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Russian VAT changes 2021 for software distribution

Upcoming changes to Russian VAT for software distribution

Russian VAT exemption reasons for sales of rights for software and databases have been altered by Federal law # 265 dated July 31th, 2020 that has made changes to Russian Federation Tax Code (further - RFTC). Amendments to RFTC on “IT industry tax maneuver” come to force on January 01st, 2021.

Russian VAT is subject of exemption only in case of sales of rights for Russian right holders' software that is included to the Register of domestic software.

According to these changes import of foreign software is subject of Russian VAT regardless of a contract type.

Payer of Russian VAT for sales of software rights

All cases of sales of exclusive software rights, as well as authorization on foreign software usage in non-automated ways (import on material mediums, network transfer with a human participation) are not subject to art. 174.2 of RFTC about e-services.

According to the new edition of subcl. 26 cl. 2 art. 149 of RFTC starting 2021 import of foreign software rights based on a sales contract or license agreement is not a reason for VAT waiving. So in b2b relationships Russian customers as tax agents are responsible to pay VAT (art. 161 of RFTC).

Individual customers (b2c relationships) exempt VAT payment because a non-entrepreneur individual is not a tax agent. When purchasing software license from a foreign citizen (regardless of their status) VAT doesn’t arise either.

The foreign company who authorizes the software usage (computer games including) in an automated way via Internet, including granting a remote access along with updates and additional functionality is responsible for Russian VAT payment (cl. 3 art. 174.2 of RFTC). Such foreign companies should remotely register with Russian tax authorities (cl. 4.6. Art. 83 of RFTC).

Sales of software rights without Russian VAT

Individuals or companies and entrepreneurs who don’t apply Russian VAT (Simplified Taxation Scheme case, Skolkovo resident, etc.) exempt Russian VAT in case of sales of software rights.

Companies and entrepreneurs under the General Taxation Scheme may exempt Russian VAT for sales of software rights if such software is included in the unified register of Russian computer programs and databases (the Register of domestic software).

However, the procedure of software registration in the mentioned Register is complicated and limited. I.e. a private right holder of registered software has to be a Russian citizen or Russian organization if Russian citizens, or commercial organizations, or non-profit organizations without a prevailing foreign participation own over 50% of its authorized capital, or Russian non-profit organization without a prevailing foreign participation.

Thereby import of foreign software and services based on it is not a subject of Russian VAT waiving provided by subcl. 26 cl. 2 art. 149 of RFTC regardless of a contract type.

Russian rights holders experience difficulties in including their software to the Register because existing laws limit the usage on foreign components in domestic software. Along with that requirements of Government order # 1236 dated November 16th, 2015 are hard to comply with related to technical documentation required to submit for including software to the Register.

Detailed information about software registration in the Register of domestic software could be found here.

Other changes to software VAT

One of positive amendments related to VAT is the number of arguable questions about software sales has been resolved in favour of a taxpayer.

1. In order to exempt VAT it’s not necessary to strictly enter into Software Transfer Agreement or Software License Agreement. Now it can be any agreement with a statement that a customer gets the exclusive right or right of use for a software.

2. Risks of selling updates and additional functionality along with software rights are eliminated so software technical support can be sold without VAT.

3. VAT exemption covers granting remote software access via the Internet. Therefore before mentioned tax risks for SaaS license will be gone starting 2021.

However, these statements don’t cover advertising services and apps, bulletin boards, marketplaces, and search systems. In these cases Russian software right holders under the General Taxation Scheme are responsible for VAT payment regardless of its inclusion in the Register and type of contract for that software.

© Vitaly Selivanov, 2020

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