What taxes do small businesses have to pay in Russia, the US or Europe?

What taxes do small businesses have to pay in Russia, the US or Europe?

26 Sep 2022

Do you want to launch a business and make it international? Then, find out what taxes you will have to pay after registering a company or a similar individual business in different countries! In this article, I have gathered all my knowledge about tax laws in different countries and highlighted the tax systems that will be incredibly beneficial for a small business whose owner lives or is located in Russia.

Russia

In Russia, it is easier to start your own business registering a sole proprietorship — there are lower taxes and more opportunities. So, throughout this review, I will concentrate on sole proprietorship. It is a good option: you will pay minimum tax until you make more than two hundred million roubles a year, or you want to raise capital by issuing shares on the market.

You will be subject to general taxation when registering as a sole proprietorship. However, this is not the most cost-effective way: you will have to pay value-added tax, VAT, which is not always necessary, personal income tax for yourself and employees, and property tax. Individual income tax would be 13% of your income, not exceeding five million roubles a year, and 15% on income exceeding five million roubles. Furthermore, check whether you are required to pay VAT on the goods or services you plan to trade in.

One of the most favourable tax regimes is the simplified taxation system. The income for an individual entrepreneur when using this system cannot exceed one hundred and fifty million roubles a year, including a maximum of a hundred employees. The simplified tax system will not apply to businesses associated with alcohol or tobacco, insurance, banking, and even companies that have managed to set up other branches. According to the simplified tax system, only revenue or the difference between revenue and expenses will be taxed. If you pay income tax, prepare to pay 6%. If you pay tax on the difference, the total amount will vary from 1% to 15%, depending on the region where the business is registered. You will pay 1% of the loss if you do not make enough money. You must also pay fixed insurance premiums: 31.1% if your income does not exceed three hundred thousand roubles a month, or 31.1% + 1% of an amount over three hundred thousand roubles. Do not forget about insurance premiums and personal income tax — which are also compulsory. If you do not want to pay taxes for your employees, you may register them as contractors. Fortunately, the self-employment mode enables you to do this procedure legally. However, for employees themselves, this option might not be the most suitable. They will lose out on social guarantees, like voluntary medical insurance and other “perks” from the employer, which could spark a real argument about them taking a job in another company.

The third option is the patent system of taxation. This is incredibly simple: you buy a patent for a particular type of activity, then renew it every one to twelve months depending on the “expiry date”, and then pay a fixed amount that does not depend on the level of income, and you do not even have to fill out a tax return. A patent’s cost will equal 6% of the potential revenue of a business operating in a certain industry. However, of course, the amount of income varies from region to region, so pay close attention to the place of registration of your sole proprietorship. A patent is a smart idea if your staff do not exceed fifteen people, and you earn up to sixty million roubles a year. And, of course, do not forget about insurance premiums — which will haunt you in any case.

Is it possible to have a business as a self-employed person? I have to say, of course, it is possible. Some entrepreneurs do this when selling individual goods or services if they can streamline the process without scaling up their business. Professional income taxpayers can not hire staff, and their yearly income cannot exceed 2.4 million roubles. Still, their taxes are low: 4% for individuals and 6% for legal entities, including sole proprietorship. Contributions to funds (health insurance, for example, or a pension one) do not have to be made or are optional. A tax return is also not required. But suppose you “switch” your employees to a self-employed system without taking care of having suitable cover for this activity. In that case, you will be asked why you are trying to save on taxes, and then there is a high chance that you will be asked to pay for what you planned to keep.

USA

America has an interesting tax system: federal companies pay income tax (for employees), corporate tax (remember the 21% on income if you start a corporation?), excise duties, customs duties, and contributions to social security funds. State companies (which operate in the territory of one single state) pay income and corporate taxes, excise duties, sales tax, vehicle (for ownership) and property tax. Municipal companies pay only income and corporate taxes, as well as property and environmental taxes.

Taxes are much higher here than in Russia. Especially if you register your company as an expat and not as somebody born in America. The LLC and Corporation forms are excellent choices for a legal startup. In the case of a corporation started by a non-resident, you will pay 21% and 15% or even 30% on dividends (if you generate any). In the case of an LLC, a company launched by one (not several) businessperson, the tax will be about 10% to 37%. It will be levied on income earned in the United States.

Notice the difference in income tax: it depends on whether the employee is single, has a partner (for example, married) and living with their spouse and submitting a joint declaration, or the head of the household. Yes, you read that right! The employees fill out their declarations on their own, they are not provided by the government. Taxpayers are responsible for calculating their taxes correctly. And if it turns out to be incorrect, questions will be asked to both them and you.

