Russian VAT was inapplicable to services rendered in electronic form until January 2017. Before the designated date, such services could be rendered without any indirect taxation in Russia.
The constitution of VAT regarding electronic services
The Federal Law no. 244-FZ was published on July 3, 2016 (hereinafter, the Law) and amended the Russian VAT treatment of a number of internet digital services and actually introduced VAT regarding electronic services alongside a definition of electronic services for Russian tax purposes. These rules came into force on January 1, 2017.
Currently Russian VAT is applied to the digital services designated in article 174.2 of the Russian Tax Code. The mechanism of VAT payment depends on the type of purchaser of the services, which may be of two types:
- Purchaser is a legal entity or an individual entrepreneur – in this case, a Russian purchaser or Russian selling agent shall pay VAT to the budget in a capacity of a tax agent.
- Purchaser is an individual (not registered as an individual entrepreneur) – in this case, VAT shall be paid to the budget by a foreign service provider or by a foreign selling agent. In this case, foreign entities are liable to register for VAT purposes in Russia.
After providing the Russian tax authorities with all documents required, the tax authorities register the company and arrange access to the company’s online personal account within 30 working days. The account thereafter can be used to communicate with Russian tax authorities and file tax returns.
According to the Law, digital services are determined as services provided via the internet or other similar electronic networks. There is an extensive list of digital services covered by the law, including, inter alia:
- provision of rights for use of software, databases
- sales of electronic content
- provision of trading platforms
- provision of domain names, web hosting services
- broadcasting of TV or radio channels
- provision of advertising services in the internet
- data storage and processing, etc.
It is important for a foreign legal entity to organize accordingly the sales of the electronic services to Russian consumers. It is important to understand the role of the foreign legal entity in the supply chain (a service provider or an intermediary involved in the payment, for example, agent, commission agent, attorney, etc.) These circumstances influence their obligation to be registered for Russian VAT purposes.
The latest significant changes in legal regulation of “electronic” VAT
In November 2017, the final amendments to No. 335-FZ were adopted.
The current mechanism of the tax agent in the provision of electronic services by foreign companies to Russian legal entities and individual entrepreneurs registered with the Russian tax authorities will be completely excluded from Russian tax legislation from January 1, 2019.
Therefore, starting from January 1, 2019, foreign electronic-service providers, as well as foreign intermediary legal entities, will be required to register for VAT purposes in respect of such supplies (B2B).
Since January 1, 2018, when providing services in electronic form by foreign legal entities, intermediaries which are the subjects of the national payment system, as well as communication operators specified in the Federal law “on the national payment system” are not recognized as tax agents.
From January 1, 2019, the obligation to calculate VAT will be assigned to foreign legal entities that provide electronic services, regardless of who the buyer is – an individual, individual entrepreneur or a legal entity.
Foreign legal entities engaged in business activities participating in negotiations directly with buyers of services based on contracts of assignment, commission agreements, agency agreements or other similar agreements with foreign legal entities providing services in electronic form shall be obliged to register with the tax authorities of the Russian Federation and pay VAT.
Foreign legal entities which provide services in electronic form to legal entities and individual entrepreneurs registered with the Russian tax authorities have to apply for registration with the tax authorities of the Russian Federation no later than February 15, 2019, in case they are not yet registered with the Russian tax authorities.
We assume that foreign companies that provide or participate in the provision of electronic services should be prepared to meet the requirements of the Russian VAT legislation in 2018. They should take into consideration the rules for VAT taxation of electronic services and consider following the next steps: → Analyze the foreign company’s activities to identify operations that may be subject to VAT on electronic services; → Assess the possibility or necessity of changing the business model to comply with the VAT rules and mitigation of tax risks; → Consider modification of the mechanism for VAT payment in supply chains; → Analyze and develop methods for the separate accounting of input VAT for Russian companies that provide electronic services to foreign customers.