Contracting with a Russian purchaser
From 1 January 2019, if a foreign company intends to render services to a Russian contractor (whether an individual or a legal entity) in the electronic form via the Internet (the “E-Services”), it shall have a tax registration in the Russian Federation (“RF”) and pay VAT to the state budget of the RF on an independent basis.
The E-Services shall include without limitation:
- providing rights to use the computer software (including computer games), data bases via the Internet, by providing remote access to them, updates and additional functional options as well;
- rendering of advertising services in the Internet, including using the computer software and data bases functioning in the Internet, as well as providing of advertising space (Ad Space) in the Internet;
- rendering of services in placement of offers of acquisition (sale) of goods (works, services), property rights in the Internet;
- rendering of services via the Internet on the provision of technical, organizational information and other options using information technologies and systems for establishment of contacts and conclusion of deals by and between the sellers and the purchasers (including providing of the trading platform functioning in the Internet in real time, on which the potential purchasers offer their prices in an automated procedure and the parties are informed of the sale by the automatically created message sent);
- ensuring and/or maintaining commercial or personal presence in the Internet, support of users’ electronic resources (websites and/or website pages in the Internet), providing of other Internet users’ access to them, providing the users with a modification option;
- storage and processing of the information, provided that the person who has submitted the information has access to it via the Internet;
- submission in real time of the computation capacity for information placement in the information system;
- providing of domain names, rendering of hosting services;
- rendering of administration services for information systems, websites in the Internet;
- rendering of services automated in the Internet, when a service purchaser puts in the data, automated services of data search, selection and sorting according to queries, submission of the specified data to the users via information and telecommunication networks (in particular, stock exchange bulletins in real time, automated transfer in real time);
- providing of rights to use e-books (periodicals) and other electronic publications, information, educational materials, graphic images, pieces of music with or without text, audio-visual products via the Internet, including by providing remote access to them for watching or listening via the Internet;
- rendering of services of search and/or submission of the information about potential purchasers to the Customer;
- submission of access to search systems in the Internet; and
- maintaining of statistics on websites in the Internet.
- Where foreign organizations render E-Services, the taxable base shall be determined as the cost of services including the tax amount calculated based on the actual prices of their sale.
Foreign organizations shall calculate and pay the tax on an independent basis.
When determining the taxable base, the cost of services in the foreign currency shall be recalculated into roubles at the exchange rate of the Central Bank of the Russian Federation established as of the last day of the tax period (the tax period shall be established as a quarter, and counted from January 01 of the respective year) in which such services are paid (partially paid) for.
The tax amount shall be calculated by the foreign organizations and determined as the taxable base percent share corresponding to the estimated tax rate in the amount of 16.67 percent.
It should be taken into account that the tax amounts charged to the foreign organizations upon acquisition of the goods (works, services), including fixed assets and intangible assets in the territory of the Russian Federation, or the tax amounts actually paid upon importing of the goods, including fixed assets and intangible assets, into the territory of the Russian Federation and other territories under the jurisdiction thereof, shall not be subject to deduction.
Foreign organizations shall pay the tax not later than on the 25th day of the month following the tax period which has ended.
The Tax Declaration shall be submitted by the foreign organizations in the electronic form via the Personal Taxpayer’s Account not later than on the 25th day of the month following the tax period which has ended.
Procedure for Registration with the Tax Authority
Application for the registration shall be filed by the foreign organizations with a tax authority within 30 calendar days from the day of beginning (termination) of the services rendering. Information of the registration shall be placed by the tax authority in the Internet.
One of the conditions for VAT deduction for a Russian contractor shall be as well the registration of a foreign company with the tax authorities of the RF, therefore, should the foreign company be not registered, the Russian contractor will know thereof, and, most probably, refuse to bear tax risks and conclude a contract with such a foreign entity.
Entities Exempt from the Obligation to be Registered with the Tax Authorities of the RF for Tax Payment Purposes
- A foreign organization rendering E-Services via a separate division located in the territory of the RF.
