Tax relief for IT companies in Russia - Conference on the pros and cons of business relocation
On September 7 at a conference on the pros and cons of business relocation Denis Mayorov, senior tax consultant and auditor at Accountor, spoke about the concessions that have been introduced for IT companies in the Russian Federation. The following issues were discussed at this conference:
- What to consider when deciding to relocate a business to another country
- Risks and difficulties of relocation
- Partial relocation
- Labor, migration, and visa issues
- Corporate issues
- Tax regulations in other countries
- Tax relief for IT companies in Russia
- Impact of COVID-19 restrictions
- Hiring employees from other countries
- Business registration in Russia, Ukraine, the Baltic states, and Vietnam
Tax relief for IT companies in Russia
In his presentation, Denis reviewed the tax that are paid by IT companies in Russia, the relief granted for each of these taxes as well as the changes that will become effective in 2021. The taxes and tax concessions granted to businesses other than IT companies were not considered. In the Russian Federation, IT companies usually pay VAT, profit tax, contributions to non-state funds withheld from payroll (known in Russia as social insurance contributions), property tax, and transport tax.
Relief for IT companies has been introduced for the following taxes:
- Profit tax;
- Social insurance contributions.
No relief has been introduced for the following taxes:
- Personal income tax;
- Property tax;
- Transport tax;
- Land tax.
In the Russian Federation, employees are not required to pay taxes on their own. All taxes on the income paid to them are calculated and paid by the organization that employs them.
Selling exclusive rights to software and databases as well as the right to use these software programs and databases under license and sublicense agreements are not subject to VAT in the Russian Federation. To benefit from this VAT relief, it will be necessary from 2021 onwards to include software programs/databases in the Register of Russian Programs and Databases.
Income from the sale of rights to intellectual properties and their use (inventions, utility models, industrial designs, topologies of integrated circuits, trade secrets (know-how)) under license and sublicense agreements are also not subject to VAT in the Russian Federation.
Profit tax relief
|Profit tax||From 2021||2020|
|Development, adaptation, and modification of software programs and databases, provision of rights to use and sell developed software programs and databases, as well as installation, testing and maintenance of software programs and databases||3%||20%|
|Design and development of electronic components and electronic or radio-electronic products||3%||20%|
The main change is the reduction in the profit tax rate for IT companies down to 3% from 2021. Companies engaged in the following activities are eligible for tax relief:
- Development, adaptation, and modification of software programs and databases, provision of rights to use and sell software programs and databases that they have developed, as well as installation, testing and maintenance of software programs and databases
- Design and development of electronic components and electronic or radio-electronic products
Conditions for tax relief
Companies are eligible for tax relief if they meet the following conditions:
- Companies must be Russian;
- Companies must be accredited as an organization engaged in IT;
- The share of income from IT operations should be at least 90% of their total income;
- Their average headcount should be at least 7.
When calculating income from IT operations, all income must be taken into account except for income from changes in foreign exchange rates, revaluation of property and claims, sale of company debts to third parties, provision of rights to programs and databases which allow advertising through the internet (or accessing advertising) or posting advertisements for sale/purchase of goods/services or searching for suppliers/customers and concluding deals with them. Relief is provided for only one type of activity, and income from different types of activity cannot be added together. If a company engages in two activities, the proportion of income for one activity should be more than 90% to be eligible for tax relief. In order to guarantee eligibility fulfillment, companies must separate the types of business they perform, i.e. they should not have specialists that are involved in the performance of various activities. The best option would be to set up separate companies engaged in a single type of activity.
Social insurance contribution relief (payments from payroll)
|Payments||IT companies from 2021||IT companies in 2020||Other companies|
|Mandatory pension insurance||6%||8%||22%|
|Compulsory health insurance||0,1%||4%||5,1%|
|Compulsory social insurance for Russian citizens (foreign nationals, stateless persons temporarily staying in the Russian Federation)||1,5% (1,5%)||2% (1,8%)||2,9% (1,8%)|
|Total||7,6%||14% (13,8%)||30% (29,8%)|
IT companies are entitled to reduced social insurance contributions. From January 1, 2021 onwards, companies eligible for reduced profit tax will also pay social insurance contributions at lower rates than in 2020 and at lower rates than other companies. Social insurance contribution rates are listed in the table above. IT companies will have to pay 7.6% in total social insurance contributions from January 1, 2021 compared with 14% in 2020, which is much lower than what other companies must pay (30%). This tax relief should allow IT companies to save a lot and invest these savings in further development. It should be noted that the conditions for applying reduced social insurance contribution rates will be like those for applying the reduced profit tax rate.
A favorable tax treatment of IT companies has been put in place in Russia, but only Russian companies will be eligible for these tax benefits. It will therefore be necessary to set up a company in Russia to benefit from this newly introduced tax relief. Any individuals or legal entities, including foreign ones may set up a company in Russia. Unlike citizens from other countries, citizens from Belarus do not need visas and work permits to live and work in Russia.
Nevertheless, Russian law remains very complex and is full of nuances, so we recommend contacting experienced Russian specialists before starting any venture in the Russian Federation. Accountor has been operating in Russia for over 27 years and provides company registration services in Russia, as well as legal, accounting and tax support services.
More information on registration of companies, representative offices, and branches of foreign companies: