Understanding Payroll in Russia: What Global Companies Need to Know About Russia Payroll
Jan 29, 2017
With the world’s sixth largest economy in terms of purchasing power parity, Russia remains an important (if controversial) outpost for many multinational companies. Though lower oil prices and international sanctions impact Russia’s potential for foreign businesses, its economy has remained stable in terms of competitiveness since the great Recession.
Despite the many advantages that Russia can provide multinational companies, however, organizations must overcome numerous challenges in order to successfully capitalize on the Russian market. With complex labor and business regulations – some of held over from the days of the Soviet Union – in effect across the country, organizations may find it difficult to navigate Russia’s employment statutes, taxation policies, and payroll guidelines. (President Vladimir Putin has said he wants the government to cut red tape and create a more favorable business environment, but whether that will happen in practice remains to be seen.)
As companies look to launch or expand Russia payroll operations as part of their overall global payroll strategy, here are the top considerations to keep in mind.
Establishing Limited Liability Company is a relatively simple, inexpensive process in Russia – making it the most common way most international enterprises enter the country. It typically takes between 4-6 weeks to complete the appropriate registrations with Trade Register and Federal Tax Service, open a bank account, and deposit the minimum share capital, and receive approval as a legal entity. It is mandatory to use an in-country bank account to pay employees and authorities in Russia.
Following the creation of the LLC, the organization will need to register with the Pension Fund of the Russian Federation, Social Insurance Fund of the Russian Federation, Statistics Fund of the Russian Federation. Depending on their region, the company may also need to register with the Centre for Workplace Quota.
Probationary periods are generally set at a maximum of 3 months for most employees, and 6 months for executives. To recruit from overseas, Russian employers must be registered with the Ministry of Ethnic and Migration Policy and Federal Migration Service. Visas and work permits must be secured for employees, sponsored by an incorporated entity, and have a typical processing time of 4 to 6 weeks. However, foreign citizens from most Commonwealth of Independent States (CIS) countries do not require entry visas.
Russian labor laws apply to foreign nationals and foreign businesses in Russia in the same manner as domestic entities, and provide strong protections to workers. Russia’s often-changing labor legislation can be challenging to adhere to, but it is highly important for organizations to craft employment agreements, termination policies, and salary guidelines that are in full compliance with the laws as fines, legal disputes, and other penalties are common.
As an example, all employment contracts must be for an infinite period, aside from rare exceptions in which substitute employees, CEOs, or chief accountants are granted fixed-term employment contracts. The inappropriate use of fixed-term employment agreements is something employers can be penalized for.
All payments to employees in Russia must be made in rubles, with no exception for foreign nationals. Salaries and wages must be paid no less the once every half-month. As with much of the world, the Russian workweek lasts from Monday to Friday, with an 8-hour work day. Overtime work compensation is paid at a rate of 1.5 times for the first two hours and 2 times the rate for additional hours. Overtime work must not exceed 4 hours in two consecutive days, and not over 120 hours per year.
Only upon specific grounds specified in Article 81 of the Labor Code may the employer terminate an employment agreement. As for severance, Russian employers typically avoid potential labor-law violations by negotiating a settlement amount usually from two to three months’ salary for regular employees and up to six months for senior executives.
Tax & Social Security Considerations
In Russia, employers’ insurance contributions, pensions, medical care and personal income tax are all administered via funds with nonadjacent laws – complicating payroll and tax compliance matters even further. A few of the key issues are summarized here.
The corporate tax rate in Russia ranges from 15.5 to 20 percent and the individual income tax rate, which is to be withheld by the employer, is a flat rate of 13 percent of gross income. With the exception of some “highly qualified” foreign employees, non-residents are taxed at a flat 30 percent rate. After living the country for 183 consecutive days, however, an individual can pass the residence test to receive the 13 percent tax rate.
Employees are not required to contribute to social security. Employer contributions are levied at a general rate of 30.2 percent for each employee’s income (not exceeding 512,000 rubles). For employees earning more than that, contributions are levied at 10 percent.
Certain pay items are not subject to taxation – such as including maternity pay, childbirth benefits, business trip and other business-expense compensations, instruction and education costs, certain employer-initiated medical insurance premiums and pension plans contributions, and some relocation costs. (Note: While business expenses are nominally tax-exempt, the rules for supporting documents are so detailed and cumbersome that some companies prefer to be taxed rather than doing the paperwork.)
All employees in Russia are entitled to 28 calendar days of holiday leave each year following six months of continuous employment. The timing of the vacation is set by the employer, with certain exceptions for pregnant women and their husbands and for minors. Any accrued vacation days will be compensated during termination of employment.
Employees may take sick leave in the event of illness, injury, or a sick family member, but compensation levels vary depending on the circumstances. Paid maternity leave (which is covered under the social insurance scheme) accrues 70 calendar days prior to birth and extends to 70 calendars following birth.
|Date||Russia's Public Holiday Schedule|
|January 1st||New Year's Day|
|January 2nd - 6th||Bank Holiday|
|January 7th||Orthodox Christmas Day|
|February 23rd||Defence of the Fatherland|
|March 8th||Women's Day|
|May 1st||Labor Day|
|May 8th||Bridge Holiday|
|May 9th||Victory Day|
|June 12th||National Day|
|November 4th||Day of Unity|
|November 6th||Day of Unity Holiday|
By understanding the intricacies of Russia’s labor codes, organizations can ensure they pay their employees fairly and protect themselves against potential disputes. Staying up-to-date with Russia’s often changing laws and regulations, however, can place a heavy administrative burden on an organization’s internal team. To maintain continuous compliance and avoid costly penalties with Russia payroll, a trusted global payroll managed services provider can be a multinational company’s best asset.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.