TOPICAL ISSUES OF TAXATION IN THE IT INDUSTRY

Benefits for the IT sector;

Starting from 2021, accredited legal entities engaged in IT activities have enjoyed a number of tax incentives, including preferential rates for income tax and insurance contributions.

In its letter dated 23.11.2020 No. 03-03-06/1/101948 the Ministry of Finance of Russia noted that it is not necessary to notify tax authorities of the application of preferential tax rates for income tax as well as the transition to payment of insurance contributions at reduced rates established for organisations involved in IT activities.

The Federal Law No. 321-FZ of 14.07.2022 has amended the Russian Tax Code to adjust benefits for the IT sector.

The Russian Ministry of Digital Development has summarised the main points:

• 1. Income tax is set at 0% until 31.12.2024.
• 2. Insurance premiums - 7.6%.
• 3. The quantitative measure for the share of revenue that qualifies for tax relief has been lowered from 90% to 70%
• 4. The list of businesses eligible for the 0% income tax and 7.6% insurance contribution rates has been expanded.
• 5. The list of IT activities revenues from which are included in IT revenue and enable a company to receive benefits has been expanded. For example, implementation services for Russian products will now be treated as a core revenue.
• 6. The requirement as to the number of employees (minimum of 7) to qualify for benefits has been removed.
• 7. Suppliers who provide Saas solutions through closed networks will also be able to receive benefits.

All the above items are effective from 01.01.2022.

The benefits have been extended to companies that receive revenues from:

• sales of online advertising on platforms;
• services for the refinement, implementation and support of any Russian software;
• providing paid access (including subscriptions) to content (films and music);
• placing advertisements in advertisements;
• development and sale of Russian hardware and software systems;
• provision of educational services through online platforms.

Important additions are also noted:

1.Companies that are reorganised or established as a result of a reorganisation (except for transformation) after 01.07.2022 will not be able to benefit from the exemption. The exemption applies to reorganised companies that:

• received an income tax exemption until 01.07.2022. They will continue to benefit from the income tax exemption;
• received a benefit on insurance contributions in 2022. They will be able to continue receiving this benefit (see also Letter No. 03-03-06/1/78713 of the Russian Ministry of Finance dated 12.08.2022).

2. Organisations in which the State has a direct and/or indirect shareholding of at least 50% may not:

• take advantage of income tax relief if they did not receive it before 01.07.2022;
• take advantage of the insurance contribution exemption if they did not receive it in 2022.

3. The procedure for accreditation of IT organisations has been amended to take into account the changes in the types of activities attributed to IT activities by the new law in order to receive benefits. The Regulation on State Accreditation of Russian Organisations Conducting IT Activities was approved by Resolution No. 1729 of the Russian Government of 30.09.2022.

In its Letter No SD-4-2/3289@ dated 17.03.2022, the Federal Tax Service clarifies that the tax authorities view an reorganisation itself that results in the IT division becoming a separate legal entity by dividing the legal entity or by spinning off another company, as an action which indicates the existence of a tax avoidance scheme ("division of business" and an unlawful receipt of tax benefits, etc.).

In its Letter No. SD-19-2/163 dated 12.07.2022, the Federal Tax Service clarifies that the method of setting up an IT company is not limited to cases of reorganisation. The provisions of the letter also apply to newly established IT companies and cases where an existing legal entity which is part of a group of companies will be converted into an IT company. The position of the Russian Federal Tax Service on this issue is similar in cases where the relevant employees are transferred to a newly established or transformed IT company, as well as in other situations specified in the letter.

Representatives of the Ministry of Finance of Russia in a letter dated 31.03.2022 No.03-04-05/26332 pointed out that exemption from personal income tax is not provided for IT-industry.

VAT exemptions

What is exempt from VAT:
From 01.01.2021, in accordance with clause. 26 п. Article 149(2) of the Russian Tax Code:

• Computer programmes included in the Unified Register of Russian Programs (from 01.01.2023 and (or) the Unified Register of Results of Research, Development and Technical Works for Military, Special or Dual Purpose);
• transfer of exclusive rights to databases, the right to use such software and databases (including their updates and additional functions) (including remote access to them via information and communication networks, including the Internet);

2) Updates of computer software and additional functions if they are carried out on the basis of an agreement on the transfer of the right to use the relevant software and database (additional agreement to the contract) (see letter of the Ministry of Finance of Russia dated 10.10.2022, № 03-07-05/97550, dated 28.07.2022, № 03-07-08/72877);

3)Services for the transfer of rights to use computer programs and databases if such programs and databases are registered in the Unified Register of Russian Computer Programs and Databases (“URRCPD”) (letter No. 03-07-08/54716 dated 09.06.2022 of the Ministry of Finance of Russia).

The letter of the Ministry of Finance of Russia dated 30.12.2020 No. 03-07-14/115984 clarifies that the subsequent assignment of such rights under the agreement, including the sub-licence agreement, does not affect the possibility of exemption from VAT.

