The recent amendments introduced into the Russian Tax Code (the Law1) change the taxation rules with respect to the intellectual property rights identified or revealed by companies in the course of inventorying during the period from 1 January 2018 to 31 December 2019. The Law also reviews certain aspects of the recognition for Russian corporate profits tax purposes of the expenses incurred for the research and development (the R&D) activities.
What the Law says
The Law states that:
- income in the form of intellectual property rights identified in a course of inventorying of property and property rights conducted by a Russian taxpayer would be included in the list of income not subject to taxation by Russian corporate profits tax (new subclause 3.6 to clause 1 of Article 251 of the Russian Tax Code). This provision should apply both to exclusive rights in and licensing of intellectual property;
- expenses on the purchase of exclusive rights in inventions, utility models, industrial designs under assignment agreements as well as on the obtaining use rights for such assets under a license agreement, if these rights are used only in R&D activities, can be included in R&D expenses for tax purposes (new subclause 3.1 to clause 2 of Article 262 of the Russian Tax Code). This provision applies until 31 December 2020 (inclusive);
- incentive payments (such as bonuses, allowances, etc.) to employees involved in R&D activities as well as social contributions paid on labour costs are added to the list of R&D expenses for Russian corporate profits tax purposes (new revision of subclause 2 clause 2 of Article 262 of the Russian Tax Code);
- a company can elect to either (i) recognize R&D expenses as a current expense for Russian corporate profits tax purposes (when such R&D or a relevant R&D stage has been finalized), or (ii) increase the value of the intellectual property that would be amortised over the useful life period of the asset (new revision of clause 7 of Article 262 of the Russian Tax Code);
- a Russian taxpayer has a right not to provide reporting on completed R&D activities to the Russian tax authorities, provided that such information was earlier disclosed in an informational system determined by the Government of the Russian Federation (new revision of clause 8 of Article 262 of the Russian Tax Code). Please note that the Russian Government has not yet designated what will constitute such an informational system.
Implications for Business
1. Intellectual property rights identified in 2018-2019 will not be subject to the Russian corporate profits tax
As a general rule, a company that identified intellectual property rights in the course of inventorying is required to pay Russian corporate profits tax (20% of the value of such intellectual property rights).
Under the Law, Russian taxpayers are provided with a two-year grace period for the recognition of intellectual property rights which are identified in 2018 - 2019 and not recorded in the books earlier. Any resulting income will not be subject to Russian corporate profits tax.
2. Recognized intellectual property increases the net assets
Identified intellectual property is recognized in the accounting at market value, increasing the balance assets value and improving the company's net assets position.
The increase of the balance assets value due to the identified intellectual property rights will be a favorable sign for banks deciding whether to provide a loan and controlling the charter capital to net assets ratio. Among others, the recognition of the intellectual property will have positive consequences for the application of Russian thin capitalization rules.
If a company was unable to deduct a part of the interest expenses on the controlled debt for the Russian corporate profits tax purposes due to unfavorable controlled debt to net assets ratio, then the recognition of the intellectual property in the accounting will change such ratio and a greater part of the interest expenses will be allowed for calculating the Russian corporate profits tax base.
3. Identified intellectual property may be amortized
The identified intellectual property rights are subject to amortization as intangible assets for tax accounting purposes. The value of such rights will be based on expenses for creating or acquiring intangible assets (subject to documentary support of such expenses).
However, the value of such identified intangible assets in the tax accounting will be significantly lower than these assets' market value, which may lead to corporate profits taxation consequences on the sale of such identified intangible assets.
4. Companies engaged in R&D activities will be able to recognize the expenses on acquisition or licensing of intellectual property faster
If a company purchases the exclusive rights for or licenses the use rights of intellectual property and such intellectual property is exclusively used for R&D purposes, the corresponding expenses may be deducted as the R&D expenses.
Thus, companies can look at their tax planning more flexibly, choosing whether to recognize certain R&D expenses as other expenses or to increase the initial value of the intellectual property to amortize it.
Actions to consider
We recommend conducting an inventorying starting from 1 January 2018 and to recognize intellectual property rights if they were not recorded earlier for accounting and tax accounting purposes.
Such intellectual property rights may include, for example, the following:
- patented innovations (such as inventions and utility models) and non-patented know-how (such as technical documentation describing manufacturing processes);
- trademarks and industrial designs;
- mobile applications, computer games / programs and other software products developed by the company or by third party developers at the company's request;
- web-sites, databases, product package design, advertisement videos and other promotional materials;
- plant varieties and breeding achievements.
It is also worth considering if the existing tax accounting policy should be amended and to revise it to take into account the changes described above.
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