Restrictions to use
the simplified taxation system in Russia

With the options to use the 6% tax on total earnings or 15% tax on profit and not to pay VAT the simplified taxation system is much more profitable for taxpayers than the general taxation system. However, there are serious restrictions to use the simplified system which are provided for by paragraph 2 and 3 of article 346.12 of the Tax Code of the Russian Federation.

Article 346.12. Taxpayers

1. ...

2. An organization is entitled to switch to the simplified system of taxation if its earnings as of nine months of the year when the organization applies for switching to the simplified system of taxation and to be determined pursuant to article 248 of this Code do not exceed 15 mllns roubles.

(the wording pursuant to Federal Laws dated July 7, 2003 No. 117-FZ and dated July 21, 2005 No. 101-FZ)

The value of the limit of organization's earnings specified in the first subparagraph of this paragraph, restricting the right of organization to switch to the simplified system of taxation, is to be indexed by a deflator coefficient to be established annually for each subsequent calendar year with consideration to the change of consumers' prices of goods (work, services) in the Russian Federation regarding the previous calendar year as well as by the deflator coefficients which were applied pursuant to this paragraph earlier. The deflator coefficient shall be determined and published officially pursuant to the rules established by the Government of the Russian Federation.

(The subparagraph was introduced by Federal Law dated July 21, 2005 No. 101-FZ.)

3. The simplified taxation system may not be applied by:

1) organizations having branches and/or representative offices;

2) banks;

3) insurers;

4) non-state pension funds;

5) investment funds;

6) professional participants of the securities market;

7) pawnshops;

8) organizations and individual entrepreneurs involved in production of excise goods as well as extraction and realization of minerals except for generally used minerals;

9) organizations and individual entrepreneurs involved in the gambling business;

10) notaries having private practice, barristers established barrister offices as well as other types of barrister entities;

(the wording pursuant to Federal Laws dated July 21, 2005 No. 101-FZ and dated July 27, 2006 No. 137-FZ)

11) organizations being parties to production sharing agreements;

(the wording pursuant to Federal Law dated July 21, 2005 No. 101-FZ)

12) lost validity. - Federal Law dated July 21, 2005 No.101-FZ;

13) organizations and individual entrepreneurs switched to the taxation system of agricultural commodity producers (single agricultural tax) pursuant to chapter 26.1 of this Code;

14) organizations having a shareholding of other organizations of more than 25 percent. This restriction does not cover organizations the capital of which consists entirely of contributions of public organizations of disabled persons if the average number of desabled persons between employees thereof is no less than 50 percents and their share in the payroll is no less than 25 percents, non-profit organizations including organizations of consumers' cooperatives carrying out their activities pursuant to the Law of the Russian Federation dated June 19, 1992 No. 3085-1 On Consumers' Cooperatives (Consumers' Entities, Their Unions) in the Russian Federation as well as business companies the sole founder of which is a consumers' cooperative or a union thereof carrying out its activities purusant to the above mentioned Law;

(the wording pursuant to Federal Law dated July 21, 2005 No. 101-FZ)

15) organizations and individual entrepreneurs whose average number of employees as of the tax (report) period to be deterimined pursuant to rules to be established by the federal authority of executive power authorized in the field of statistics, exceeds 100 employees;

(the wording pursuant to Federal Law dated June 29, 2004 No. 58-FZ)

16) organizations whose net fixed assets and intangible assets to be determined pursuant to the legislation of the Russian Federation regarding accounting, exceeds 100 mlns roubles. For the purposes of this subparagraph there shall be taken into account the fixed assets and intangible assets which are subjected to amortization and recognized as property pursuant to chapter 25 of this Code;

(the wording pursuant to the Federal Laws dated December 31, 2002 No. 191-FZ and dated July 21, 2005 No. 101-FZ)

17) budgetary institutions;

(Subparagraph 17 was introduced by Federal Law dated July 21, 2005 No. 101-FZ.)

18) foreign organizations.

(Subparagraph 18 was introduced by Federal Law dated July 21, 2005 No. 101-FZ, the wording pursuant to Federal Law dated May 17, 2007 No. 85-FZ.)

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