Foreign companies rendering e-services on the Russian B2B market will be subject to new VAT registration, reporting and payment requirements from 1 January 2019 under Law No. 335-FZ*.
As we previously reported, foreign companies providing e-services on the B2C market have since 1 January 2017 been required to register with the Russian tax authorities, prepare VAT reports and pay VAT in Russia.
If the buyer of the e-services is a local entity (B2B market), the VAT reporting and payment obligations lie on the Russian customer, as tax agent for the foreign e-services provider.
The new rules unify the VAT reporting and payment procedures for e-services, irrespective of the status of the buyers of such services. In other words, the procedures apply to both B2C and B2B markets. Accordingly, starting from 1 January 2019, foreign providers of B2B e-services (to Russian legal entities or individual entrepreneurs) will have to register with the Russian tax authorities, maintain individual taxpayer accounts online, submit VAT returns, as well as calculate and pay VAT to the Russian authorities, if and where applicable. These changes stem from the abolition of the tax agency system that used to handle such issues.
These changes may affect intra-group transactions which involve the allocation of IT costs.
Tax registration and risks
Foreign companies that are affected by the new provisions, but have not registered with the Russian tax authorities, must apply for tax registration not later than 15 February 2019.
As the Russian tax legislation does not provide for separate VAT registration, registration with the local tax authorities may expose foreign companies to all types of tax potentially payable in Russia. This could increase the number of tax inspections of foreign companies.
The VAT paid by a foreign company may be offset by its Russian customers if they can provide the following documents:
- a contract or a settlement document that indicates the VAT amount, the taxpayer identification number (INN) and the taxpayer registration code (KPP) of the foreign company; and
- documents that confirm the payment made to the foreign company and the amount of VAT due.
If the foreign e-services provider does not register with the Russian tax authorities and fulfil its VAT obligations, its Russian customers will most likely be unable to offset the input VAT. This is because the new rules do not allow for a voluntary payment of VAT by a tax agent.
VAT exemption for software use licences
The Russian Tax Code’s VAT exemption on transfers of certain types of exclusive and non-exclusive IP rights (including those related to software) will continue to apply after the new provisions come into force. At the same time, based on the current wording of Law No. 335-FZ, tax registration and reporting requirements will arise for the foreign companies even if they use the VAT exemption.
Foreign providers of e-services in Russia that potentially fall under the new rules, and to a certain extent their Russian counterparties, should:
- analyse the scope and nature of the e-services they provide in Russia and the legal status of the buyers of such services;
- consider restructuring their existing operations to separate those that fall under the new provisions;
- prepare for the application of the new VAT reporting and payment obligations, including registration with the tax authorities, preparation and filing of VAT reports, calculation and payment of taxes and management of the taxpayer online account;
- establish a workflow and information exchange between the provider and buyer of e-services to ensure that the foreign services provider complies with the new rules and that the Russian buyer of such services can offset VAT.
* In Russian