Bryan Cave Leighton Paisner (Russia) LLP, formerly Goltsblat BLP in Russia, advises that, on 22 July, the State Duma passed a Federal Law1 amending the Russian Tax Code in relation to tax benefits for IT companies (the “Law”, see Bill No. 990337-7, status: https://sozd.duma.gov.ru/bill/990337-7). The Law implements the Russian President’s instruction to make the tax legislation more IT company friendly in Russia. Here is an overview of the key changes introduced by the Law.
Lower corporate profit tax and social security rates
The Law grants the following tax benefits to Russian companies operating in the IT sector:
1. corporate profit tax is cut from 20% to just 3% (all the tax being payable to the federal-level Treasury);
2. the social security rate is reduced indefinitely from 14% to 7.6% with respect to compulsory pension and healthcare insurance contributions and compulsory temporary disability and maternity social insurance.
It is proposed that the applicability criteria for the above beneficial tax regime be similar to those set by the effective Russian tax legislation for the lower social security tax rate (14%), namely:
1. the company must be accredited with the Russian Ministry for Communications2 as an information technology organisation;
2. over 90% of the company’s total revenues in the relevant reporting (tax) period should come from its IT operations;
3. the company’s average headcount in the reporting (tax) period should be at least seven.
Notably, the Law changes the method for calculating the 90% share of IT proceeds in the Company’s total revenues. On the one hand, it has been clarified that, for calculation purposes, revenues from transferring rights to use computer software and databases (including updates and additional functionality) by remote access via the Internet are to be factored in.
On the other hand, certain types of income are expressly excluded from the 90% share, specifically revenues from granting rights to enable:
1. dissemination of and access to advertising information on the Internet;
2. posting of sale or purchase offers for goods, works, services or property rights on the Internet;
3. a search for information about prospective buyers or sellers and/or entry into transactions.
Transfer of software and/or database rights is VAT exempt
The Law also maintains the VAT exemption for granting of exclusive rights to computer software and databases and rights to use them subject to:
1. the computer software and databases having been entered on the Unified Register of Russian Software and Databases (the Russian Register);
2. the transferred rights not enabling dissemination of or access to advertising information on the Internet, posting of sale or purchase offers for goods, works, services or property rights on the Internet, or a search for information about prospective buyers or sellers and/or entry into transactions.
The Law also extends the VAT exemption to the following transactions:
1. granting of rights to use updates and additional functionality for computer software and databases;
2. granting of rights to use computer software and databases by remote access via the Internet.
The new beneficial tax regime for IT sector companies is effective in Russia from 1 January 2021.
In this context, it is practicable for IT companies to have their business models assessed to see if they will be able to claim the new, more favourable tax treatment. Otherwise, the current tax benefits (VAT exemption and/or lower social security tax rates) will not be available from 1 January 2021.
Foreign IT companies and Russian companies controlled by foreign entities will, in practice, be unable to enjoy the VAT exemption on sales of software and databases to Russian users under the new tax regime. In order to remain competitive on the Russian market, they could consider entering their software and databases on the Russian Register, i.e., localising their software and databases in Russia.
Companies currently using software and databases under licence agreements should zoom in on how the contractual clauses on price VAT-ability and grossing-up will operate once the Law takes effect.
Special rules on residence of individuals in 2020
The Law also allows individuals who stay 90 to 182 days in Russia in 2020 to apply for Russian tax resident status for the purposes of their PIT returns for the 2020 tax year.
If you have any questions or comments, please feel free to contact us and we will be happy to discuss them.
Bryan Cave Leighton Paisner (Russia) LLP, formerly Goltsblat BLP in Russia, will continue monitoring the situation and keep you updated on all developments in this field.
1 “On Amending Part Two of the Tax Code of the Russian Federation”
2 The Ministry for Digital Development, Communications and the Media of the Russian Federation
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