On June 23, 2020, the President of the Russian Federation told the nation about new measures supporting the Russian economy amid the pandemic of COVID-19. In particular, he announced a plan to support IT companies by a major reduction of taxes on them.
According to Mr. Putin, it is planned to reduce income tax on IT companies from 20% to 3% and mandatory social insurance premiums from 14% to 7.6%. He also noted that when these measures are implemented, the tax rates will be among the lowest in the world, and in this regard, he compared Russia with India and Ireland.
Moreover, the President said that the Government of the Russian Federation would consider new measures of economic support for IT and related companies.
A few weeks later, in Innopolis (the Republic of Tatarstan), a panel discussion was held with the participation of representatives of the IT industry, where the Prime Minister of the Government of the Russian Federation, Mikhail Mishustin, took the floor. In his speech, Mr. Mishustin raised the issue of the proposed benefits of the President’s “tax maneuver”, and specified that benefits will be provided to Russian companies for which 90% of their income is from the sale of software and services for its development, support, and cloud services.
On July 10, 2020, the Ministry of Finance of the Russian Federation (Minfin) prepared legislative amendments to tax legislation on conducting the “tax maneuver”. Along with reducing the income tax and mandatory social insurance premiums for IT companies, the Minfin proposes to establish such benefits also for the companies that are engaged in the design and development of electronic component base and electronic (radio-electronic) products and included in the corresponding register. This register will be maintained by the Ministry of Industry and Trade of Russian Federation (Minpromtorg). As well, the Minfin is preparing mechanisms for additional incentives for the domestic IT industry, which include both direct support for companies to introduce innovations and launch startups, stimulate demand, develop PPP partnerships, and increase staff capacity in this industry.
The adoption of the bill regarding the President’s “tax maneuver” was not long in coming. Thus, the bill passed all the necessary stages for its adoption and was published on July 31, 2020.
According to the bill, it makes the following amendments to the Tax Code of the Russian Federation (Tax Code):
Value-Added Tax (VAT)
The amendments deal with (i) exclusive rights to software and databases included in the register of domestic software, and (ii) rights to use the software and databases that will be exempted from VAT.
The rights to use can be transferred by concluding a license agreement and by providing remote access to software and databases via the Internet.
Exemption from VAT will not apply to the transfer of rights to use software and databases, if these rights pertain to the following:
– distributing advertising on the Internet or get access to it;
– posting on the Internet of offers for the purchase or sale of goods, works, services, and rights; or
– searching for information about potential buyers and sellers or conclude deals.
Income tax rates for IT companies will be reduced. The rates will be as follows:
– 3% tax to the federal budget for companies that develop, install, test, maintain and promote their software and databases; and
– 0% tax to the regional budget for companies that are engaged in the design and development of electronic component base and electronic (radio-electronic) products.
Also, to apply the reduced rates, IT companies must meet the following requirements:
– the company should be included in the special register as a company that operates in the field of IT;
– the company’s income from operations in the field of IT according to the results of the tax period should be at least 90% of the total income; and
– the average staff number should be not less than seven people.
Mandatory Social Insurance Premiums
Mandatory social insurance premiums will be reduced from 14% to 7.6% for IT companies that meet the same requirements as for the companies applying the reduced income tax rates (please see the requirements for (2), above).
It should be noted that all of the above amendments to the Tax Code will enter into force on January 1, 2021. In the period before the specified date, state bodies or officials may adopt any additional acts in this regard.