VAT for e-services provided by foreign companies
Author: Denis Alekseev, Lawyer at Accountor
Google tax will apply from January 01, 2019 onwards to all e-services purchased from foreign companies. Foreign organizations will be required to register with Russian tax authorities and themselves calculate and pay Russian VAT regardless of whether their counterparty is an individual, legal entity or individual entrepreneur.
Russian counterparties purchasing such services will no longer fulfil the obligation to act as tax agents.Payments for intragroup IT services and sales to individuals through online stores, for example, are classified as e-services.
The sale of e-services is a new object of VAT taxation that was introduced recently in Russian tax legislation so we recommend checking again whether your company or several companies within the same group should be registered with Russian tax authorities as a result of this new change.
How to determine whether a company should register with Russian tax authorities and pay VAT?
The following criteria are used to determine whether companies should register with Russian tax authorities:
- Sellers’ companies of any legal form should be registered outside Russia with no branches or representative offices in Russia;
- Counterparty or buyer should be located in Russia;
- Services are provided in electronic form;
- Intermediary in settlements upon provision of e-services so foreign intermediary companies pay Google tax only if they are ultimate intermediaries. For example, foreign companies selling services in Russia, not those that perform them.
What services are classified as e-services?
Russian tax law defines e-services as “services provided through the Internet, an automated system using information technologies.”
The law also provides a list of e-services:
- Subscriptions to software programs, games, databases, their updating and customization;
- Provision of advertising services on the Internet and provision of advertising space on the Internet;
- Provision of services to advertise the purchase (sale) of goods, work, services and property rights on the Internet;
- Provision of intermediary/brokering servicesbetween buyers and sellers on the Internet (for example, marketplaces, auctions);
- Website or webpage creation and support;
- Data storage and processing (for example, cloud storage);
- Provision of real-time computing power to post information onto an information system (for example, server rental);
- Provision of domain names, hosting services;
- Provision of services for administration of information systems, websites;
- Automatic search and data processing services such as stock exchange reports or automatic translation;
- Sale of electronic books, publications, graphic images, music,videos, etc.
- Provision of search services or information about potential buyers;
- Provision of access to search engines;
- Keeping website statistics.
Russian tax law also provides an open list of services subject to taxation.
The following transactions are not deemed to be e-services:
- Sale of goods (work, services)ifafter being order through the Internet, goods are delivered (work performed, services rendered) without the Internet;
- Sale of computer programs or games,databases on physical media (for example, computer games on CDandDVD);
- Provision of consulting services by email such as services provided by consulting and law firms;
- Provision of Internet access services.
What needs to be done when a foreign company must pay VAT on e-services?
It is necessary to check whether the foreign company needs to register with tax authorities. This can be done through Internet Company VAT Office.
After submitting all required data on the website, the company will have access to the website with email notification for 30 working days.
After registration, it will be necessary to submit quarterly tax returns to Russian tax authorities. This can be done in English.
Tax returns should be submitted and VAT should be paid by the 25th of the month following the reporting quarter.
Bank details for VAT payment by foreign companies and guidelines for completing payment orders can be found at https://lkioreg.nalog.ru/ru/information#requisites
Right to VAT deduction
Additional regulations on conditions and right to tax deduction will be introduced from January 01, 2019 onwards. The counterparties (buyers) of foreign companies providing e-services will be entitled to tax deduction if:
- Foreign companies are registered with Russian tax authorities;
- A valid contract between the parties is available or a payment document specifying the tax amount is available;
- Tax identification number (INN) is specified in the contract between the parties;
- Code of reason for registration of foreign company is indicated;
- Documents for payment transfer specifying the tax amount are available.
Such information about foreign companies (i.e. name, INN, code of reason for registration of foreign company and date of registration with tax authorities) must be posted onto the website of the Federal Tax Service.
What will happen if foreign companies do not register?
- If a foreign company provides e-services without registration,then a fine of 10% of the income from these services (with a minimum of RUB 40,000) could be imposed on such company.
- The buyers of such services will no longer be entitled to deduct tax. As a result, those foreign companies will lose counterparties and damage their reputation in the Russian market.
How may we help?
We provide comprehensive assistance and help foreign companies collecting all required documents as well as registering with tax authorities. At a later stage, we ensure timely submission of required reporting,and if necessary, we provide explanations to state authorities.We constantly monitor changes in legislation to enable foreign companies to run their business in Russia safely and have sufficient time to respond to changing market conditions.