The Russian Federal Tax Service has confirmed that it is legal to separate IT units into individual legal entities in order to receive tax benefits
Pepeliaev Group advises that, according to the position of the Russian Federal Tax Service, the reorganisation of a legal entity as a result of which a standalone IT company is created cannot be considered by tax authorities to be a distortion of facts of economic life and qualify as the application of a tax evasion scheme[1].
In 2021, a tax manoeuvre began in the IT sector[2]. IT companies received the right to take advantage of tax benefits in the form of a reduced profit tax rate and reduced insurance contribution rates if there is state accreditation and a number of conditions are met:
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the share of income from activities in the field of IT should be at least 90 percent of all income of the company for the corresponding period ( article 284(1.15), articles 427(5)(4) and 427(5)(8) of the Russian Tax Code (the “Tax Code”));
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the average headcount (average number of employees) for the same period should be not less than 7 people ( article 284(1.15), articles 427(5)(5) and 427(5)(9) of the Tax Code).
Read more about additional benefits and the procedure for obtaining state accreditation in Pepeliaev Group’s alert.
By its letter No. SD-4-3/2249 @ dated 20 February 2021 the Russian Federal Tax Service drew the attention of business to the fact that the creation of an IT company as a result of the reorganisation of existing legal entities (separation, allocation) should be investigated by the tax authorities in each individual case for signs of business fragmentation, when the sole purpose of these actions is to obtain the right to apply reduced corporate profit tax rates of and insurance contribution rates.
Main provisions from the Russian Federal Tax Service’s letter on tax advantages for the IT business
In connection with the increased relevance of the issue of supporting the IT industry in the face of sanctions, the Russian Federal Tax Service issued explanations concerning the reorganisation of legal entities in order to obtain tax advantages for IT companies.
In particular, in the Russian Federal Tax Service’s opinion:
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Reorganisation of a legal entity that creates a standalone legal entity (separation, split-off), which carries out activities in IT, which is subject to the provisions concerning reduced profit tax rates (articles 284(1.15) and 284 (1.16) of the Tax Code as well as reduced rates of insurance contributions (articles 427(1)(3) and 427(1)(18) of the Tax Code), cannot be considered by tax authorities as a distortion of the facts of economic life in violation of article 54.1(1) of the Tax Code and qualify as the application of a tax evasion scheme (‘business fragmentation’, unjustifiably obtaining tax benefits, etc.);
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the provisions of the Letter No. BV-4-7/3060@ of the Russian Federal Tax Service "On the practice of applying article 54.1 of the Tax Code of the Russian Federation” dated 10 March 2021 regarding the assessment of the main purpose of such reorganisation (article 54.1(2)(1) of the Tax Code) do not apply to cases where IT divisions are split off into standalone companies.
Please be reminded that article 54.1 of the Tax Code aims to counter tax abuses.
According to article 54.1(1) of the Tax Code, an unlawful reduction in the taxable base and/or the amount of tax may occur as a result of the taxpayer's distortion of information about the facts of economic life, including about the financial and economic operations performed in pursuance of transactions, the totality of such facts, and about the taxable items. The main purpose of the transaction cannot be the non-payment (incomplete payment) of tax; the reason for such a transaction should be a business purpose (article 54.1(2)(1) of the Tax Code).
In relation to the IT industry, the Federal Tax Service indicates that in the absence of distortions in the facts of economic life, the legitimacy of obtaining economic benefits in the form of tax benefits created as a result of the reorganisation of an IT company cannot be questioned by the tax authorities. Obtaining such an economic benefit is fully consistent with the goals of introducing a benefit - tax support for the IT industry.
Tax incentives will be available to both existing IT companies and new ones that will appear after the expansion of preferences, and it does not matter in the interests of which persons (within the group of companies, interdependent/affiliates, external users, etc.) an IT company carries out activities in the field of information technology.
For information
Federal Law No. 67-FZ dated 26 March 2022 granted additional tax benefits to accredited IT companies. IT companies that previously paid profit tax at a rate of 3% will be completely exempt from profit tax in 2022-2024.
In addition, by its Letter No. SD-4-2/3586@ dated 24 March 2022 the Russian Federal Tax Service has suspended until 3 March 2025 field (including repeated) tax audits with respect to accredited IT companies.
What to think about and what to do
Companies that plan to split off IT departments as independent legal entities are advised to familiarise themselves with the requirements established for obtaining state accreditation and to bring their activities in compliance with these requirements.
An audit of an IT company’s activity performed in advance and its compliance with the requirements of the legislation will reduce the risk of state accreditation being denied and of possible additional costs.
Help from your adviser
Pepeliaev Group’s experts are ready to provide comprehensive legal support to companies that operate (are planning to operate) in the field of IT.
Pepeliaev Group provides the following types of services:
- Providing general advice for companies engaged in the IT sector:
- Preparing clarifications and legal opinions on how sanction-related restrictions should be complied with, as well as on other regulatory aspects of activity in the IT sector;
- Conducting due diligence of Russian and foreign companies as to their compliance with legislation and the case law established against the backdrop of the sanctions.
- Services of setting up standalone IT companies in order to obtain benefits and measures of support.
- Assisting IT companies with obtaining benefits and measures of support:
- analysing whether it is possible for an IT company to obtain benefits and measures of support;
- advising on how to interact with state authorities (if necessary).
[2] Articles 1(4) and 1(5) of Federal Law No. 265-FZ "On amending to Part Two of the Tax Code of the Russian Federation” dated 31 July 2020 on tax benefits for IT companies entered into force on 1 January 2021.