The electronic services of foreign companies are subject to VAT in Russia

9 min read
Pepeliaev Group advises that, on 1 January 2017, a Federal Law comes into force*, which establishes the procedure for applying VAT to services that foreign companies supply to Russian consumers in electronic form. The Law also establishes a specific procedure for such companies to register with the Russian tax authorities.

New definitions and categories

The Russian Tax Code (the “Code”) has been supplemented with an article 174.2, which contains a definition of services provided in electronic form. They are defined as services provided via an information and telecommunications network (an “ITN”), including the Internet, in an automated manner and using information technologies. 

The list of services in electronic form is exhaustive, and includes 14 types of such services. Of these, the following are particularly worth highlighting:

  • providing rights to use computer programs (including computer games) and databases via ITNs, among other things by way of providing remote access to them, including installing updates and additional functional capabilities;
  • storing and processing information, on condition that the person providing such information has access to it via the ITN;
  • providing domain names and supplying hosting services;
  • providing access to ITN search engines;
  • compiling statistics on ITN sites.

For the purposes of applying VAT, the Law also stipulates an exhaustive list of services that do not fall within the category of services supplied in electronic form, namely:

  • selling goods, work or services, if, while they are ordered via the ITN, the actions in question take place without using the ITN;
  • selling (transferring rights to use) computer programs (including computer games) and databases on physical storage media;
  • providing consulting services by email;
  • supplying services that involve access being provided to the ITN. 

The place of supply of services supplied in electronic form is regarded as Russia when at least one of the following conditions is met (article 148(1)(4) of the Code):

  • the buyer is a Russian resident;
  • there is an account in a bank that is located in Russia and the buyer uses such account to pay for the services, or the electronic payment operator through which the buyer pays for the services is located in Russia;
  • the buyer uses a network address registered in Russia when it acquires the services;
  • the international country code in the telephone number used to acquire or pay for the services is the code for Russia. 

Record of foreign companies in Russia

The obligation is introduced for foreign companies (“Companies”) to register with the Russian tax authorities when: (i) such Companies provide services in electronic form to individuals; (ii) the place of supply of such services is Russia; and (iii) settlements with such individuals are carried out directly. Intermediaries in relation to the provision of the same services must register too. Within 30 days after they start to provide such services, Companies must submit an application to register, accompanied by the corresponding set of supporting documents (article 83(4.6) of the Code).

We should note that the supply by Companies of services in electronic form in Russia does not lead to a permanent establishment being formed (article 306(14) of the Code). 

If foreign companies provide services in electronic form by engaging intermediaries (under commercial mandate, commission or agency contracts), the obligations of a tax agent are vested in an intermediary who directly carries out settlements with individuals, irrespective of whether such intermediary has a contract with the foreign company (article 174.2(3) of the Code). Among those that may be recognised as tax agents are Russian companies and individual entrepreneurs that acquire services in electronic form from Companies or act as intermediaries in settlements between Companies and the consumers of such services (article 174.2(10) of the Code). 

PG comments: We would highlight that the need to register applies both to foreign companies which provide the services under discussion and foreign companies which are intermediaries in the provision of such services (if, of course, the latter are engaged by companies in the first category). Foreign companies may engage as intermediaries, among others, Russian companies that are already registered with the Russian tax authorities, such Russian companies being recognised as tax agents for VAT purposes. However, in this case, the foreign companies must also be registered with a Russian tax authority. 

It is possible to de-register with a tax authority further to an application of a Company within 30 days of the application being filed, but no earlier than the end of a desk tax audit for the tax period in which the application is field (article 84(5.4) of the Code).

It is possible for a Company to be removed from the register at the tax authorities’ initiative if:

  • a tax authority identifies inaccurate information in documents based on which it entered the Company in the register;
  • the Company has not met the requirement to pay VAT, fines and default interest for 12 months;
  • the Company has not filed documents with the tax authority pursuant to article 93 of the Code for 3 months;
  • the Company has, for 6 months, not filed a tax return when the tax office has information confirming the fact that the Company has provided services in electronic form in Russia;
  • the Company has not paid arrears, default interest and fines that have been restored (article 84(5.5) of the Code.

If a company re-registers with a Russian tax authority, amounts of VAT as well as debt in relation to fines and default interest is restored (article 59(1.1) of the Code)**.

