8 min
On July 31, 2020, the President of the Russian Federation signed the law providing for the following changes as they regard income tax, VAT, and social security contributions payable by IT companies.
We will remind that in his Address to Russian Citizens dated June 23, 2020, the President of the Russian Federation mentioned that the rate for social security contributions may be reduced to 7.6% and for income tax — to 3% (as opposed to the current 20%) for IT companies with no time limit.
The substance of the amendments is as follows.
INCOME TAX
The income tax rate will be:
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3% (federal budget)
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0% (budget of the constituent entity of the Russian Federation)
This tax rate may be used by the Russian entities that:
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Operate in IT sector, develop and sell computer software programs and databases developed thereby, either on a tangible medium or in the form of an electronic document, via the data links irrespective of the agreement type;
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And/or provide development, adaptation, and/or modification services in respect of computer software programs, databases (computer software tools and information products), install, test, and support computer software programs.
In addition, a company willing to secure a reduced rate must meet the following requirements taken together:
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The entity obtain documentary proof of state certification as a company operating in IT sector;
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The entity must generate at least 90% of its total income for the reporting (tax) period by selling copies of computer software programs developed thereby, by providing services (performing works) in the area of computer software development, adaptation, and/or modification and computer software installation, testing, and support services in the period referred to above;
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The entity must have an average staff of at least seven employees in the reporting (tax) period.
In case of failure to comply with these requirements, the taxpayer shall lose the right to use the tax rates specified above starting from the beginning of the tax period when the relevant failure took place or when the taxpayer’s state certification was cancelled.
Besides, the same income tax rate may potentially be used by the Russian entities engaged in designing and developing digital components and electronic (radio-electronic) products. To that end, they must meet the following requirements:
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The entity must be included in the register of entities providing services (performing works) in the area of design and development of digital components and electronic (radio-electronic) products managed by the federal executive authority responsible for the development of government policy and legal regulation in the industrial and defense sectors in the manner established by the Government of the Russian Federation;
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The entity must generate at least 90% of its total income for the reporting (tax) period by providing services (performing works) in the area of design and development of digital components and electronic (radio-electronic) products in the reporting (tax) period;
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The entity must have an average staff of at least seven employees in the reporting (tax) period.
In case of failure to comply with the requirements listed above, the taxpayer shall lose the right to use the reduced tax rates starting from the beginning of the tax period when the relevant failure took place or when the taxpayer’s state certification was cancelled.
Besides, the taxpayer shall lose the right to the tax preference as per Clause 6, Article 259 of the Tax Code of the Russian Federation allowing for simultaneous accounting of the costs of computer hardware instead of gradual accounting by means of depreciation
SOCIAL SECURITY CONTRIBUTIONS
Furthermore, the draft law provides for the introduction of reduced rates for social security contributions (expected to be 7.6% in total) that may be claimed by the Russian companies that:
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Operate in IT sector, develop and sell computer software programs and databases developed thereby, either on a tangible medium or in the form of an electronic document, via the data links irrespective of the agreement type;
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And/or provide development, adaptation, and/or modification services in respect of computer software programs, databases (computer software tools and information products), install, test, and support computer software programs, databases;
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Design and develop digital components and electronic (radio-electronic) products.
The requirements concerning the percentage of total income that the entity must generate in order to use the reduced rates are as follows. In particular, the entity must generate at least 90% of its total income by selling copies of computer software programs, databases developed thereby, by providing services (performing works) in the area of development, adaptation, and/or modification of computer software, databases and installation, testing, and support of the relevant computer software programs, databases (except for the income earned by granting rights to use computer software programs, databases (including by granting remote access thereto online)).
Similar requirements apply to the Russian entities engaged in designing and developing digital components and electronic (radio-electronic) products.
If at the end of the accounting (reporting) period, the entity fails to comply with at least one requirement or is removed from the relevant register, it shall lose the right to use the reduced rates for social security contributions starting from the beginning of the accounting period when the relevant failure took place or when the entity was removed from the register referred to above
VAT
The transactions involving the disposal of exclusive rights to computer software programs and databases included in the unified register of Russian computer software programs and databases, rights to use such software programs and databases (including updates and additional functional features), in particular, by granting remote access thereto online, shall be exempt from VAT.
The exemption from VAT shall not apply if the rights to be granted consist in gaining the opportunity to distribute promotional information online and/or secure access to such information, place offers to purchase (sell) goods (works, services), property rights online, search the information on potential buyers (sellers), and/or make deals.
At that, similar to the current practice, disposal of exclusive rights to inventions, utility models, industrial prototypes, integrated circuit topographies, and know-how along with the rights to use the copyright products listed above under a license agreement shall be exempt from VAT.
It should be taken into account that the entities will be unable to opt out of the VAT exemption applicable to such transactions. In case of Russian IT companies, this implies that it will be impossible to deduct the input VAT under such transactions.
The provisions of the draft law referred to above give rise to certain questions, in particular:
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Currently, the Rules for Compiling and Managing the Unified Register of Russian Computer Software Programs and Databases and Unified Register of Computer Software Programs and Databases Originating from Member States of the Eurasian Economic Union, Except for the Russian Federation, are in effect. However, these rules are intended to disqualify foreign-produced software from procurement for central and municipal needs and require fine-tuning to be used for the purposes under review.
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The draft law does not contain any transitional provisions for the situations where the sales of software become subject to VAT at 20% rate, including in terms of the question concerning application of VAT to:
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Royalties payable at certain intervals (month, quarter, etc.) in 2020 and 2021;
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Royalties for the use of the product paid in 2020 for the right to use it in 2021, etc.
Thus, we believe that to the extent it regards the revision of the provisions concerning application of VAT to a transaction involving disposal of exclusive rights to computer software programs and databases, this draft law fails to address multiple issues arising due to legislative innovations and requires adjustments and relevant clarifications from financial and tax authorities.
TAX RESIDENCE PROVISIONS
The draft law contains provisions stipulating that an individual staying in the Russian Federation for a period from 90 to 182 calendar days inclusive from January 1 through December 31, 2020 shall be recognized as a tax resident in the 2020 tax period if such individual submits a relevant statement to the tax authority at the place of residence (to the tax authority at the place of stay in case of no place of residence or to the tax authority at the place of registration if the person has no place of residence and place of stay and is not an individual entrepreneur). Such statement shall be made in free form and shall specify the following details:
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Last name, first name and patronymic (if any)
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INN (Taxpayer Identification Number)
The statement must be submitted by April 30, 2021 (Clause 1, Article 229 of the Tax Code of the Russian Federation).
It appears that the amendments mentioned above are due to the restrictions on exit from the Russian Federation and other countries (or entry thereto) due to the spread of the coronavirus disease and are aimed at protecting the interests of the individuals who were unable to come back to the Russian Federation in a timely manner. At that, there is no way to opt out of the Russian tax residence status in case the individual is unable to depart from the Russian Federation. Besides, it should be remembered that the other countries may set different rules for assigning tax residence status to individuals, which will make it difficult to establish the tax residence.
We suggest considering these aspects when choosing to accept the status of Russian tax resident along with the obligations and consequences associated therewith (e.g. the obligation to file a notice of membership in foreign companies, notice on controlled foreign companies, application of the provisions concerning taxation of CFC income, etc.).
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