact us or leave a message below.
