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Changes in VAT relief for foreign companies in 2021

From 2021 onwards, VAT relief for transfer of exclusive rights as well as rights to use software programs and databases will change as follows.

Now

The following transactions are exempt from VAT:

а) Transfer of exclusive rights to software and databases;

b) Transfer of rights to use software and database under a license agreement.

From 2021 onwards

The following transactions will be exempt from VAT:

а) Transfer of exclusive rights to software and databases recorded in the National Software Register,

b) Licensing of software and databases recorded in the National Software Register.

Exemptions will not apply if the transferred rights enable (i) distributing advertising information on the internet and/or gaining access to such information, (ii) posting on the internet offers for the purchase/sale of goods (services), property rights, (iii) searching for information about potential buyers/sellers.

Those changes will mostly affect foreign companies providing rights to software and databases not included in the National Software Register. As a result of these changes, foreign companies may find themselves in one of the following situations in 2021:

Foreign licensors granting rights to use software or database not included in the National Software Register

1. Without using the internet

Subject to VAT which is withheld and paid by a tax agent (licensee)

2. Over the internet

Subject to VAT. Recognized as an e-service. VAT must be paid as per the rules for e-services

In the first case (i.e. software use without the internet), everything is quite simple: the Russian licensee will act as a tax agent and will withhold and pay VAT. In the second case, the transfer of rights to software and databases will be recognized as an e-service (Article 174.2 Russian Tax Code) and as a result foreign licensors will be required to pay VAT on e-services on their own:

  1. Foreign licensors (sublicensors) will be required to apply for a taxpayer identification number (INN) within 30 days of the license date;
  2. Foreign licensors will have to file a VAT return on the Tax Service website or electronically;
  3. Foreign licensors will have to pay VAT on e-services on their own.

Operating through Russian or foreign agents (sublicensors) allows foreign companies to avoid registering with Russian tax authorities as well as declaring and paying taxes on their own. It is worth noting that a Russian licensee may deduct VAT on a license for software programs and databases only if the foreign licensor is registered as a payer of VAT on e-services and only upon compliance with Russian Tax Code requirements for drawing up contracts and other documents.

Many factors must be considered (actual use of software, terms and conditions of license agreements, etc.) to determine whether a transaction is subject to VAT upon intragroup distribution of expenses related to software licenses.

Our tax advisors can help you to work with these changes in each individual situation by:

  • Assessing whether the provision of rights to software program is recognized as an e-service and thereby is subject to VAT;
  • Explaining what the tax liabilities of all parties to license agreements will be from 2021;
  • Recommending options to operate through intermediaries;
  • Assessing the risks of intragroup distribution of license costs.

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