On 24 July 2009 the President signed Federal Laws No. 212-FZ and 213-FZ which abolished the unified social tax (UST) and replaced it with social contributions as of 1 January 2010.

UST was introduced in 2001 and replaced and consolidated social contributions. At that time, social contributions were collected by five off-budget funds:

In the year 2000, in aggregate, these contributions amounted to 38.5% from employers plus 1% from employees.

When UST was established, with its regressive rate schedule decreasing from 26% down to 2% on annual earnings in excess of RUB600,000, it considerably reduced the burden of social contributions on Russian employers and had the effect of encouraging some to institute appropriate reporting and payment of salaries.

As of 2010, Russia will return to the old system of collection and administration of social contributions. However, unlike under the old regime, social contributions will be payable only on annual earnings up to a specific amount (RUB415,000, subject to annual indexing). Such capping of the assessment base should mitigate the negative effect of flat rates for employees with higher salaries.

Below we briefly summarise the new social contributions regime effective as of 1 January 2010.

Social contributions will be payable to the following off-budget funds:

Like UST, social contributions will be levied on remuneration accrued/payable to individuals on the basis of labour contracts or works/services contracts.

Social contributions will be paid solely at the expense of the company acting as employer or customer. As is the case with UST, social contributions will be calculated monthly and paid to each off-budget fund separately.

Social contributions will be administered and controlled by the off-budget funds (unlike UST, which is controlled by tax authorities only). Local bodies of the funds will be responsible for collection of quarterly reports and conduct of external (field) audits.

Unlike UST, social contributions will be levied at fixed rates. In 2010, these rates will amount to 26% (which equals the maximum rate under the current UST regressive schedule). Beginning in 2011, these rates will go up to 34%.

Social contribution will however apply to the individual's annual earnings only up to a specific cap amount equalling RUB415,000, subject to annual indexing.

The rates (tariffs) of social contributions in 2010 and after will be as follows:

The following graph helps to compare the overall burden of social contributions with the current UST.

The graph shows that in 2010 the burden will slightly increase with respect to employees earning less than RUB750,000 annually, but it will considerably decrease for whose who earn more.

Starting with 2011, the new assessment rules will increase the tax burden with respect to the vast majority of the employees, but will be beneficial with respect to those who earn more than RUB2,420,000 annually.

Payments to foreign citizens who stay in Russia temporarily and work on the basis of visa and work permits will be exempt from social contributions. This is remarkable change as Russian employers currently pay UST for all employees regardless of their nationality and status of their stay in Russia.

Foreign citizens who reside in Russia permanently or temporarily (that is, those who have residence permit or permission to temporarily reside) will continue to be treated in the same way as Russian citizens.