Simplified taxation for small business persons: overview.

C.26.2 Pt 2 of the Tax Code on the simplified system of taxation was enforced on January 1, 2003. Under this system certain companies can elect to pay single tax instead of the most federal, regional and local taxes (including VAT, property and sales taxes). Persons using the simplified system of taxation do not pay the uniform social tax. The obligation to pay pension insurance contributions, VAT on imported goods and state duties remains. Under this regime taxpayers are entitled to elect whether they pay a uniform tax at a rate of 6 per cent on the basis of all revenues or at a rate of 15 per cent on the basis of income.

For the purposes of the simplified system an income is defined somewhat differently from one for the corporate income tax (CIT) purposes. Unlike income for CIT purposes the simplified system income contains a closed list of deductible expenses, which include most business expenses such as rent, salary, interests, business trips, advertisement (within limits established for the CIT), development of new manufacturing processes, VAT and other taxes and duties. Cost of bought fixed assets is deducted from tax liability at the moment when the exploitation of equipment begins.

Companies that elect to be taxed on the income basis are obliged to pay a minimal tax which is 1 per cent of company revenues. The difference between the minimal tax and tax calculated at the rate of 15 per cent of income can be regarded as losses and can increase an amount of total losses of a company. Companies that use income as a basis for taxation can carry forward the company losses earned during the period when a company has been using the simplified system of taxation with income as a tax basis for up to 10 years. However, losses can not decrease a taxable income for more than 30 per cent during each of the subsequent years.

As companies introducing the simplified system do not pay the property tax, such companies used to be a popular structure for holding of assets. This opportunity still remains, however, substantially restricted. Indeed, since January 1, 2003, companies with a total amount of fixed and intangible assets of more than 100 million roubles ($3.2 million) are not allowed to use the simplified system of taxation.

The following categories of companies are not allowed to use the simplified system of taxation:

- companies that h