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Changes in taxation of foreign companies that provide electronic services

6 April 2018

Since the beginning of 2017, Russia has had a special procedure for imposing value added tax (VAT) on services provided in electronic form by foreign companies that have no branch or representative office in Russia. Such taxation features are informally known as the 'tax on Google', as they apply primarily to large internet companies.

Electronic services

The electronic services taxed under the special procedure include:

  • the granting of rights to use databases and computer programs (eg, computer games), including through the provision of remote access thereto;
  • the provision of advertising services and the placement of proposals for the purchase or sale of goods (including works and services) on the Internet;
  • the provision of domain names, hosting services and services for the administration of information systems and websites;
  • the granting of rights to use e-books, information and educational materials, images, music and audiovisual works through the Internet;
  • the provision of services for finding and presenting information about potential purchasers to customers;
  • the provision of access to web search engines and the maintenance of website statistics; and
  • the provision of other services through the Internet or remote access to information and technical resources.
Payment of VAT

If a foreign company provides electronic services to individuals and the services are recognised as having been provided in Russia, the company must register with the Russian tax authorities and pay VAT. However, if such electronic services are rendered to Russian legal entities or individual entrepreneurs, the latter parties must act as a tax agent and withhold VAT from payments to the foreign company and transfer it to the Russian budget. At the same time, if such a tax agent is a VAT payer and complies with specific conditions, it can deduct the VAT withheld from the payment to the foreign company.

Recent changes

Federal Law 335-FZ of November 27 2017, which will enter into force on January 1 2019, will introduce significant changes to the above procedure.

The main changes are as follows.

Exemptions from tax agent VAT duties

From January 1 2019 Russian organisations and individual entrepreneurs will be exempted from the duties associated with tax agents with regard to the payment of VAT on services that they purchase from foreign organisations in electronic form. Rather, a foreign organisation that provides services in electronic form or its agent involved in settlements with the buyer must calculate and pay VAT. This means that foreign organisations that sell such services to Russian legal entities must register for taxation purposes in Russia as VAT payers and pay this tax independently. This innovation will affect many foreign companies, including some that are not directly related to the internet technology field. For example, international hotel chains working under a franchise model provide franchisees with access to a centralised website so that they can manage online bookings and have remote access to client databases. If a franchisor levies an extra fee for providing such services to Russian franchisees, these services can now be considered electronic services provided in Russia. In addition, whereas the franchisees would previously have acted as a tax agent when paying the fee to the franchisor, following the law's enactment, the franchisor must register with the Russian tax authorities and pay VAT on the cost of such services independently.

Offsetting VAT

When purchasing services in electronic form from foreign organisations, the claimed VAT can be offset without issuing an invoice (the main document of tax control required to pay VAT in Russia). Following the introduction of Federal Law 335-FZ, in order to offset this VAT on electronic services, a foreign organisation must be registered as a taxpayer for electronic services. Further, in order to confirm the payment of VAT, it must:

  • have a contract with a foreign organisation or a settlement document (account) specifying the tax amount and the Russian identification number of the taxpayer of the foreign organisation; and
  • provide documents confirming payment in the foreign organisation's favour.

The former VAT payment procedure for Russian taxpayers that buy electronic services will expire on January 1 2019.


Foreign organisations that provide services in electronic form to Russian buyers are advised to register for tax accounting in Russia as VAT payers, as Russian counterparties will likely refuse to purchase electronic services from parties that fail to do so. This is because Russian counterparties will be unable to deduct VAT paid to such foreign organisations, which will result in significant financial losses. In this regard, parties are advised to register for tax accounting in advance of the law taking effect, as this process takes at least 30 working days.