Companies that feature in a register maintained by Russian tax authorities must use their individual taxpayer accounts for dealings with the tax authorities: this is the main method for interacting with Russian tax authorities (article 11.2(3) of the Code).

Procedure for calculating VAT

VAT on services provided in electronic form is calculated applying a settlement rate of 15.25% (article 174.2(4-5) of the Code).

The first tax period for VAT for Companies is treated as the period of time running from the date on which the Company started its business of providing services in electronic form (1 January 2017 at the earliest) and until the end of the corresponding quarter. 

Companies are not granted the right to apply a deduction of amounts of input VAT when they calculate their tax base (article 174.2(6) of the Code).

Companies are released from the obligation, in relation to the services in question, to draw up VAT invoices and maintain purchase ledgers, sales ledgers, and a journal of VAT invoices received and issued (article 196(3.2) of the Code).

Transaction registers indicating information about the performance of terms and conditions, as provided for by the Code, together with the cost of the services provided are acknowledged to be the documents confirming the place of provision of the services in electronic form (article 148(5) of the Code).

Tax control

The timeframe for a desk tax audit of Companies is 6 months from the date on which they file their tax return in electronic form using their individual taxpayer account (article 88(2) of the Code).

For Companies, the timeframe for additional tax control measures is 2 months, should such measures be designated based on the results of an audit that has been conducted (article 101(6) of the Code). 

A tax authority is entitled to carry out a check based on documents and information available to it about a Company, as well as data about similar taxpayers, if the Company has not filed a tax return (article 88(2)(2) of the Code).

In the context of auditing Companies, tax authorities are entitled to demand information from companies in the national payment card system, money transfer operators, electronic money operators, operating centres, payment clearing centres, central payment clearing partners, financial settlement centres and mobile communications operators. A demand of this type must be approved by the head or deputy head of Russia's Federal Tax Service (article 93.1(2) of the Code).

Other changes

The provisions of article 78 of the Code concerning set offs and refunds of excess amounts of tax paid also extend to VAT on services in electronic form provided by Companies (article 78(16) of the Code).

The provisions of articles 46 and 47 of the Code concerning measures to recover arrears of VAT and any debt relating to default interest or fines also apply to Companies.

It should be noted that the amendments to the Code do not provide for any special mechanisms for imposing liability on Companies.

An assessment of the Law

The final version of the Law was substantially reworked in comparison with the bill that was put before the State Duma. Thus, for example, the list of services provided in electronic form is set out in a more general way and does not include services that involve transmitting television channels and/or radio channels, while it also omits communications services provided over the ITN. 

The powers of the tax authority have been supplemented with a right to conduct a tax audit of Companies based on documents or information available to the tax authorities about the taxpayer being audited and about similar taxpayers. 
An idea that is not reflected in the Law was that concerning the grant of a right to receive tax deductions for VAT to Russian companies performing services in electronic form when Russia is not treated as the place of supply of such services and a right for expenses on the sale of such services to be recognised in their actual amount for profit tax. 
Meanwhile, some innovations can be considered as positive: the fact that article 149(2)(26) of the Tax Code has not been amended, under which the transfer of exclusive rights to and rights to use results of intellectual activity in relation to computer software is exempted from VAT; and the addition to the Code of an exhaustive list of transactions that are not classed as services provided in electronic form.

What to think about and what to do 

We advise foreign companies that provide services in electronic form in Russia or are planning to do so, as well as Russian companies and individual entrepreneurs who provide similar services in Russia as intermediaries under contracts with foreign companies, to study in detail the amendments made to Parts One and Two of the Russian Tax Code. 
The procedure for foreign companies to register with the Russian tax authorities for VAT purposes is worthy of particular attention, as is the procedure for calculating and paying tax on services provided in electronic form.

Help from your adviser 

Pepeliaev Group's lawyers have considerable experience of resolving issues concerning the application of tax legislation. We are ready to offer integrated support in relation to VAT being levied on services provided in electronic form by foreign companies in Russia. We can also prepare legal recommendations and documents, and represent companies before regulatory bodies and in court.

* Federal Law No. 244-FZ dated 3 July 2016 ‘On amending Parts One and Two of the the Russian Tax Code’ (the “Law”).
** We are speaking about cases in which a foreign company that has debt in relation to VAT (default interest, a fine) is de-registered and then again placed on the register: then, unpaid fines and default interest plus amounts of arrears are restored.
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