Russia and Social Security System Reforms
In December 2011, a new federal law1 introducing changes to the Russian social security system passed the final stage of approval. The new regulations, which came into force on 1 January 2012, expand the scope of individuals considered “insured individuals” and will impact the application and collection of insurance contributions to the state pension, medical, and social security funds, potentially increasing the tax burden on Russian employers in respect of most categories of employees. The new law does not affect the mandatory contributions for insurance against occupational accidents and diseases (and the latter contributions are not covered in this Flash International Executive Alert).
Insurance contributions to state pension, medical, and social security funds were introduced in 2010,2 replacing a unified social tax.3 The most significant change was that the amount of employee income subject to insurance contributions was capped. As a result, social security tax was not paid on amounts exceeding the limit. Also, employers were freed from paying insurance contributions for most foreign nationals who work in Russia (i.e., those who stay in Russia temporarily).
The amendments to the social security regulations introduced by the new federal law overturn, to a large degree, the above rules.
1. Cancelling Limitations on Employee Income Subject to Social Security
In general, the new law maintains the cap on the amount of employee income subject to insurance contributions. However, during the next two years, this cap will not be applicable. The new law sets one rate for contributions that will be charged on employee remuneration within the established threshold and an additional rate that will be charged on employee income exceeding the threshold. The law implies that this additional rate will apply only in 2012 and 2013.
For 2012, the government set the threshold of employee annual income at RUB 512,000. For 2013, the government will set the threshold in late 2012, but for budgeting purposes the state authorities used RUB 567,000.
Social security contributions remain the employer’s responsibility, and they remain payable at the employer’s expense. Employees continue not to have any social security contributions obligations. From a corporate perspective, the company can deduct for profit tax purposes the social security contributions that are paid.
2. Changing the Rate of Insurance Contributions
In 2012 and 2013, different rates will apply, compared to 2011: employee remuneration within the threshold will be subject to contributions at a rate of 30 percent, and the amounts exceeding the threshold will be subject to a new additional contribution at a rate of 10 percent. The additional contributions are payable to the pension fund. The law establishes that payment of the 10-percent contribution should cease in 2014. Starting in 2014, the total general rate of insurance contributions should be 34 percent.
The government announced a decrease of employers’ social security costs, changing the rate from 34 percent to 30 percent. However, the decrease will apply only to employees with annual remuneration below RUB 512,000 (i.e., RUB 42,667 per month). For employees with higher salaries, the employer costs will increase. Employers should take this into consideration when budgeting employee-related expenses.
Although payment of the additional 10-percent contribution to the pension fund is made based on the employee’s remuneration, this should not lead to an increase of the employee’s future pension benefit. These additional contributions will go to a pool of funds used to pay base state pensions and to make similar payments.
3. Foreign Nationals’ Salaries Will Be Subject to Pension Insurance Contributions
The new law expands the list of categories of individuals insured for state pension insurance purposes. Starting in 2012, the list will include many foreign nationals who work in Russia.
Therefore, from January 2012, employers are liable for making insurance contributions on remuneration paid to foreign nationals who temporarily stay in Russia and have in effect Russian employment contracts of a duration of six months or longer. However, the overall rates for foreign nationals will be slightly lower than for Russian employees, since social and medical insurance contributions will not be applicable for them (rather, only the portion of contributions that is due to the pension fund will be payable). For expatriate workers, employers will be required to pay contributions at a rate of 22 percent, which will be charged on remuneration that is within the established threshold. The threshold amount is the same as for employees who are Russian nationals (RUB 512,000/year in 2012). Similar to Russian nationals, the additional 10-percent contribution would be payable to the pension fund on remuneration exceeding the threshold. Starting in 2014, the employer will pay insurance contributions at a rate of 22 percent on the remuneration of insured foreign national employees until the employee salary reaches the threshold.
Foreign national employees who work in Russia under the regime for highly-qualified specialists are exempt from these rules. Such employees are not regarded as insured individuals for state pension insurance purposes.
Previously, insurance contributions were not paid on the remuneration of foreign nationals who are temporarily staying in Russia. Employers were required to pay insurance contributions only on the salaries of foreign nationals who have temporary or permanent Russian residence permits. Based on the new legislation, many expatriates working in Russia would be regarded as insured individuals for pension purposes, as, in practice, local employment contracts with foreign employees are seldom concluded for less than six months.
Although the salaries of certain foreign nationals are subject to insurance contributions, foreign nationals remain excluded from the list of individuals entitled to Russian state pension benefits. Foreign nationals temporarily staying in Russia also remain excluded from receiving other state social benefits, e.g., sick leave payment or maternity benefit.
KPMG Note: In Summary
• As noted above, the decrease of the overall contribution rate from 34 percent to 30 percent will affect only contributions for employees whose annual remuneration is within the established threshold. Employee salary amounts that exceed the threshold will be subject to a 10-percent contribution. In 2014, the 10-percent additional charge will cease; however, the 34-percent contribution will be reinstituted.
• The new law does not drastically change the mechanism used to pay contributions nor change employer reporting obligations.
• Due to these new rules, employing foreign nationals that are highly-qualified specialists becomes even more beneficial for companies in Russia. In addition to a preferential migration and taxation regime, the salaries of these employees are not subject to social insurance contributions in Russia and, thus, the cost of employing such individuals is less.
• Employers in Russia need to consider the above changes when budgeting employee-related expenses. Payroll systems should also be adjusted to foster the correct treatment of foreign nationals’ salaries for payment of social insurance contributions and reporting purposes.
1 Federal Law 379-FZ of 3 December 2011 introduces amendments to the Federal Law On insurance contributions to the Pensions Fund of the Russian Federation, the Social Insurance Fund of the Russian Federation, and the Federal Mandatory Health Insurance Fund, plus various other laws. (Федеральный закон от 3.12.11 №379-ФЗ вносит измененияв Федеральный закон «О страховых взносах в Пенсионный фонд Российской Федерации, Фонд социального страхования Российской Федерации, Федеральный фонд обязательного медицинскогострахования»)
2 Federal Law 212-FZ of 24 July 2009.