In this legal bulletin we would like to draw your attention to the amendments that have been made to the Tax Code that entered into force in January 2017 regarding value added taxation of digital services rendered by foreign companies in Russia. These amendments have been introduced by the Federal Law No. 244-ФЗ dated 03.07.2016 “On the amendments to Parts One and Two of the Tax Code of the Russian Federation”.
What Has Changed
From now on, foreign companies providing services to Russian consumers by digital means via the Internet must: (i) apply for registration with the Russian Tax Authorities and (ii) charge and pay Russian value added tax (VAT).
Whom It Concerns
Foreign companies in the e-commerce industry operating on the Russian market (e.g. Google, Microsoft, Apple, Netflix, etc.). The aforementioned companies have registered within the Russian Tax Authorities in January-February 2017.
Internet services that are considered taxable activities:
- providing software licenses for computer programs, applications, games and updating them via the Internet (including providing remote access);
- storing and processing information, providing access to it via the Internet (cloud services);
- services of hosting providers and providing domain names;
- services of Internet search engines;
- other services (exhaustive list provided by the law).
Internet services that are not considered taxable activities (exhaustive list):
- sale of goods, works and services via the Internet if the supply of goods or provision of services is performed outside of the Internet platform (e.g. online retailers with delivery and pickup);
- providing software licenses for computer programs, applications, games and databases and updating them via physical media;
- providing Internet access;
- providing consulting services via email.
Tax is payable in any of the following circumstances:
- the buyer resides in the territory of Russia;
- the internet protocol address (IP) of the buyer, which was used for the purchase, is registered in Russia;
- the phone number of buyer, which was used for the purchase, is registered in Russia;
- the bank, which the buyer used to render the payment for the purchase, is located in the territory of Russia.
Registration with the Tax Authorities
Foreign companies shall register with the Russian Tax Authorities within 30 days of starting their business activities. The deadline for registration for companies already doing business in Russia at the time of the new law’s enactment was 31 January 2017. Companies that have not registered by this deadline are advised to do so without delay.
If the company is doing business through a foreign company acting as agent, such agent will also need to register with the Tax Authorities. If a foreign company is doing business through a Russian agent, the Russian company is already registered with the Tax Authorities and will serve as the tax agent for the foreign company (i.e. will withhold and pay VAT for the foreign company).
PLEASE NOTE: registration with the Tax Authorities and payment of Russian VAT does not constitute a permanent establishment for the foreign company.
Document flow between the foreign companies and the Tax Authorities is handled through the company’s personal online account. Login credentials for the account are provided by the Tax Authority at the time of registration.
Tax Rate and Payment
The tax rate is 15.25%. Russian accounting rules for VAT are not applicable (i.e. no VAT invoices or purchase/sales ledgers are required).
The first tax period for the foreign companies is January to March 2017. The companies must provide VAT records and pay the tax no later than 25 April 2017.
Foreign companies cannot apply for VAT deductions in this case, however, they can apply to for tax credit/refund of excessively paid tax.
The Tax Authorities may conduct in-office inspections with regard to the calculation and payment of VAT, request information from a foreign company as well as use other means to levy the tax.