- A foreign organization rendering services through an intermediary: a foreign company. In this case the intermediary shall be obliged to be registered with a tax authority in the RF and pay the VAT.
When preparing the documents for the purchaser, it should be taken into account that a foreign company shall not issue a VAT invoice, as it is not located in the territory of the RF. Therefore, the Russian purchaser, the foreign company’s service has been rendered to, will need:
- a contract and/or a settlement document specifying tax amount and indicating the INN (Taxpayer Identification Number) and KPP (Tax Registration Reason Code) of the foreign firm (this information of the foreign company shall be placed in the official website of the FNS (Federal Tax Service));
- documents for transfer of the payment, including VAT.
The second important amendment to the tax laws of the RF to become effective from 2019 is a change of the VAT rate from 18% to 20%.
How will this influence the parties?
If the place of the services rendering by a foreign company is the RF territory, the Russian purchasing company shall be the VAT tax agent. This means that the Russian company shall deduct the VAT from the amount payable to the foreign company.
Thus, in case of VAT increase by 2 percent (now it is 18%, but will be 20%), there is a risk of short payment to the foreign company of the amount established in the contract, and, therefore, a loss incurring by the foreign company.
In order to avoid negative consequences, we recommend that foreign organizations should hold negotiations with their Russian contractors and conclude supplementary agreements upon increase of the contract prices.
“Russian offshore zones” on Russky and Oktyabrsky Islands
A foreign legal entity being a commercial corporate organization and taking a decision to change their governing law in accordance with the procedure established by such a governing law (the “foreign legal entity”) may become an international company.
Advantages of the international company status:
- the profit of the controlled foreign companies is not accounted for as profit;
- the tax rate on the dividends shall be 0 percent, provided that as of the day of adoption of the resolution on the dividends payment the international holding company has been beneficially owning, for not less than 365 calendar days, at least a 15% contribution (share) in the authorized (share) capital (fund) of the organization, paying the dividends, or the depositary receipts authorizing to receive the dividends in the amount equal to not less than 15% of the total amount of the dividends paid out by the organization;
- the tax rate on the dividends, received by the foreign persons, on the shares (stakes) of the international holding companies, being public companies, as of the date of the dividends payment shall be 5%; and
- the tax rate on the income from sale or other disposal (including redemption) of the equity shares in the authorized capital of Russian and/or foreign organizations, as well as the shares of Russian and/or foreign organizations, shall be 0%.
Terms and conditions for granting tax exemptions:
- the international company shall be registered on the basis of re-domiciliation of a foreign organization, established in accordance with their governing law before 1 January 2018;
- as of the date of registration of this international company on the basis of re-domiciliation of a foreign organization, the controlling persons of the international company have become the controlling persons of such a foreign organization before 1 January 2017.
The controlling person of an international company shall be deemed an individual or a legal entity whose equity interest in this international company (for the individuals; jointly with the spouses and minor children) amounts to over 15%.
Terms and Conditions for the Status Obtaining (Registration of an International Company)
In order to obtain the status of an international company such a company shall get registered (carry out its activities) in the territory of a special administrative district: Russky Island (Primorsky Krai) or Oktyabrsky Island (Kaliningrad Region) and meet a number of conditions:
- it shall not be a credit organization, non-credit financial organization, payment systems operator and a provider of payment infrastructure services;
- it shall carry out business activities in the territory of several countries, including the territory of the Russian Federation, through its directly or indirectly subordinated entities, or the branches, or the representative offices (or other separate divisions);
- it shall undertake the obligations of investing minimum ROUBLES 50 million in the territory of the Russian Federation within 6 months;
- it shall be initially registered in the country which is a member state or an observer in the Group of Financial Action Task Force on Money Laundering (FATF) and/or a member of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL).
ICLC Group, Russia
ICLC Group, Russia