Tax and Legal Implications of Engaging Freelancers for Businesses in Russia

1) What are the tax risks for businesses when hiring freelancers instead of full-time employees?

Tax risks in such cases will be associated with the potential reclassification of the existing relationship with freelancers as employment. In the event of reclassification of the relationship from freelancing (which is regulated by civil law) to employment (which is regulated by labour law) by a decision of the tax authorities, the company will be obliged to pay additional insurance contributions and personal income tax, which was not withheld, for the entire period of the freelancer's engagement with the company.

2) How do tax authorities determine whether a freelancer arrangement should be reclassified as employment?

Tax authorities can reclassify a contract with a freelancer as an employment agreement if the actual relationship displays signs of employment. Inspectors focus on the freelancer’s subordination to internal schedules and rules, regular payments on fixed dates, and whether the company provides a workspace and equipment. To identify such situations, an automated system analyzes payment data and, upon detecting risks, passes the information to the tax authorities for review.

3) What are the employer’s withholding or reporting obligations when working with freelancers?

Everything depends on the freelancer's status. If the freelancer holds the status of a self-employed individual (i.e., is a payer of the Professional Income Tax (PIT)), they calculate and pay taxes independently. If the freelancer does not have the status of a PIT payer, the company assumes the obligation to calculate and remit taxes and contributions.

4) Are withholding taxes applicable when engaging cross-border freelancers?

The emergence of withholding tax by the payer depends on:

• the tax residency of the foreign freelancer; and
• their status (whether they are a PIT payer or not).

If the foreign freelancer is a PIT payer, they calculate and pay taxes on their own. If the foreign freelancer is a tax resident of the Russian Federation and is not a PIT payer, the company acts as the personal income tax (PIT) withholding agent, applying the progressive PIT rate scale.

If the foreign freelancer is not a tax resident of the Russian Federation, the company has no obligation to withhold personal income tax. In this case, the foreign freelancer pays taxes in accordance with the legislation of their tax residency.

5) How do double taxation treaties impact taxation of payments to foreign freelancers?

As a general rule, double taxation treaties provide that withholding tax is not required at the source of payment.

Since August 8, 2023, the effect of double taxation avoidance agreements (including provisions regulating taxation of income from independent personal services) with countries unfriendly to the Russian Federation has been suspended or denounced. Consequently, when making payments to a citizen of an unfriendly country, personal income tax must be withheld. Income received by non-resident individuals is subject to a personal income tax rate of 30%.

6) What compliance documentation should businesses maintain when working with freelancers?

Under Russian law, individuals are not considered VAT taxpayers.

7) What compliance requirements must companies meet when engaging freelancers?

In Russia, relations with a freelancer are formalized through a civil law contract (the “GPC agreement”), governed by Article 420 of the Russian Civil Code. A GPC agreement with an individual is executed for a specific, one-time assignment or project. The agreement must specify the subject matter, deadlines, remuneration, performance procedures, scope of work (or services), and the rights and obligations of the parties.  

A freelancer may also be registered as a self-employed individual (paying “professional income tax”) by registering with the tax authorities. This status must be explicitly stated in the agreement.  

The contract should also set out the self-employed contractor’s obligations regarding settlements — in particular, the timeframe for issuing a receipt generated via the “My Tax” mobile application — and should stipulate sanctions to apply if the contractor loses self-employed status and fails to promptly notify the client.

8) What are the legal and contractual best practices for structuring freelancer engagements to minimize tax risks?

When engaging freelancers under GPC agreements, companies are not required to pay for rest periods, provide insurance contributions for occupational accident coverage, or equip a workplace for the contractor. 

However, the law prohibits substituting employment relationships with civil law agreements (Article 15 of the Russian Labour Code). Doing so infringes the worker’s rights and may attract scrutiny from tax authorities, who may examine the agreements for signs of disguised employment under Article 15 of the Labour Code and the Plenum of the Supreme Court Resolution No. 15 dated 29 May 2018.

No statutory criteria definitively distinguish employment from civil law relationships, so disputes are resolved based on documented factual circumstances established during tax audits.  

Indicators of employment relationships identified by the tax authorities include:  

1. The company is the freelancer’s sole client.  

2. The freelancer is structurally or infrastructurally dependent on the company.  

3. Payment is made for the performance of a labour function, rather than a specific result.  

4. The agreements are recurring or continuous in nature.  

5. The client exercises control over how the work is performed.

Authors: Vyacheslav Khorovskiy, Alena Ivanova, Oksana Afanasyeva