Russian e-services VAT changes in 2019
1. What have been changed for Russian E-services VAT in 2019?
2. Which companies waive tax agent obligations in Russia for E-Services VAT in 2019?
3. Who is responsible for Google and Apple fee Russian VAT payment in 2019?
5. Which foreign companies have to be registered in Russia as E-Services VAT taxpayers in 2019?
6. Do foreign distributors have to be registered in Russia as E-Services Russian VAT taxpayers in 2019?
1. What have been changed for Russian E-services VAT in 2019?
New changes to the art. 174.2 of the Russian Federation Tax Code are effective since January 01, 2019, related to e-services VAT, also known as “Google tax”. Now if the foreign companies sell digital services to Russian companies and entrepreneurs, such foreign companies have to be registered with Russian tax authorities and pay the VAT by themselves.
Before 2019 Russian legal entities and entrepreneurs who buy electronically supplied services from a foreign company had to pay the VAT as tax agents. After 2019 began Russian buyers of e-services waive this obligation in full because they are not VAT tax agents anymore.
Changes to E-services VAT are outcome of the following changes:
1) Formerly, the foreign companies had to be registered as Russian VAT taxpayers and pay Russian VAT for digital services sales to Russian natural persons. Since 2019 natural persons are excluded from art. 85 of the Russian Federation Tax Code (legal entity accounting) and from art. 174.2 of the Russian Federation Tax Code (E-Services). Therefore, the causes to be registered as the Russian VAT taxpayer and to pay the VAT are not limited to electronically supplied services sales to natural persons: the purchase of the E-service made by Russian company or entrepreneur causes equal tax obligations for the foreign company.
2) Consequent on the above mentioned the cl. 9 of art. 174.2 of the Russian Federation Tax Code have been terminated. Before that it have obliged Russian companies and entrepreneurs to calculate and pay VAT as tax agents in case of electronically supplied services purchase from foreign entities. Now the non-resident is responsible for e-services VAT payment, no matter the Russian buyer status.
2. Which companies waive tax agent obligations in Russia for e-services VAT in 2019?
According to the Ministry of Finance circular #03-07-08/76139 dated October 24th, 2018 the foreign company who sales E-services is responsible to be registered as Russian VAT taxpayer and make such VAT payments. In case the Russian company or entrepreneur have made VAT payments voluntary as tax agent tax deductions are not applicable in accordance with chapter 21 of the Russian Federation Tax Code.
As mentioned before, since January 01st, 2019 the non-residents are responsible for calculation and payment of VAT no matter the e-services buyer status.
Before 2019 in case of electronically supplied services purchase from the foreign entity Russian companies and entrepreneurs had the tax agent obligations according to cl. 9 of art. 174.2 of the Russian Federation Tax Code. The Russian companies and entrepreneurs still had to pay the VAT on behalf of the foreign company even in case the Russian buyer is the subject of the Simplified Taxation Scheme or the Unified Tax of Imputed Income which exclude the obligation for VAT payment for own sales. Such foreign company had not been obliged to be registered as VAT taxpayer in Russia, tax agents had pay VAT on its behalf.
Since 2019 the above mentioned cl. 9 of art. 174.2 of the Russian Federation Tax Code terminates. Therefore Russian companies and entrepreneurs stop to pay VAT as tax agents in case they purchase e-services from non-resident entities.
Notice that it is no matter if such foreign entity has been registered as a taxpayer in Russia or not as well as it pays VAT in fact or not.
At the same time cl.10 of art. 174.2 of the Russian Federation Tax Code remains in effect. According to it, the tax agents are the Russian companies, entrepreneurs or foreign entities’ subdivisions located in Russia - intermediaries registered with Russian tax authorities and ran a business with direct payments from buyers based on commission contracts, agency contracts or similar agreements with foreign entities rendered such services.
At the end of the day, if the Russian entrepreneur or company purchases e-ervices for own use they are not recognized as tax agents and they don’t pay the VAT on behalf of the non-resident entity. Vice versa, if the Russian entrepreneur or company only acts as the intermediary in payments with the buyer under the contract with the foreign company sich Russian entity has to pay VAT from the services sales price for such buyer. Only national payment system members and communications providers waive to obey this rule.
The non-limited list of intermediary contracts causes a lack of legal clarity. In our opinion, the intellectual property rights transfer under the license agreement is not the intermediary business according to its legal nature. The intellectual property rights are assigned and sold with payment of Russian sales tax from the full sales price.
However, the difficulties may occur in case of distribution agreements because of the lack of clear description of license scheme, only the “right to resale” is mentioned. To mitigate mentioned tax risks the localization of such distribution agreements is required in the way of make them relevant to the type of contracts existing in the Russian legislation.
