Following amendments to the Russian tax code which were adopted in July 2020, Russian software developers may, starting from Jan. 1, benefit from significant tax cuts. 

The new tax regime provides:

• Reduced rates on the taxes on profit: from 20% to 3% for federal taxes and to 0% for regional taxes;
• A reduced rate on social security taxes, from 14% to 7.6%;
• The end of the VAT exemption on software licenses.

The reduced taxation rates are applicable to software developers — defined as such if software product sales account for at least 90% of their total revenue, — but not to software distributors, integrators, or Internet companies. To apply for the tax relief, the concerned companies need to obtain an accreditation from the Russian Ministry of Digital Development, Communications and Mass Media.

The new tax regime “is better than in the most attractive jurisdictions for IT businesses today, such as India and Ireland,” President Putin stated last year to present the reform. “In fact, it will be one of the lowest tax rates in the world,” he asserted. 

However, the new regime has been criticized on several points. In particular:

• Some provisions of the amended tax code, and the way they should be implemented, have remained unclear;
• The abolition of the VAT exemption on software licenses is likely to trigger publishers to raise license prices and/or alter their business model;
• Several categories of players in the IT industry, while needing support no less than software developers, are not concerned by the tax relief.

However, as reported by TASS, Deputy Prime Minister Dmitry Chernyshenko said that a second package of measures to support the IT industry is under consideration. These new measures could target Internet companies, game developers, social media and streaming service providers.

As noted this past summer by The Moscow Times, it is unlikely that this new tax regime will be enough to attract foreign companies to headquarter in Russia — which the goal of low-tax regimes like Ireland, Cyprus or The Netherlands. Rather, the reform “could be a backdoor for Russia’s protectionism, resulting in higher software prices for consumers, and a less attractive market for foreign players.”