Russian Federation: radical tax reform in the IT sector takes shape

In brief

2021 will bring a new tax regime for the IT sector1 earlier announced by the Russian President (see our Legal alert dated 30 June 2020). For Russian IT companies and electronic hardware developers, the new rules will reduce corporate profits tax from 20% to 3%, and social security contributions from 14% to 7.6%. The preferential regime is subject to compliance with a number of conditions, which many market players may be unable to fulfill.

The existing VAT exemption for software and database licenses will be substantially restricted. The exemption will only apply to software and databases included in Russia's National Software Register2, and will not be available to foreign software vendors. Depending on the circumstances, it may be advisable to review current prices and existing contracts for the supply of software and related services.


Contents

How we can help

We will be pleased to assist our clients by:

  • Assessing the impact of 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 reviewing 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

The preferential tax regime will be available to a limited number of market players. To apply the reduced profits tax and social security contributions rates, Russian companies must fulfill the following conditions simultaneously:

  1. Accreditation as an IT organization. The current accreditation rules3 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.

Similar requirements apply to developers of electronic hardware. They must be included in a special register maintained by the Russian Ministry of Industry and Trade.

  1. A staff of at least seven employees.
  2. Revenue structure: at least 90% of the company’s revenues must come from sales of software developed by this company, from the provision of related services, or from the design and development of electronic hardware.

Revenues from the provision of access to advertising and online marketplace software will not qualify as income from IT activities. Thus, the preferential tax regime will not be available to online aggregators, search engine operators, social networks, or to many software distributors.

Restriction of the VAT exemption. The exemption will only be available for software and databases included in the "National Software Register." Also, the exemption will not extend to the provision of access to advertising and online marketplace software.

This restriction may adversely affect the profitability 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., the financial sector, small businesses applying special tax regimes).

The existing VAT exemption for patent and know-how licenses will remain unchanged and will continue to be available to both Russian and foreign companies.

Click here to access the Russian version.


1 Federal Law No. 265-FZ “On Changes to Part Two of the Tax Code of the Russian Federation” dated 31 July 2020.

2 Unified register of Russian computer programs maintained in accordance with Resolution of the Russian Government No. 1236 dated 16 November 2015.

3 The current accreditation rules are established by Resolution of the Russian Government No. 758 dated 6 November 2007.


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