3. Who is responsible for Google and Apple fee Russian VAT payment in 2019?
Electronic services include a rendering of following services through the Internet: technical, organizational, informational and other opportunities provision using information technologies and systems, to make contacts and enter into agreements between sellers and customers. Google and Apple require the developers to pay the fee for such services if they sale apps using their markets.
According to the above mentioned since 2019 the foreign entities have to pay VAT by themselves if they sell electronically supplied services to Russian entities (no matter natural persons, companies or entrepreneurs). This is why Russian companies and entrepreneurs waive tax agent obligations and don’t pay VAT in case of purchase e-services from Google or Apple.
4. Is the foreign software distributor responsible for Russian VAT payment on behalf of non-resident party?
Usually, the distribution agreement with foreign title holder gives the end-users the right to use the software in two ways depending on such software specific. In one case the user has the right to install the computer program onto his or her computer, in another case the user has the remote access to e-service, running on such software base.
- Software license sale which requires the installation to the user’s computer (downloadable software), guided by subcl. 4 of cl. 1 of art. 148 of the Russian Federation Tax Code;
- Giving access to the service in a form of license usage of its software, guided by the art. 174.2 of the Russian Federation Tax Code (E-services).
This is why the VAT payment basis related to E-services rendering is different from the downloadable software sales or its intellectual property rights assignment.
E-services list contains “entitling the user to use the computer programs (including computer games), databases via the Internet, including the way to provide the remote access to them, including their updates and additional functionalities”.
However, this is a particular case which depends on main e-service criteria presence. Digital services include only services automatically rendered using informational technologies.
Classic software license agreements require “manual” license assignment and software copy transfer. Especially, in case of complicated software complexes require customization and implementation. In other words, software copy transfer through the Internet is not an e-service according to the Russian legislation.
For this reason, Russian customers and distributors of foreign software keep the tax agent obligations under the art. 161 of the Russian Federation Tax Code, because they are not the subject of art. 174.2 of the Russian Federation Tax Code (electronical services).
In 2019 and before, the legislation related to VAT for import of downloadable software consist from the following provisions of the Russian Federation Tax Code (further - RFTC):
- determining the place of assignment of license for copyright objects at the customer’s location (subcl.4 of cl.1 of art.148 of RFTC);
- tax agent obligations to calculate and pay the VAT for foreign companies which are not registered with Russian tax authorities (cl.1 of art.161 RFTC);
- tax waiving for sales of software usage under the license agreement (subcl.26 of cl.1 of art.149 of RFTC).
According to this the Russian distributor (buyer) of the foreign software is the tax agent but Russian entity is not obliged to pay VAT from the fee to the foreign company under the license agreement according to subcl.26 of cl.1 of art.149 of the Russian Federation Tax Code. Other sales objects related to software license (i.e. consultation services and technical support) still the VAT subject. So the Russian distributor has to pay the VAT from such services as the tax agent as before.
5. Which foreign companies have to be registered in Russia as E-services Russian VAT taxpayers in 2019?
Cl. 4.6. of art. 83 of the Russian Federation Tax Code sets the procedure of the registration of foreign entities with the Russian tax authorities.
Before 2019 the foreign entities had to be registered with Russian tax authorities:
- in case of e-ervices sales and direct payments with Russian natural person;
- in case of direct payments with Russian natural person related to e-services rendering if foreign intermediary entity renders services above mentioned in cl.1.
Since 2019 above mentioned rules are not related to natural persons. This is why these rules are related to cases of a rendering of e-services to any Russian customers, including companies and entrepreneurs.
6. Do foreign distributors have to be registered in Russia as e-services Russian VAT taxpayers in 2019?
The foreign company sales the software in Russia via the distributor. Does it have to be registered as Russian VAT taxpayer in 2019?
In case of downloadable software distribution the foreign entity does not have to be registered with Russian tax authorities.
The rules of import of downloadable software to Russia didn’t change. The provisions of subcl.4 of cl.1 of art.148 of the Russian Federation Tax Code apply, determining of the place of assignment of a license, copyright or other similar rights, consultation services and information processing services at the customer’s location (in Russia).
If Russian entity purchases such license or services it acts as a tax agent in common sense under art. 161 of the Russian Federation Tax Code.
This is why the foreign title holders of downloadable software don’t have to be registered as Russian VAT taxpayers in 2019 in case of supplement to Russia of such software.
© Vitaliy Selivanov, IT-Lex legal firm
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02.09.2008 г.
ИНН 5407053894
