Agent VAT upon payments to foreign companies in Russia
Sergey Shabotinsky, Chief Accountant at Accountor Russia
Foreign companies often enter into contracts with their subsidiaries in Russia for provision of services such as, for example, management services, consulting services, information support, royalties, etc. In some cases, the Russian subsidiaries will be required to withhold agent VAT upon payment of fees for services rendered to their parent company.
When is it necessary to withhold agent VAT?
Agent VAT is paid in cases where the Russian Federation is deemed to be the place of sale of work or services, and the taxpayer (in our case, the parent company) does not pay VAT in Russia. In such case, the customer (in our case, the subsidiary) will withhold 18% VAT from the payable service fee and transfer this amount to tax authorities on the same day that the service fee is paid.
All cases where the Russian Federation is deemed to be the place of sale of services are listed in Article 148 of the Russian Tax Code. The place of sale is determined depending on the services provided, and it must be specified in contracts. It follows that the services, which are to be provided, must be described in detail and accurately in contracts to correctly determine whether payment of agent VAT is required.
For example, agent VAT must be paid if a non-resident company provides consulting, legal, accounting, audit, engineering, advertising, marketing, and information processing services to a Russian company. VAT must also be paid when a non-resident company provides services related to the property of its subsidiary in Russia such as, for example, equipment installation or repair on site.
How much agent VAT should be withheld?
The question as to what part of fees should be withheld arises often? Should 18% VAT be charged on top of fees or should 18/118% rate be applied?
This matter is usually addressed and regulated in the text of contracts. This issue is most conveniently resolved by specifying in contracts the payable fee amount and providing that the indicated amount is already after deduction of all taxes. In such case, agent VAT will be 18% of the paid fee.
If the fee is paid in foreign currency, then the tax amount should be calculated at the rate of the Central Bank of Russia effective on the date of payment transfer.
Is agent VAT refunded?
The paid amount of agent VAT may be deducted in the same quarter in which it is paid by declaring it in the relevant quarterly VAT return. The amount paid to tax authorities will be deducted from the current amount of payable VAT. Alternatively, if deductions for the quarter exceed the amount of accrued VAT, the paid amount of agent VAT could be refunded by tax authorities.
However, VAT is deductible only if services are actually rendered and accepted by customers. In Russia, provision of services is confirmed by signing by both parties of a statement of services rendered. Although this document may be drawn up with no special form, it must include the following:
- A list of services rendered with quantitative indicators;
- Service fee;
- Date of acceptance of services (which is usually the same as the date of statement of services rendered);
- Signatures and seals of both parties.
Statements of services rendered must be drawn up also in Russian (either a bilingual document or a separate document in Russian).
If the provision of services is settled on a pre-payment basis, agent VAT should be remitted upon payment of services, but it will be deducted only in the quarter in which services are actually rendered.