Taxation of foreign employees: accrual rules
The role of tax residency affects the taxation system:
A tax resident is a person who lives in Russia for more than 183 days a year. The personal income tax rate in this case for him is 13%.
A tax non-resident is a person who lives outside the territory of Russia for more than 183 days per year. The personal income tax rate is equal to 30%, but in some cases 13% deductions are not applied.
A foreigner must confirm his tax status with documents confirming his stay in Russia.
The above-mentioned personal income tax conditions apply regardless of the type of employment contract. Also, the 13% rate is automatically applied to temporarily staying visa-free foreigners working under a patent and for citizens of EAEU member states. However, if a foreign employee of the EAEU does not become a tax resident within 183 days, the basic personal income tax rules apply and the tax paid is recalculated at the rate of 30%.
Tax deductions for personal income tax, including standard deductions, also become available to foreign tax residents of the Russian Federation. Foreigners working under a patent may apply for a tax deduction for the amount of fixed advance payments under the patent.
From 1 January 2023, insurance contributions for foreign workers are calculated according to standard rules and amount to 30% of payments, regardless of the type of contract – labour or GPH, as stated in Article 420.1 of the TC. Citizens of countries that are members of the EAEU and working in the Russian Federation do not receive privileges. Insurance contributions for them are charged in the same way as for Russian citizens.
The 30% rate continues to apply until income does not exceed RUB 2.225 million in 2024 (see Government Decree No. 1883 of 10.11.2023). After that, the employer applies the 15.1% rate.
Labour contract
It is important to note that it is not possible to reduce tax liabilities by choosing the type of contract with a foreigner, so it is necessary to carefully consider all the advantages and disadvantages of concluding an employment contract or a civil contract.
Entering into an employment contract with a foreign national emphasises the employer’s integrity and provides a basis for stable cooperation. Such a contract provides the employer with opportunities for effective control and, if necessary, disciplinary and material sanctions.
However, the employment contract obliges the employer to keep personnel records and to pay sick leave benefits, compensation and holidays in accordance with the Labour Code. This requirement is not present in a civil law contract, which may be considered an advantage of this type of contract.
The main disadvantages of a civil contract are the lack of proper control on the part of the customer and a high risk of its conversion into an employment contract with the subsequent recognition of the employer as a tax agent.
This type of contract will be optimal if a foreign citizen provides services as a self-employed person or an individual entrepreneur. In this case, the foreigner himself will be responsible for paying his taxes.
Nevertheless, when concluding a contract of employment, it is important to formulate it correctly in order to exclude the possibility of its reclassification as a labour contract. This may result in additional payments of personal income tax and insurance contributions, as well as tax liability under Articles 122 and 123 of the Tax Code of the Russian Federation.
