Russia: Major Tax Maneuver for IT Companies – Risks and Opportunities for International Companies
Timur Nurmukhametdinov
t.nurmukhametdinov@bellerage.ru
Bellerage Alinga
www.bellerage.com
During the pandemic, the Kremlin has announced a series of amendments to the tax code. A major change concerns a sweeping tax maneuver for the IT sector. By decreasing the tax burden to levels "lower than in Ireland and India", the declared goal is to make the Russian IT sector globally more competitive and to increase its role in national growth. President Putin's June proposal was swiftly approved by the Russian parliament and the new tax regime will enter into force on January 1, 2021.
The main benefits for IT companies will be the following:
Reduction of corporate income (profit) tax rate from 20% to 3%;
Reduction of total social contributions rate from 14% to 7,6%.
To apply these benefits a company should meet all the following criteria:
Obtention of a special state accreditation (more of a formalistic procedure);
Average staff not lower than 7 employees;
At least 90% of revenue should come from IT operations.
While the two first criteria are quite clear, the last requires extra clarification. According to law, the term "IT operations" includes the following activities:
Sales of software and databases developed by the company;
Granting of exclusive rights to software and databases developed by the company;
Licensing of rights to use software and databases developed by the company (incl. granting remote access - SaaS);
Provision of services on development, adaptation, modification, testing, launching and maintenance of software and databases.
It should be mentioned that tax benefits are not applicable to software and databases used for trading or advertising purposes.
Opportunities and Risks
At first glimpse, the new tax benefits seem to be an efficient growth driver for the Russian IT sector, especially considering that:
Payroll is usually the main expense item for IT companies;
There are no restrictions or limitations for companies with foreign shareholders;
Russia has a strong human capital in the IT sector and an already well-established IT industry.
However, the reality is not that simple: The maneuver also amends the criteria for application of VAT exemption. Currently, transfer of exclusive rights to software and databases (or rights to use based on license agreements) is exempt from Russian VAT. This VAT exemption can be applied by all companies (incl. foreign companies) regardless the type of software sold / licensed.
Starting from 2021, sales (provision of exclusive rights and rights to use) of software will be exempt from Russian VAT only if the specific software is included in the government's "Unified Register of Russian Software", which was created in 2016 as part of Russia's import substitution program.
Such legal amendments may be considered as a protectionist measure since software developed by foreign or "foreign-rooted" companies (when the predominant shareholder is a non-Russian company or citizen) have very few chances to be included in the abovementioned register. Thus, a vast majority of Russian and foreign companies (incl. those not from the IT sector) will soon lose the right to apply Russian VAT exemptions, which will result into a 20% price hike.
Nonetheless, we believe that the IT tax maneuver will boost the attractiveness of Russia as an IT outsourcing destination. Concerning the overall effects for the Russian economy, only time will tell.
With a quarter of our staff being IT specialists and our own in-house-developed app for servicing outsourcing clients, Bellerage Alinga is a leader in digitalizing accounting services in Russia. Combining tax expertise and practical IT experience, we are uniquely qualified to advise international companies interested in Russia's IT sector (This email address is being protected from spambots. You need JavaScript enabled to view it.).
XLNC ARCHIVE | 07 October 2020