Russia: New requirements for foreign IT companies; VAT and tax implications
Implications of new measures for VAT and other tax liabilities of foreign IT companies
Implications for VAT and tax liabilities of foreign IT companies
A new law (published 1 July 2021) introduces requirements for foreign IT companies.
The new law may have implications for value added tax (VAT) and tax liabilities of foreign IT companies.
What is changed?
The law introducing the new requirements for foreign IT companies is applicable for foreign IT companies owning a website, webpage, information system or online software having a daily audience of more than 500,000 of Russian users if:
- Information on the website is in Russian or other languages of Russian regions and nations of Russia.
- The website contains target advertising for the Russian users.
- The company processes data of the Russian users.
- The company collects payments from the Russian companies or individuals.
The law also applies for certain other foreign companies such as hosting providers if the users of website are in Russia, or companies operating the website or the software to distribute the advertising to Russian users or messaging among the users including the Russian users. Such companies will have to:
- Create a branch, representative office or subsidiary in Russia which will have the authority to represent company’s interests in court and be responsible for certain other actions on behalf of the company
- Make and provide an electronic form on the company’s website for requests and claims from Russian users (subject to requirements to be established by the Russian authorities)
- Open a personal account on the website of Russian authorities for communicating with authorities
The law provides for sanctions that may be applied against a foreign IT company, if the foreign IT company does not comply with these and other requirements of the Russian legislation (e.g., the law on advertising), including the following:
- Russian users will be informed that the company violates the Russian law.
- Advertising of the company and its website will be prohibited.
- Distribution of advertising on the company’s website will be prohibited.
- Payments to the company will be limited.
- Collection and cross-border transfer of personal data will be prohibited.
- Search result restriction.
- Slowdown of the website or full block of access to the website of the company.
These changes generally are effective as of 1 July 2021 (except the requirement to create the branch, representative office or Russian subsidiary is effective 1 January 2022) and application of the sanctions to the failure to provide information about advertising to the authorities in accordance with the law on advertising is effective 1 September 2022.
Implications for VAT and other taxes
The new law may have implications for VAT and other tax liabilities of the foreign IT companies in Russia including the following:
- The creation of a branch, representative office or subsidiary in Russia may change application of Russian VAT and other tax liabilities of the foreign IT company in Russia. For instance, the foreign IT company supplying the e-services through a branch in Russia is not to apply and use the simplified VAT registration and special rules for payment and reporting of VAT due on the e-services. Moreover, the activities through the branch or representative office may have implications for corporate income tax, individual (personal) income tax and other tax liabilities of the foreign IT company.
- The law sets out sanctions for a failure to comply with its requirements as well as other applicable laws of the Russian Federation; however, it does not specifically mention the tax lax. Therefore in instances of non-compliance with the Russian tax law, the IT companies would continue to face penalties imposed under the Russian tax law rather than measures set forth in this new law. Still, the Russian tax authorities may try to use this new law to require foreign IT companies to comply with the Russian tax law. It will be necessary to monitor the interpretation and application of this law by all relevant authorities.
Foreign IT companies need to consider the impact of the new law on VAT and other tax liabilities and may want to consider the following actions:
- Check to see if the company is covered by the new requirements introduced by the law
- Analyze the tax aspects for the creation of a branch, representative office or subsidiary in Russia and what would be the implications on the current Russian VAT liabilities (if the company is VAT registered and pays VAT due on the e-services in Russia)
- Verify to see if the company is in compliance with the Russian VAT rules for e-services (i.e., the company is VAT registered, pays and reports VAT due on the e-services rendered to Russian customers) or is not liable to Russian VAT liabilities (e.g., if the company provides the e-services through intermediaries that collect the payments and are liable to Russian VAT instead of the company)
For more information, contact a KPMG tax professional:
Philippe Stephanny | +1 202 533 3082 | firstname.lastname@example.org
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