The Russian President has announced a reduction in corporate profits tax from 20% to 3% and in social security contributions from 14% to 7.6% for Russian IT companies. It is not yet clear whether this preferential tax regime will be available to Russian subsidiaries of foreign companies. In fact, some companies may face an increased tax burden, as current VAT exemptions for software, know- how and patent license fees may be abolished.
These measures drastically change the taxation landscape for Russian and foreign IT companies and software distributors, including foreign vendors of electronic services. Cancellation of the VAT exemption may require revisiting the current software prices. Depending on circumstances, it may be advisable to revise existing contractual structures for the supply of software and related services.
How we can help
We will be pleased to assist our clients by:
- Assessing the impact of the VAT changes on current supply prices;
- Identifying effects of the changes for companies qualifying as “foreign vendors of electronic services” for VAT purposes;
- Analyzing the possibility of revisiting procurement prices in agreements with Russian affiliates and independent partners whose activities fall under the new rules;
- Assessing business-restructuring opportunities within the framework of the announced preferential tax regime.
In more detail
President Putin has announced the upcoming "tax maneuver" in the IT industry in his address to Russian citizens on 23 June 2020. The new preferential tax regime for Russian IT companies is not intended to have an expiration date.
Simultaneously, we learned that the Russian Ministry of Communications, following a meeting with the Russian President, has proposed the following specific measures to implement the "tax maneuver":
- To apply the preferential tax regime to entities accredited as IT companies. The current accreditation rules impose no restrictions on foreign ownership in a Russian company applying for accreditation. If these rules remain unchanged, the preferential tax regime may be available, inter alia, to Russian subsidiaries of foreign companies. It is likely that additional criteria for applying this tax regime will be introduced apart from the accreditation requirement – e.g., revenues from IT activities may need to constitute a certain share in the overall company revenues.
- To abolish the current VAT exemption for software, know-how and patent license fees. This measure may adversely affect the profitability of sales of foreign IT companies in the Russian market. It will have the greatest impact on sales of foreign software to customers that may not recover "input" VAT: individuals and companies with VAT-exempt revenues (e.g., banks, financial and insurance companies). In contrast, Russian suppliers of software and other "technological" intellectual property may benefit from this measure. They will be entitled to “input” VAT recovery that is currently unavailable to them. Moreover, their "export" supplies will not be subject to the Russian VAT.
These proposals may be substantially changed before the new tax regime is enacted into law. We will monitor the legislative developments on these issues.
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This legal alert is issued to inform Baker McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.