The provisions of the updated clause 26(2) of Article 149 of the Tax Code do not apply. 2, Article 149 of the Tax Code does not apply if the right to transfer consists in distributing advertising information and (or) providing access to such information, placing offers to purchase (sale) goods (works, services), property rights in information and telecommunication network, including the Internet, searching for information about potential buyers (sellers) and (or) concluding of transactions (see also letter of the Ministry of Finance of Russia dated 25.08.2020 № 03-03-07/74723).

Accordingly, from 01.01.2021, transactions on the sale of exclusive rights to programs, databases not included in the URRCPD, as well as the rights to use the specified results of intellectual activity on the basis of a licensing agreement are excluded from VAT (see letters of the Ministry of Finance of 09.09.2020, № 03-07-14/79116, 01.09.2020, № 03-07-08/76516).

According to information from the Federal Tax Service dated 02.03.2021, VAT exemption for contracts concluded before 01.01.2021 for a definite period of time has been clarified as follows:

• for periods of software use in 2020, the VAT exemption applies, and for their use from 01.01.2021, the exemption applies only to software included in the URRCPD. Herewith, if the software was registered in the Register in the middle of the tax period, the exemption does not apply for the days preceding the registration in the Register (see also the letter of the Ministry of Finance of Russia dated 27.01.2022 No. 03-07-07/5364);
• in addition, computer software developers are entitled to income tax and insurance contribution exemptions, and there is information that the VAT exemption applies not only to developers but also to other participants in the software supply chain. IT companies eligible to participate in the Skolkovo project are entitled to choose between the IT exemption and the Skolkovo project exemption.

VAT charged to the taxpayer on property rights acquired for the sale of goods (work, services), advertising and marketing services, as well as on the transfer of rights in accordance with subparagraph 26 of Para.2 Article 149 of the Tax Code, can be recovered. The place of sale is covered by Article 148 of the Tax Code and is not considered as a territory of the Russian Federation (subparagraph 4 of paragraph 2 of Article 171 of the Tax Code).

Exemption from VAT on the sale of inventions, utility models, industrial designs, layout designs of integrated circuits, production secrets (know-how) and exclusive rights to the above intellectual property under licence agreements is governed by a separate subpara. 26.1 p.2 Article 149 of the Tax Code of the Russian Federation from 01.01.2021.

From 01.07.2022 par. 26.2(2) of Article 149 of the Tax Code exempts from VAT:

• a sale (transfer) of exclusive rights to inventions, utility models, industrial designs, integrated circuit topologies and know-how;
• rights to use certain results of intellectual activity under commercial concession agreements (tax exemption).

This exemption applies if the fee paid for the transfer of an exclusive right or the right to use certain results of intellectual activity is included in the price of the commercial concession agreement.

Income tax exemptions

The Federal Law No. 321-FZ of 14 July 2022 has introduced amendments to the Tax Code of the Russian Federation which adjusted benefits for the IT sector, including income tax. At the same time, the new procedure shall apply to legal transactions which have arisen since 01.01.2022 with account of special provisions set out in Art. 2 of the Law No. 321-FZ (see also information of The Russian Ministry of Digital Development of 02.08.2022, the letter of the Ministry of Finance of Russia of 12.10.2022 № 03-03-06/1/98693).

Thus, in accordance with Article 284, Paragraph 1.15 of the Tax Code, the income tax rate for organisations active in the field of information technology for the period from 2022 to 2024 is 0%, starting from the tax period in which the document certifying the state certification of organisations active in the field of information technology was obtained. The Regulation on State Accreditation of Russian Organisations Acting in the Field of Information Technology was approved by the Russian Government’s Resolution No. 1729 of 30.09.2022.

It should be noted that one of the criteria for accreditation of an organisation is the average monthly salary of its employees. Therefore, the average monthly amount of payments and other remuneration made in favour of employees of IT companies cannot be less than the average monthly salary in Russia or its regions. The Federal Tax Service of Russia in its letter No. ZG-3-11/13312@ dated 28.11.2022 describes the technical mechanism for calculating this indicator. At the same time, tax authorities explain that employment status, e.g. full-time or part-time, does not affect the calculation of average monthly wages and other remuneration paid to employees.

In its Letter No. SD-4-3/763@ dated 25.01.2023, the Federal Tax Service clarifies that if an IT entity has not received state accreditation or has not met the condition of 70% of income from IT activities in the first half of 2022, it will apply the general profits tax rate for the first half of the year. If such an IT-company meets these two conditions (the accreditation and 70% of income from IT-activities) for the period from January to September 2022, and for the calendar year, that company is entitled to a reduced rate of income tax on the tax base calculated cumulatively from the beginning of the tax period (i.e. from 01.01.2022) (see also letters of the Ministry of Finance of 02.05.2023 № 03-03-06/1/40180, of 26.04.2023 № 03-03-06/1/38345).

