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Russian VAT for in-app purchases

Does the developer have to pay the Russian VAT for purchases through a free-to-play app?

The previous article VAT for online services has brought up an important topic about VAT waiving for license agreements. So the developers of free-to-play apps wonder do they have to pay the VAT for purchases through such app.

ВThe common pro argument is the case Mail.ru vs Russian tax authority (case #A40-91072/14-90-176). The tax authority has proved Mail.ru has to pay the VAT from game enable services cost because according to the license agreement the games are free to use but follow service agreements are paid.

However, they forgot the fact Mail.ru has reworded the license agreement provisions and Russian Federal Tax Service has approved the VAT waiving for in-games purchases with the same fact conditions of providing additional software functionality (Russian Federal Tax Service’s Official Letter #СД-4-3/988@ dated January 23rd, 2017).

Let’s consider the situation Russian developers distribute free-to-play apps via Google and Apple markets.

The previous article has a detailed description of Google and Apple’s position to decline the VAT charge from intellectual property rights assignment to Russian residents for the apps developed by Russian specialists. In this case, the developers fulfill their tax obligations by themselves according to the Russian legislation.

There are two possible scenarios of taxation of sales from Russian software:

1. Russian developers waive VAT payment in case they are subjects of the Simplified Taxation Scheme. No matter do you sell software licenses or services related to it: there is no VAT.

2. In case of the General Taxation Scheme, the Russian developer has to follow the Russian tax legislation which set the general procedure of calculation and payment of VAT, no matter the way of software distribution. There is no difference if the developer provides software to Russian customer through the foreign or Russian online market.

Software sales via Google Play and Apple iTunes are made under the EULA. So in case, any intellectual property rights for computer programs or database usage are assigned under such license agreements there is no VAT.

Готовое решение для вашего бизнеса
Special edition for mobile apps in Google Play and Apple iTunes

Based on art. 1261 of the Russian Federation Civil Code the computer program is the complex of data and commands displayed at the object form for computers and other hardware aimed to gain the particular result, including source, design, and algorithms have been getting as a result of computer program development and its audiovisual display.

According to par.2 of cl.2 of art. 1260 of the Russian Federation Civil Code the database is the complex of separate materials (articles, calculations, statutory acts, court decisions, etc) which are systemized in the way they could be found and processed by the computer.

The databases and computer programs could be used under the license agreement because the user gets the updates from them.

In the same way, the additional software functionality could be the result of the customer’s usage of the complexes of data and commands and/or materials under the license agreement.

So in case of software license agreement compliance for software initial version and its following updates and extensions the intellectual property rights assignment for software and database could be treated as the sales object under the license agreement.

The Russian legislation treats the updates and additional functionality provided as the enforcement of rights for computer programs usage in case the foreign company renders online services (par.2 of cl.1 of art. 174.2 of the Russian Federation Tax Code). So these operations are executed under license agreements according to the Russian legislation.

In the case of the General Taxation Scheme the Russian developer has two separate ways to waive the VAT payment for in-app purchases if the developer provides the intellectual property rights for the software:

1. The Russian developer waives the VAT payment in case he or she assigns the intellectual property rights for the software to a non-resident entity based on subcl.3 of cl.4.4. of art. 148 of the Russian Federation Tax Code (license sale in case the customer resides abroad of Russia);

2. The Russian developer waives the VAT payment according to subcl.26 of cl.2 of art.149 of the Russian Federation Tax Code in case he or she enters into the license agreement with a resident entity.

At the end of the day, the well-thought EULA wordings (i.e. Mail.ru case) could help avoid additional costs.

Learn more about the detailed position related to the VAT waiving by Russian developers under art.174.2 of the Russian Federation Tax Code in case of software sales through the foreign markets in the following article.

Get the legal advice for international software sales taxation
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