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DATE: March 18, 1996

Source: Dave Reis

Russian Compensation and Benefits Planning

The best alternative is dependent on the legal structure of the business, the individual’s current compensation and benefits, and a variety of other factors; I recommend that readers hire a good consulting firms to help structure the arrangements.

Alternatives for Russian nationals

Compensation

• Russian law requires that the Russian national work for a Russian company. A Russian national cannot be a "seconded" employee of a foreign company.
• The individual could designate himself as an independent contractor before the taxing authorities. The employer then is not required to pay payroll taxes, or withhold taxes.
• The individual could be under a dual employment contract (e.g., an employee of both the Russian and Polish or U.S. operations). It may then be possible to pay him a higher salary for his time in Poland/U.S. than his time in Russia. This may not change his tax picture much, though.
• Although some companies pay the Russian a low wage in Rubles and the rest in cash, this is not legal.

Benefits

• Most of the consultants and companies I talked to said it would be inadvisable to put the Russian national on U.S. benefits. The plans would have to be rewritten, the individual may end up with U.S. tax liabilities, and U.S. benefits may also be fully taxable in Russia as a nonqualified plan. It may be appropriate for a dual employment contract arrangement.
• A popular alternative was to give Russian benefits with supplemental coverage (health, life, retirement) from someone like Aetna, John Hancock, or AIG. Supplemental coverage arrangements may not be tax effective, however.
• Could use an informal/unfunded pension arrangement (similar to a U.S. SERP) on top of a local pension plan. Such arrangements give flexibility regarding plan design and funding.

Alternatives for UK nationals

Compensation

• The individual could be employed by the U.S. parent. However, if he works in Russia for over 182 days, he is taxable on all worldwide income.
• Consequently, paying the candidate from the Russian payroll may be sensible. With some exceptions, the consultants and companies did not think this was appropriate. It is considered to be the most expensive option, because expatriate employees of Russian companies are required to pay all social taxes, have taxes withheld at the source, and receive their salary in rubles.
• The Russian company could be established as a branch or permanent establishment of a foreign company. If the individual was an employee of the branch, there is no withholding or social security taxes. This could be useful to Europeans, who also may not be subject to home country social security taxes.
• It may be possible for the individual to be an employee of a related UK operation (seconded to Russia), if there is a desire to maintain UK benefits. However, this arrangement may require the individual to have the related operation’s benefits, would give the related operation the tax deduction, and may create tax nexus in Russia for that operation.
• The individual could be under a dual employment contract (e.g., U.S. and Russia) as with the Russian national. This can be useful if the UK is a treaty partner of Russia, because the individual would only be taxed on Russian sourced income. There also would be no withholding or social security taxes. This is considered to be the least expensive approach.
• The individual could designate himself as an independent contractor before the taxing authorities. The employer then is not required to pay payroll taxes, or withhold taxes.

Benefits

• Most of the consultants and companies I talked to said it would be inadvisable to put the UK national on U.S. benefits. It may be appropriate for a dual employment contract arrangement.
• A popular alternative was to give Russian benefits with supplemental coverage (health, life, retirement) from someone like Aetna, John Hancock, or AIG. Supplemental coverage arrangements may not be tax effective, however.
• Could use an informal/unfunded pension arrangement (similar to a U.S. SERP) on top of a local pension plan. Such arrangements give flexibility regarding plan design and funding.

Possible Contacts

• Graham Catlett, CEO of Catlett Corp. (a 150 employee food distributor in Moscow). Graham also runs a Russian law firm helping foreign companies navigate business and human resource issues. Phone: 501-372-2121
• Coopers & Lybrand Moscow, Rob van Leeuwen, 7502-225-8600. Coopers also employs a partner, Lioudmila Mamet, who was previously a member of the Ministry of Finance group responsible for drafting tax legislation. She is currently advising the Duma on tax matters.
• Jeff Kadet or Scott Antel, Arthur Andersen Moscow, Phone: 7095-262-5077
• Alice Sitaro, KPMG Moscow, phone: 7502-222-4030
• Paul Kohlenbrener, Mercer Principal, 312-902-7731