Date added: : 28.02.2019

From the 1st of January 2019, all legal entities in the Russian Federation without any form of legal representation, who provide electronic services to Russian companies, sole proprietors or natural persons have to register for Value Added Tax (“VAT”) with the Russian Tax Authorities (Federal Tax Service, Федеральная Налоговая Служба).

 

Previously, Russian VAT applicable to electronic services were paid by the tax agent mechanism: Russian companies purchased electronic services, used to withhold VAT from payments to foreign suppliers and participated as tax agents, paying tax on behalf of the foreign suppliers, reporting both income and outcome value added taxes respectively. This VAT could be claimed for recovery.

 

It should be noted that registration for Value Added Tax is obligatory, even if in Russia such transactions are exempted from VAT by law. It means that all foreign electronic service providers are required to register with the tax authority of Russia.

Electronic services include the following:

 

  • Distribution of software via the internet,
  • Digital advertising services in the internet,
  • Provision of services involving the posting of offers to buy or sell any product or service,
  • Remote storage of digital data,
  • Hosting,
  • E-books and other digital content (images or videos) distribution via the Internet,
  • Search engines,
  • And other digital services that are provided via the internet.

The foreign company is required to submit VAT tax returns each quarter. Deadline for filing of such tax returns with the tax authorities is 25th of the following month at the end of each quarter: for example, VAT tax returns for the 1st quarter (January, February, March) should be filed by the 25th of April. Tax returns should be filed electronically and authorized by the digital signature of the legal entity.

What is the VAT rate to be paid?

Generally speaking, Russian VAT is charged at the rate of 20%. However, foreign suppliers of electronic services will be charged at the effective rate (not the general rate) of 20/120, or 16.67 % from the tax base, which is the price of services provided.

Is it possible to pay VAT in foreign currency and how to calculate the tax base?

Unfortunately, it is not possible. The payment should be transferred only in Russian rubles. However, the following question may arise: how to calculate the tax base and the tax itself, if there were several transactions in foreign currency (for example, Euro) during the reporting period.

The answer is as follows: the tax base should be converted into Russian rubles based on the exchange rate of the last day of that quarter in which payment was received: for example, the tax base for the first quarter should be calculated, taking into account the Central Bank exchange rate on the 28th of February (or the 29th of February in the event of an intercalary year).

This means if the Company received payments from Russian tax-resident in the sum of 100 euros on the 21st of January, 300 euros on the 24th of February and another 100 euros on the 2nd of April, the company will report 400 euros as a tax base for the 1st quarter (January, February and March) of the year.

When reporting, the company should convert 400 euros into Russian rubles. Let’s assume that the exchange rate on the 28th of February is 73,25 rubles to 1 euro. So, the tax base is equal to 29 300 Russian rubles (400*73,25) and the company will pay 4 884,31 Russian rubles (29 300 * 16,67%). Take note that in this case, the tax return should be made no later than the 25th of April.

Is there an obligation for foreign companies to open a bank account on the territory of the Russian Federation for the purposes of Value Added Tax?

Generally speaking, there is no such obligation. Foreign suppliers of electronic services may pay their Value Added Tax from bank accounts opened outside of the Russian Federation, but in Russian rubles, converting the funds at the relevant date’s exchange rate. However, the foreign company may open a bank account in Russia for acceptance of funds from Russian counterparts, reducing problems with currency control. However, in the event, the foreign company pays more than it should have, the foreign seller may apply for a refund of overpaid amount, provided that such amount be refunded only to the bank account opened in Russia.

What are the penalties for non payment of Russian VAT for foreign providers of electronic services?

In the event, a foreign provider fails to register for Russian Value Added Tax, the Federal Tax Service of Russia may impose a penalty of 10% on revenue generated. Furthermore, if the foreign provider fails to register and pay for Russian Value Added Tax on electronic services, it could attract a penalty of 20% of the tax due.

Lawyers of L&T International can support your business with the following:

Analysis of whether services offered by your company maybe considered as electronic services and should your company be registered for Russian VAT or not.

Our lawyers may also assist you in:

  1.  Registering foreign entities with the tax authorities and further VAT compliance support,
  2.  Calculating taxes payable,
  3.  Preparing and filing tax returns,
  4.  Preparing payment orders for taxes and penalty fee payments (if any),
  5.  Communication with the tax authorities of the Russian Federation.

Law & Trust International provides tax planning, legal support for taxation, and is also ready to assist in assessing the amount of taxes, financial payments, settlements, payment orders, document flow, and much more.