Timur Nurmukhametdinov
More than a year has gone by since President Putin announced a sweeping tax maneuver for the IT sector and its entry into force on January 1st 2021. By decreasing the tax burden to levels “lower than in Ireland and India”, the declared goal was to make Russia’s IT sector globally more competitive and to increase its role in the national economy.
With a year of practice, let’s review the chances and consequences for foreign IT companies.
What are the benefits?
- Reduction of corporate income (profit) tax rate from 20% to 3%;
- Reduction of total social contributions rate from 14% to 7,6%;
- Simplified migration/visa rules for foreign employees of IT companies being highly qualified specialists.
Who can benefit?
To qualify for this special tax regime, a company should meet all of 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 the law, the term “IT operations” includes the following activities:
- Sales of software/databases developed by the company;
- Granting of exclusive rights to software/databases developed by the company;
- Licensing of rights to use software/databases developed by the company (incl. SaaS);
- Provision of services on development, adaptation, modification, testing, launching and maintenance of software/databases.
The tax benefits are however not applicable to software/databases of marketplaces and/or used for advertising purposes.
However, the new tax regime has no restrictions or limitations for companies with foreign shareholders.
What are the opportunities?
Since the entry into force of the law, an additional 2500 companies obtained a state accreditation as an IT company, in addition to the 13 000 companies already accredited.
The new tax benefits are considered by the business community as an efficient growth driver for the Russian IT sector, especially considering that:
- Payroll is usually the main expense item for IT companies;
- Russia has a strong human capital in the IT sector and an already well-established IT industry;
- Software licenses as well as IT development services are exempt from Russian VAT when sold to foreign customers (however, input VAT may be recovered).
We believe that the IT tax maneuver has already and will further increase the attractiveness of Russia as an IT outsourcing destination. With the Russian authorities staking on the IT industry as booster for national economy, we assume that the tax benefits are a long-term measure.
For international companies, the creation of an IT-hub in Russia to reduce their R&D and support costs is becoming an option to consider.
What are downsides for foreign IT companies?
To cover for the budget losses caused by this tax reform, the government tightened the criteria for application of VAT exemption for importation and domestic sales of software and database services.
Starting from 2021, sales of software and database services are 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.
These amendments may be considered as a protectionist measure: Software developed by foreign or “foreign-rooted” companies (when the predominant shareholder is a non-Russian company or citizen) has very few chances to be included in the abovementioned register. As a consequence, a large number of Russian and foreign companies (incl. those not from the IT sector) lost the right to apply Russian VAT exemption upon sales of software and database services to Russian customers.
XLNC ARCHIVE | 04 February 2022