Russia: VAT exemption available for certain software and database providers

Russia: VAT exemption available

The president on 31 July 2020 signed into law legislation (Federal Law No. 265-FZ) that amends the Russian tax law to provide an exemption from value added tax (VAT) for the IT or digital sector. The new law addresses how the VAT exemption applies for software and databases.


Related content

In part, the new law relates to the VAT exemption for software and databases. The measures were adjusted during consideration of the legislation by the Russian State Duma. Read TaxNewsFlash

The final version of the law does not refer to license agreements as a condition for application of the VAT exemption. Once effective, the VAT exemption is to apply to software and databases (i.e., those listed on the unified register of Russian programs for computers and databases, with the exception of “advertising software”) provided under certain types of agreements other than just license agreements (e.g., franchising agreements and “mixed agreements” containing license and service elements). However, applicability of the VAT exemption to “software as a service” (SaaS) is still an open question.

VAT exemption for software and databases, changes as of 2021

The VAT exemption will apply to the provision of rights to use software and databases that are listed in the unified register of Russian software and database. The VAT exemption will apply to the rights to use the software and databases (including updates and additional functionality) through remote online access.

The VAT exemption will not apply if right to use the software or databases consist of the receipt of an opportunity to disseminate advertising information via the internet and/or to receive access to it; to post offers regarding the acquisition (sale) of goods (including services), property rights in the internet; to search for information on potential buyers (sellers) and/or to conclude transactions (in general, advertising software).

VAT exemption for software and databases, consequences

For software listed in the unified register, the provision of exclusive rights and rights to use software (except for advertising software) under a license agreement will be VAT-exempt.

A provision of rights to use the software (but not advertising software) including updates and additional functionality under mixed and franchise agreements would be VAT-exempt.

Concerning SaaS, it is still not clear if the VAT exemption would apply. 

Software not included in the register and advertising software

  • Software provided between Russian companies would be subject to VAT at a rate of 20%, that would be recoverable by the Russian business customer (if the software is acquired for VAT-able activities).
  • Software provided by the Russian companies and provided to foreign customers would not be subject to VAT (because the place of supply is deemed not to be Russia). At the same time, these Russian companies would be eligible to recover VAT incurred on the development of the software and other expenses related to the software.
  • Software provided by foreign suppliers to Russian customers would be subject to VAT, recoverable by the Russian business customers (if the software is acquired for VAT-able activity).

Additional VAT costs would arise with regard to software sold to certain companies (e.g., banks and insurance and healthcare companies), SMEs applying special tax regimes, and individuals.

KPMG observation

Concerning the VAT exemption for software and databases, what action steps are to be considered?

  • Identify the software included in the register and determine whether it is possible to include in the register software that currently is not listed
  • Analyze the possibility to apply the VAT exemption to “cloud” software and services that are currently subject to VAT
  • Identity types of software that could be classified as advertising software and be subject to VAT
  • Agree with counterparties on the approach to the amount of the fee for the software (whether the fee will be increased by the amount of VAT)
  • Assess whether it is necessary to introduce amendments to agreements for the provision of software
  • Implement changes to accounting systems and related documents (in particular, to invoices issued by foreign companies)
  • Determine changes in calculations for input VAT allocation and consider separately accounting between VAT-able and non-VAT-able activities, and verify that the documents required for VAT recovery or refund are in place

For more information, contact the head of KPMG’s Global Indirect Tax Services:

Lachlan Wolfers | +852 2685 7791|

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