Apart from all the above taxes, a “state tax” is also added, a fee for doing business in a particular US state. It can be 2.5% in North Carolina, or it could be 12% in Iowa. Some states have more sympathy towards entrepreneurs and have eliminated some taxes, including a tax on franchised businesses in Illinois. Connecticut does not levy “commercial companies” taxes, and Nevada, Texas, Ohio, and Washington levy no state taxes at all. Instead, they will ask you to pay the gross income tax of businesses that have moved into these jurisdictions to reduce the tax burden. They are considered “economically harmful” because they seek tax benefits.

Europe

In Europe, a business will go from one extreme to another. At least when it comes to tax. Whereas in Russia, you can cut economic losses and pay extraordinarily little (provided you do not hire a substantial number of full-time employees). In the US (in Washington, for example), it is better to open a representative office which covers the entire American market. In Europe, you certainly have to work hard. There are many countries and many tax systems. Generally, it can be quite a task. Measure your potential with particular attention and take this step only if you are certain that it is necessary to continue your business, or you want to explore new markets.

One of the most convenient countries for doing business in Europe is, of course, Cyprus. People who reside in Cyprus for more than sixty days in a tax year enjoy a special tax system. However, you do not have to permanently reside in Cyprus, i.e., you cannot make it your permanent tax address. To take advantage of that special tax regime, you will have to demonstrate proof of having “close ties to the country”, which in practice might be understood as investment in setting up a company. This is known as having non-domicile status and can be issued for seventeen years. With this status, you will pay a corporate tax of 12.5% ​​and 19% VAT, if necessary, or from 0% to 9%, depending on the company’s turnover and scope of business activity. The minimum employee salary, which will not be taxed, is 19.5 thousand euros annually. The tax on business dividends is 0%, regardless of the country where they are earned. With the money for insurance, unemployment, “social cohesion and training development,” if you are hiring employees officially, you will pay 12% for everything.

Another “tax heaven” for registering a European business is Portugal. In Madeira, you can start a company with a corporate tax of 5%. However, suppose you belong to the Non-Habitual Resident programme (the tax programme for non-residents in the country). In that case, you do not have to pay taxes on almost anything. The “almost anything” list includes ten-year investments, rentals, capital gains, and dividends. It is true that outside Madeira, the tax rate rises from 5% to 21%. VAT is equal to 6% to 23% (divided into three rates that are reduced by 1% if the company is established in Madeira). Additionally, the tax on dividends outside Madeira will be 25% or 35%, and social security contributions will amount to about 24% of your monthly salary. Therefore, it is better for a business to be registered in Madeira without leaving the area.

The last European country I want to mention is Malta. I think this country, like Portugal and Cyprus, reduces taxes on businesses to attract investment into their economy. The corporate tax is 35%. Seems like a lot? Not really, because it can be easily reduced to almost zero due to the tax refund system. VAT is normally 18%, and the reduced VAT is between 0% and 7%. It is as if you never left Madeira, however, Portugal does not have a system for tax return yet. Social contributions work out at an acceptable 10%, and you can even have some staff members. Although there are specific questions about this, it would be better to contact a lawyer familiar with companies registered in other countries. At least for the first (introductory) consultation — it can be free of charge with lawyers who have a private practice.

Why have I not mentioned more familiar European countries like Germany or France in our list of countries? This is because businesspeople, myself included, do not like tax rates in these countries. For example, in Austria, you are guaranteed to pay 25% corporate tax and 27.5% on dividends. In France, it is 25% or 28% and even as much as 75%, respectively. In Italy, 24% and 1.2% or even 26% (depending on the country of dividends’ origin, and the company’s business areas). On top of these very intimidating percentages, we must add compensation for dismissed employees or the ones who quit. In many European countries, like France, employment legislation is even worse than applying the “presumption of guilt” in Russia. Therefore, when registering a company or sole proprietorship, you should pay maximum attention to all the detail.

1 Dec 2022

SOS. How can networking help you find a job?

In our everyday lives, we are constantly networking without realising it. So, when new acquaintances, friendships or friendly relationships arise, many businesspeople, including myself, immediately wonder: how do I make

Read the material

17 Nov 2022

Job hopping: how do HR managers and employers feel about it, and is it actually as bad as it seems? 

Today, I want to share my views on job hopping – the constant (or relatively frequent) job changes that some HR managers and jobseekers are so afraid of happening. Regular

Read the material

17 Nov 2022

“Let's play hide and seek!” or How to spot hidden stress and get rid of it

Life constantly challenges us with stressful situations. There are many reasons for this – for example, perpetual bickering with family members, attempting to elucidate homework to an inapprehensive child, or

Read the material

Watch all the materials