Contributed by Vladislav Donchenko, tax practice partner in Lex Alliance Law Company (Moscow), Russian AITC member.
From 2021, all (!) foreign companies, which provide software to the Russian customers (legal entities and individuals) and other Internet services are liable to be registered in Russian tax authorities and pay Russian VAT from Russian income at the rate 16,67%. Please note that the new regulation affects any sales of any software including sales of software under license agreement. Previously such sales were exempted from the Russian VAT.
According to the new law, Russian VAT affects digital services provided within the Internet or other similar electronic networks. There is an extensive list of digital services covered by the law, including, inter alia:
- sales of electronic content
- provision of trading platforms
- provision of domain names, web hosting services
- broadcasting of TV or radio channels
- provision of advertising services in the Internet
- data storage and processing, etc.
If a foreign entity provides electronic services to the Russian customers through a foreign entity engaged under Commission agreements, Agency agreements or other similar agreements, and this foreign entity participates in settlements directly with Russian customers (foreign intermediary), such foreign intermediary pay VAT instead of provider of digital services.
The Law established obligation for the foreign providers of e-services and foreign intermediaries the obligation to be registered with Russian tax authorities through a special Internet portal https://lkioreg.nalog.ru/en. If foreign provider of e-services acts through a foreign intermediary, such foreign intermediary should be registered only.
Registration claim should be submitted to the Russian tax authorities through mentioned Internet portal no later than 30 days since the beginning of services render.
It is necessary to mention, that in case of such electronic registration, the company shall be fully liable in respect of Russian VAT for the sale of goods and services, which are sold on the territory of Russian Federation, since it shall have Russian tax ID (for example consulting services for Russian companies or sale of goods in Russia).
It is important that VAT paid by foreign supplier of software could be deducted by a Russian legal entity, acting as a customer. In this case, Russian subsidiary is a good solution for minimization of tax loses taking into consideration strong Russian tax benefits for IT companies (3% CIT and 7% social contribution, 0% CIT in some cases). Previously we described this matter in our article «Russia - tax haven for IT companies»
Foreign companies, which provide or participate in the provision of electronic services, should be prepared to meet the requirements of the Russian VAT legislation. They should take into consideration the rules for the VAT taxation of electronic services and consider following the next steps:
- Analysis the foreign company’s activities to identify operations which may be subject to VAT on electronic services;
- Assess the possibility or necessity of changing the business model to comply with the VAT rules and mitigation of tax risks;
- Consider modification of the mechanism for VAT payment in supply chains;
- Analysis and development methods for the separate accounting of input VAT for Russian companies, which purchase electronic services from foreign customers.
What does I mean for you?
Step 1. If your company provides software or Internet services, you should identify whether you have Russian customers.
Step 2. You found that you have Russian customers. It means that you have submit registration form to the Russian tax authorities. You will receive registry confirmation within 30 days.
Step 3. Every quarter your company should submit VAT returns and pay VAT at the rate 16,67% from sales of software and internet services.
Step 4. Think about establishing a Russian subsidiary to deduct your VAT in Russia.
Lex Alliance tax team is ready to help you with any Russian VAT issues including Vat registration, VAT filing and establishing your Russian subsidiary. Please feel free to contact us.Dated: [bxcode.pagedata.date]