Changes in the taxation regime of sale of digital content in the territory of Russia

Law Firm Gorodissky & Partners informs the Clients about the significant changes in the tax treatment of Internet sales of digital content by the foreign companies to the Russian consumers.

On June 15, 2016 the State Duma of the Federal Assembly of the Russian Federation adopted in the third reading the Federal Law «On Amendment of the Part One and Part Two of the Tax Code of the Russian Federation» (hereinafter — the Law). The novelties contained in this Law, during its consideration, have been informally named as «Google tax», since they introduce significant changes in the regime of taxation in Russia of sale by the foreign companies of:

• services associated with the provision of remote access to computer software and databases,
• hosting services,
• transfer of rights on software, computer games, audiovisual and literary works, as well as
• provision of advertising services on the Internet and some other activities named in the Law as «services in electronic form».

The main novelty of this Law is the obligation of a foreign company providing services in the electronic form and/or selling its content online to the Russian consumers is to register with the Russian tax authorities. Such registration does not depend on the presence or absence of the foreign company’s representative office in the Russian Federation, or any other place of business, and. in itself. does not lead to creation of such representative office.

Foreign company providing services in the electronic form in Russia should register with the Russian tax authorities not later than 30 days from the date of the beginning of provision of such services, or, if the provision of such services has started, within 30 days from the effective date of the Law (January 1, 2017).

The services in the electronic form shall be deemed to be provided in the territory of Russia where any of the following conditions exists:

• if the customer is the resident in the territory of the Russian Federation;
• if the bank or the operator of electronic money, through which payment of services has been organized, are located in the Russian Federation;
• if the IP-address of the customer (used for the purchase of services) is located in the Russian Federation;
• if the international country code of the telephone number used for acquisition or payment of the services is assigned to the Russian Federation.

The cost of services in the electronic form provided in the territory of Russia is subject to VAT under the computed rate of 15.25% which should be calculated and paid by the taxpayer (foreign company).

If the foreign company providing services in electronic form in Russia will not submit an appropriate tax declaration and fails to pay the corresponding VAT, the Russian tax authorities should be entitled to perform an audit of this foreign company and to charge VAT basing on the available data about similar operations of other taxpayers.

The overpaid VAT may be returned by the foreign companies however they are not entitled to use VAT deduction.

The Law introduces revolutionary taxation amendments associated with the sale of software and services via the Internet in the territory of Russia and may potentially affect all foreign companies operating in the Russian market as well as Russian companies with foreign sales offices.

In this regard, we recommend making an assessment of tax risks related to the introduction of «Google tax» as well as the obligation to register with the Russian tax authorities from January 1, 2017.

We will be glad to give you a more detailed information/advice on the issue and/or provide other necessary assistance. For any questions you may contact Evgeny Alexandrov, Partner, Head of Legal Department, and Valery Narezhny, Counsel.