IT Tax Maneuver
On July 31, 2020, the President of Russia signed a law that introduces significant changes to how taxation of the IT industry is regulated[1]. The President gave an outline of these changes already on June 23, 2020 in yet another address to the nation, proposing to reduce the total social insurance contribution rate for the IT industry down to 7.6% and the profit tax rate down to 3% (instead of 20%). Read more here.
What are the main points of this tax maneuver?
The tax maneuver in the IT industry consists of the following 3 main changes:
- Introduction of additional conditions under which the disposal and provision of rights to use software and databases are exempted from VAT;
- Reduction in the profit tax rate for IT businesses down to 3% (instead of 20%) provided certain conditions are met;
- Reduction in the social insurance contribution rate for IT businesses also under certain conditions.
We have taken a closer a look at each of these changes below.
1. Limited VAT exemption
Russian VAT applies only on transactions performed in Russia, so if a transaction is performed outside Russia, Russian VAT does not apply[2]. The law sets out formal criteria to determine where a transaction is deemed performed: the disposal of rights to software and databases as well as the provision of rights to use software and databases are deemed performed in Russia and are subject to Russian VAT only if the buyer operates in Russia[3]. Conversely, if the buyer is abroad, then Russian VAT does not apply.
The law also provides that the disposal and provision of rights to use software and databases under a license agreement are exempted from VAT[4]. This means that even if the buyer is based in Russia, then such transactions will not be subject to VAT.
The following additional conditions for the abovementioned VAT exemption will apply from January 01, 2021 onwards:
- Software programs and databases disposed of and provided for use must be recorded in the Register of Russian Software and Databases;
- Software programs and databases should not be intended for advertising on the internet, i.e. they should not enable the distribution of promotional information on the internet and/or gain access to such information, place offers on the internet for the purchase/sale of goods (work, services), property rights, search for information about potential buyers/sellers, and/or conclude transactions.
It looks like the Russian government has made compromises as it initially considered completely canceling the VAT exemption for the disposal and provision of rights to use software and databases.
What does this change mean?
The sale of software and databases to Russian buyers will be subject to VAT from January 01, 2021 unless, of course, they are recorded in the Register of Russian Software and Databases. This will increase the tax burden for:
(1) Foreign companies selling software and databases or rights to use them to Russian buyers;
(2) Russian companies selling in Russia software and databases not recorded in the Register of Russian Software and Databases.
On the other hand, this change will reduce the tax burden for Russian companies and entrepreneurs selling software and databases for export as they will be able to deduct input VAT on goods and services purchased for such sale. They could not do this previously[5].
What steps to take?
We recommend closely reviewing the terms and conditions of contracts for software and databases to understand how this VAT changes will affect the price of these software and databases.
2. Reduced profit tax rate and other changes
From 2021 onwards, Russian IT organizations[6] will be subject to 3% profit tax if they meet the following conditions[7]:
- They have an average headcount of at least 7 people at the end of the reporting/tax period;
- They are officially accredited in Russia as an IT organization;
- At least 90% of their income for the reporting tax period is derived from IT activities.
The law also provides a preferential profit tax rate of 3% on similar conditions for Russian organizations that design and develop electronic components and electronic (radio-electronic) products. To apply this preferential rate, they also must have an average headcount of at least 7 people; they must be included in a special register, and at least 90% of their income should come from the sale of services for the design and development of electronic components and electronic (radio-electronic) products.
3. Reduction in social insurance contributions
Social insurance contributions will be reduced from January 01, 2021 for IT organizations and organizations that design and develop electronic components and electronic (radio-electronic) products (within the threshold for accrual of social insurance contributions)[8]:
- Compulsory pension insurance – 6%;
- Compulsory social insurance for temporary incapacity to work – 1.5%;
- Compulsory health insurance – 0.1%.
The conditions for applying these reduced rates are the same as those for applying the reduced profit tax rate.
If you have any questions or would like to discuss this matter further, please contact Anton Kabakov.
Truly yours,
[1] Federal Law N 265-FZ dated July 31, 2020 Amending Part 2 of the Tax Code of the Russian Federation
[2] Article 146 Tax Code
[3] Article 148(1(4)) Tax Code
[4] Article 149(2(26)) Tax Code
[5] Article 171(2(3)) Tax Code
[6] IT organizations refer to organizations operating in the IT industry, developing and selling the software programs they develop, databases on physical media or electronic document and/or providing services to develop, adapt, modify software, databases (software and computer technology information products), install, test and maintain software, databases.
[7] Article 1(4) Federal Law N 265-FZ dated July 31, 2020 Amending Part 2 of the Tax Code of the Russian Federation
[8] Article 1(5) Federal Law N 265-FZ dated July 31, 2020 Amending Part 2 of the Tax Code of the Russian Federation