Special tax regime for companies in the IT industry in Russia

Limitation of general VAT exemption for software licenses & new tax regime for the IT industry

1. Limitation of VAT exemption

Starting 1 January 2021, the VAT exemption for granting use rights for software and databases under a license agreement will be abolished. The new VAT exemption will be applicable to licensing “national software” i.e. software and databases included in the Unified Register of Russian Software and Databases (the register is available at https://reestr.minsvyaz.ru/ and currently includes 6,870 programs). A license agreement will no longer be required for a VAT exemption.

Regulation of the Russian Government No. 1236 of 16 November 2015 established the following requirements for “national software”:

• the software must be owned by the Russian Federation, Russian individuals or companies with a foreign participation of less than 50%;
• the software can be freely used in Russia;
• payments for licenses and support to foreign suppliers and their Russian subsidiaries make up no more than 30% of the revenue from software licensing;
• mandatory updates and software management are not performed outside Russia;
• software maintenance, modification and support is provided by a Russian individual or a company with a foreign participation of less than 50%.

The VAT exemption will not apply to software and databases used for advertising on the internet that permit such actions as placing offers for purchase/sale on the Internet, searching for information on potential customers, etc.

The Law will not change the current VAT exemption for granting use rights for inventions, utility models, industrial designs and know-how. This exemption has been moved to a separate paragraph of Art. 149 of the Russian Tax Code.

2. Tax regime for IT companies

The Law also introduces a new tax regime for the IT industry: from 1 January 2021, the profit tax rate for Russian IT companies and developers of electronic components/products will be 3%, and the rate of social security contributions 7.6% (contributions to the pension fund 6%, to the social insurance fund 1.5% and to the medical insurance fund 0.1%).

At the same time, the Law repeals Clause 6, Art. 259 of the Russian Tax Code, which allowed Russian taxpayers to claim the costs of purchasing IT hardware as current expenses (starting from 2021, these costs will be subject to depreciation).

The Law does not establish “transitional” rules. Thus, pricing mechanisms in existing agreements for licensing software and databases may need to be revised. Further, a transaction with a value that exceeds RUB 1 billion p.a. and involves a Russian IT company will be considered a controlled transaction and be subject to transfer pricing control by the Federal Tax Service.

These amendments will affect:

• Russian IT companies that develop software and databases or provide services for development, adaptation, modification, installation, testing and maintenance of software and databases;
• Russian companies that design and develop electronic components and products. Currently the Law does not contain a definition of electronic components, which may create uncertainty for taxpayers.

3. Conditions for applicability of reduced profit tax and social security contribution rates
Russian IT companies must meet the following criteria:

• they must have IT accreditation granted by the Russian Ministry of Communications and Mass Media;.
• the share of income from the qualifying activities by the end of the tax (reporting) period is at least 90% of total income for the relevant period (income from qualifying activities does not include income from software and databases which enable advertising to be distributed / received on the Internet);
• the average number of employees for the tax (reporting) period is at least seven.

Russian companies that design and develop electronic components/products must meet the following criteria:

• they are included in the special register to be maintained by the Russian Ministry of Industry and Trade (currently there are no rules for maintaining this register);
• the share of income from qualifying activities is at least 90% of total income for the relevant tax (reporting) period;
• the average number of employees for the tax (reporting) period is at least seven.

Federal Law No. 265-FZ of 31 July 2020 (the “Law”) limits the VAT exemption for granting use rights for certain IP assets and introduces a special tax regime for companies in the IT industry.

Source – noerr.com