Electronic services as of 2019-Publication

In 2019 we would like to draw the attention of the companies belonging to international holdings to the following aspects:

1. Which entities are obliged to register with the RF tax authorities and pay VAT on their own?

Foreign organisations:

providing ES to Russian buyers (in another way than through a separate division);
making settlements directly with Russian buyers of these services.

2. Deadline for submitting an application for tax registration in the RF in connection with the rendering of ES

15 February 2019 - for foreign organisations which are obliged to register as of 1 January 2019;
within 30 calendar days from the day when they started providing electronic services - for foreign organisations starting to provide ES to Russian companies in 2019.

3. Actions to be taken before registration with the Russian tax authorities

make up inventory of the services being provided to a Russian company by foreign companies to identify a list of ES (Ref. ES with the corresponding codes in Schedule );
divide the ES from the list identified into those paid and free;
separate the cost of paid ES from the cost of other services;
as for free ES ref. clause 6.

4. Issues requiring and pending further explanations of the RF Ministry of Finance, the RF Federal Tax Service

procedure for VAT taxation on other (non-electronic) services after the foreign company registers with the Russian tax authorities;
procedure for deduction of VAT on other services, if VAT is to be paid by foreign companies;
procedure for deduction of the VAT on ES paid after 1 January 2019, but prior to the date of foreign contractor’s registration;
provision of free ES by the companies belonging to the international holdings (by foreign organisations) to the Russian companies belonging to the holding (necessity / absence of necessity for registration in the Russian Federation).

5. Prior to the said explanations regarding the disputed matters (if you have identified any disputed matters in relation to your holding), we recommend

To avoid:

making any payments in favour of foreign companies against intraholding contracts, invoices, etc. in January-February in 2019;
issuing invoices, certificates of acceptance in January-February in 2019.

6. Free ES

A foreign company shall be treated as providing free ES, if the Russian company does not pay for any services to its parent company or any other foreign company belonging to the holding, but still uses, for example:

the foreign company’s website for advertising;
domain names (including employees’ emails ending with “@holding name.com”);
common software of the holding (for example, Microsoft, SAP, electronic trading platforms, booking systems, etc.), software updates via Internet.

The issue of whether or not such foreign company is subject to tax registration in the Russian Federation for VAT purposes requires official explanations of the RF Ministry of Finance, the RF Federal Tax Service to be settled. Such registration is likely to be obligatory, regardless of the fact that no payments are made for such services.
So, it is recommended that the market value of such free ES and tax risks are assessed in total terms using the fines information provided in clause 9.
In the case of registration in the Russian Federation and VAT payment for free ES, one should inform the Russian company receiving such services of the cost of ES (for the purposes of profit tax of the Russian company).

7. Foreign companies’ branches, representative offices in the Russian Federation

If ES are provided directly by the foreign company’s branch in the Russian Federation, the new rules shall not be applied in such situation (which is directly stated in Clause 2, Article 174.2, Clause 4.6, Article 83 of the Tax Code of the Russian Federation); an old procedure shall be applied;
If the branch / representative office uses the ES directly provided by the headquarters (hereinafter “HQ”), there is no reason for the HQ to register, as no services are sold or bought in such a situation, they are consumed by the same company (the branch / representative office is regarded a part of the company).
If the branch, representative office of one foreign company (HQ) buys some ES from the other foreign company, the new rules shall be applied to such company providing the ES.
If the branch, representative office of one foreign company (HQ) uses some ES from the other foreign company free of charge, the new rules might be applied to such company providing the ES.

However, if the documents (contracts, agreements, etc.) indicate that the ES are not directly provided to the Russian branch, representative office, but rather to the foreign company (HQ) that, in turn, grants the right to use the same to its branch, representative office, then there is no reason for the company rendering the ES to register.

8. Information on registered foreign organizations

9. Possible implications of the failure of a foreign organization to register with tax authorities and/or pay VAT when rendering services in electronic form in the Russian Federation:

For a foreign company providing electronic services:

the failure to submit an application for tax registration is subject to a fine in the amount of RUB 10 000 (Paragraph 1, Article 116 of the RF Tax Code, Letter of the Russian Ministry of Finance No. 03-03-06/1/8847 dated February 16, 2017).
the failure to submit a tax declaration is subject to a fine in the amount of 5 % of the outstanding tax amount according to this declaration, for each complete or incomplete month starting from the due submission date (however no more than 30 % of the specified amount and no less than RUB 1 000).
company operations without tax registration are subject to a fine in the amount of 10 % of incomes generated from such operations within the specified period, however no less than RUB 40 000 (Paragraph 2, Article 116 of the RF Tax Code).
the failure to pay tax is subject to recovery of the assessed tax amount, a fine in the amount of 20 % to 40 % of outstanding tax, penalties for late payment in the amount of 1/300 of the refinancing rate of the Central Bank of Russia (for the first 30 calendar days in arrears) and 1/150 starting from the 31st calendar day in arrears (Articles 122, 75 of the RF Tax Code).
the failure to submit information for tax enforcement purposes is subject to a fine in the amount of RUB 200 for each missing document (Article 126 of the RF Tax Code).

For a Russian company purchasing electronic services: the RF Tax Code does not expressly specify any causes to hold a Russian buyer liable for the failure of a foreign vendor providing services in electronic form to register with tax authorities and/or pay VAT. The only negative implication for the buyer, in this case, maybe the deprivation of the right to apply VAT deductions. However, no official clarifications on this issue are currently available.

Сodes for types of services provided in electronic form by foreign organizations:

Code	Description of services
010	provision of rights to use computer programs, databases via the Internet, including by providing remote access to them, including associated updates and additional functionality, except code 020;
020	provision of rights to use computer games via the Internet, including by providing remote access to them, including associated updates and additional functionality;
030	provision of online advertising services, including through the use of computer programs and databases operating via the Internet, as well as the provision of advertising space on the Internet;
040	provision of services on the posting of offers for the acquisition (sale) of goods (works, services) and property rights on the Internet;
050	delivery of services via the Internet involving the provision of technical, organizational, information and other capabilities, using information technologies and systems, to allow establishing contacts and entering into transactions between sellers and buyers (including the provision of an online trading platform operating in real time, at which potential buyers offer their price via an automated process and the parties are notified of the sale using a system of automatically generated messages);
060	ensuring and/or maintaining a commercial or personal presence on the Internet, supporting user digital resources (websites and/or web pages on the Internet), providing access to other network users, and enabling users to modify them;
070	data storage and processing provided that the person supplying the data has access to it via the Internet;
080	provision of real-time computer capacity to post information in an information system;
090	provision of domain names, hosting services;
100	provision of IT system and website administration services on the Internet;
110	provision of services carried out automatically via the Internet upon input of data by the purchaser of the service, automated data retrieval, filtering and sorting services upon request, provision of specified data to users via information and telecommunications networks (in particular, real-time stock exchange bulletins , online automated translation);
120	provision of rights to use electronic books (editions) and other electronic publications via the Internet, including by providing remote access to them for online viewing or listening;
130	provision of rights to use information, educational materials via the Internet, including by providing remote access to them for online viewing or listening;
140	provision of rights to use graphic images via the Internet, including by providing remote access to them for online viewing or listening;
150	provision of rights to use pieces of music whether with or without text via the Internet, including by providing remote access to them for online viewing or listening;
160	provision of rights to use audiovisual works via the Internet, including by providing remote access to them for online viewing or listening;
170	provision of services for the search and/or supply of information on potential buyers to the customer;
180	provision of access to Internet search engines;
190	maintenance of statistics on Internet websites