These are the key amendments provided in Law office “Kovalev, Tugushi & partners” review:- Changes in the criteria for recognizing a natural person as the resident of the Russian Federation on 2020- Decrease of a tax rate of tax income for IT-companies from 20 % to 3 %- Changes in the amount of insurance contributions from 14 % to 7,6 %- New procedure for imposing VAT on realization of exclusive ECM rights and rights to databases
The Federal Law № 265-FZ dated July 31, 2020 “On the introduction of amendments to the second Section of Tax Code of the Russian Federation” (hereinafter – the “Law”) was officially published. The Law introduces various changes to the Tax Code of the Russian Federation (hereinafter – the “TC”) related to the so-called IT-maneuver. The introduced amendments cover the following issues:A natural person who is staying in Russia within the period from 90 to 182 days in a row from January 1, 2020 to December 31, 2020 can be regarded as tax resident of the Russian Federation in 2020 tax period.
- The rules for tax residency of natural persons are amended
For this to happen, such natural person shall file an application prepared in any format to the tax authority at his place of residence.
Herewith, the term for obtaining residence is calculated starting from January 1, 2020 (para. 3 art. 2 of the Law). The introduction of such right is related, inter alia, to coronavirus pandemic.
Due to the introduced restrictions on entry in Russia because of COVID-19 some of the Russian citizens were unable to return to Russia. As a consequence, some Russian citizens stayed in Russia less than 183 days in a year and seized to be tax residents. The new rules for provision of residency in 2020 provided in the Law will allow such citizens to pay income tax in the amount of 13 % instead of 30 %, the same as tax residents of the Russian Federation.1. Companies engaged in activity in the information technology area, including those developing and selling ECM programs, databases.
- Tax rate of income tax that is to be transferred to the federal budget can be fixed in the amount of 3 %, whereas tax rate of income tax for constituent entity of the Russian Federation will be 0 % for the following taxpayers:
In order to apply such rates a company shall:
- acquire a registration document of a company carrying out activity in the information technology area;
The Ministry of Communications is responsible for such accreditation. In order to be accredited, a company shall submit to the Ministry of Communications (i) application for provision of state registration, (ii) record confirming that the company is carrying out activity in the information technology area (para. 5 of Regulation of Government of the Russian Federation № 758 dated November 6, 2007). Resolution on state accreditation is adopted within 30 working days.
- pat of income from realization of ECM programs, databases, developed by the company, transfer of exclusive rights to developed ECM programs and other intellectual property objects listed in para. 1.15 of art. 284 of TC for the reporting (tax) period shall constitute not less than 90 % in the whole sum of all components of income;
Herewith, exchange-rate gains (differences) from deviation of rate of selling (purchasing) foreign currency from the official Central Bank rate shall not be included in income.
v the average number of employees of the company for the reporting (tax) period) shall be not less than 7 persons
2. Companies that are engaged in design and development of component base and electronic (radioelectronic) products
Such products include, inter alia, integrated circuits, UHF-components, power sources, semiconductor components, opto-electronic components, etc.
In order to apply such rates a company shall:
v be included in the register of companies providing services (performing works) on design and development of electronic component base and electronic (radioelectronic) products, that is maintained by the Ministry of industrial trade
The order for maintenance of such register is to be adopted by the Government of Russia
v have part of income from implementation of services (works) on design of electronic component base and electronic (radioelectronic) products to the end of reporting (tax) period not less than 90 % in the total sum of all components of income.
Herewith, exchange-rate gains (differences) from deviation of rate of selling (purchasing) foreign currency from the official Central Bank rate shall not be included in income.
v the average number of employees of the company for the reporting (tax) period) shall be not less than 7 persons.
3. The decrease of the total amount of insurance contributions for Russian companies engaged in design and development of component base and electronic (radioelectronic) products, as well as for Russian companies carrying out activity in information technology industry from 14 % to 7,6 % (para. 2 art. 427 of TC)
- 6 % for compulsory pension insurance
- 1,5 % for compulsory social insurance in case of incapacity for work and maternity
- 0,1 %.for compulsory medical insuranceCurrently realization of exclusive rights to inventions, useful models, industrial designs, programs for electronic computing machines, databases, integrated circuit layout designs, trade secrets (know how) as well as rights of use of above intellectual property under license agreement is VAT free.
- Implementation of IT maneuver entailed certain negative issues for taxpayers
Under subpara. 26 para. 2 art. 149 of TX as of January 1, 2021 only realization of rights to objects included in the unified register or Russian programs for electronic computing machines and databases (hereinafter – “Register”) shall be VAT free.
The Register is maintained by The Ministry of Communications and is accessible online[1]. Only software that is owned by public entities, Russian citizens or companies with foreign participation less than 50 % can be included in the Register.
A significant number of technical requirements for inclusion in the Register is set by Government Regulation № 1236 dated November 16, 2015. The objects can be included in the register only at the outcome of expert research conducted by a committee of experts.
Therefore, such rule will impede the opportunity to use VAT exemptions for certain operations. From our point of view, a part of the companies will not be included in the Register. Consequently, not all IT companies will enjoy VAT exemption.
Herewith, transfer of exclusive rights will by no means be exempt from VAT if such rights entail the opportunity to spread information of advertising nature in the Internet, upload of sale and purchase advertisements, search of information on potential purchasers.
Despite the changes related to VAT, the adopted amendments significantly improve taxation of IT-companies which should contribute to the increase of investment in information industry. For instance, after declaration of tax maneuver on June 23, 2020 shares of Russian IT companies went up [2].
The amendments to TC will enter into legal force on January 1, 2021, with the exception of rules on privileged provision of residency in the Russian Federation which shall have legal effect after July 31, 2020 and affect relations that arose after January 1, 2020.
Ksenia Stepanischeva – Counsel
Sergey Truschin - Lawyer
[1] https://reestr.minsvyaz.ru/
[2] https://1prime.ru/Financial_market/20200623/831674380.html