However, following the results of the reporting (tax) period zero tax rate is applied on the sum of all incomes of IT companies, taken into consideration when determining the tax base for profits tax, if more than 70% of income is listed in paragraph 1.15 of Article 284 of the Tax Code (see also letters of the Ministry of Finance of Russia of 26.04.2023 № 03-03-06/1/38347, of 08.11.2022 № 03-03-06/1/108354, of 18.08.2022 № 03-15-06/80750). Such income should be taken into account regardless of the place of business activity (see the letter of the Ministry of Finance of Russia No. 03-03-06/1/107451 dated 03.11.2022).

List of income types included in Section 1.15 of Article 284 of the Tax Code and included in the share of income from IT activities to apply reduced tax rates for insurance premiums is closed (see letters of the Ministry of Finance of Russia of 03.11.2022, № 03-03-06/1/107451, of 24.10.2022 № 03-03-06/1/102730, of 24.08.2022 № 03-03-06/1/82480, of 10.08.2022 № 03-03-05/77899).

The Ministry of Finance of Russia in its Letter dated 24.10.2022 № 03-03-06/1/102607 has clarified that income from IT services (works) can be included in the share of income for the application of zero rate of income tax with regards to:

• development, adaptation and modification of bespoke computer programmes. In other words, bespoke programmes and databases are computer programmes and databases (computer software and information products) whose development, adaptation and modification services (work) are performed by an IT organisation for its customers;
• installation, testing and maintenance of software developed, adapted and modified solely by the organisation (see also letters No. 03-03-06/1/96270 dated 05.10.2022 of the Ministry of Finance of Russia, No. 03-03-06/1/95062 dated 03.10.2022).

The amount of income is determined on the basis of tax accounting data in accordance with Article 248 of the Russian Tax Code and does not include the income referred to in point 2 and 11 of Article 250 and point 4.1 of Article 271 of the Russian Tax Code. Income from the transfer of receivables arising when income is recognised in accordance with Article 284.1.15 of the Russian Tax Code.

We would like to remind you that the Russian Ministry of Finance in its letter dated 09.11.2022 № 03-03-06/1/108933 indicates that income in the form of subsidies, except for subsidies received for reimbursable contracts, are not included in the amount of income of IT-organisations in order to apply section 1.15 of Art. 284 of the Tax Code.

If a taxpayer does not comply with the income distribution conditions at the end of the tax period or fails to obtain certification, they lose the right to apply the 0% tax rate from the beginning of the tax period in which the non-compliance or non-accreditation occurred.

At the same time, companies reorganised after 01.07.2022 or companies established as a result of a reorganisation (except for transformation) cannot benefit from this tax exemption. An exception is reorganised companies that were already exempt from income tax in 2022. Those companies may continue to use the tax exemption (part 3 article 2 of the Law No. 321-FZ, see also letters of the Ministry of Finance of 28.04.2023 No. 03-03-06/1/39358, of 05.09.2022 No. 03-03-06/1/86210, of 23.08.2022 No. 03-03-06/1/82028).

According to subparagraphs 19 and 21 of paragraph 1.15 of Article 284 of the Tax Code, regardless of other conditions stipulated by this section, the reduced corporate income tax rates will not apply in 2022 to organisations, in which the Russian Federation participates directly and (or) indirectly and its share is at least 50% (including credit organisations) (see also letter of the Ministry of Finance of Russia of 07.11.2022 № 03-03-06/3/107914).

At the same time, organisations in which the Russian Federation directly and (or) indirectly participates and the share of such participation exceeds 50%, if they received deductions for income tax in 2022, they will use the reduced income tax rates (part 3 article 2 of the Law ¹ 321-FZ, see also letters of the Ministry of Finance of Russia from 12.10.2022 ¹ 03-03-06/1/98693, from 15.08.2022 ¹ 03-03-05/79303).

Entities that are included in the same group with an entity are persons who are directly involved in the entity, or in which the entity and third parties are directly involved, and in both cases have a shareholding of at least 50%.

Reduced insurance premiums

The Federal Law No. 321-FZ of 14 July 2022 has amended the Russian Tax Code to change the procedure for applying preferential rates of insurance contributions for the IT sector. At the same time, the new procedure applies to legal relations arising from 01.01.2022, taking into account the specifics set out in Article 2 of Law No. 321-FZ. 2 of Law No. 321-FZ.

From 2023, the taxpayers specified in sub-paragraph 3 of paragraph 1 of Article 427 of the Tax Code and in sub-paragraph 18 of paragraph 1 of Article 427 of the Tax Code will apply a single reduced rate for insurance contributions (Article 427(2.2) of the Russian Tax Code):

• 7.6 % - up to a single ceiling for calculating insurance contributions;
• 0% - above the single base limit.

The reduced insurance contribution rates in the aggregate amount of 7.6% for Russian organisations engaged in IT activities apply subject to the conditions set out in paragraph 5 Article 427 of the Russian Tax Code:

• 1) Obtaining a document confirming state accreditation of an organisation dealing with IT or a certificate confirming the registration of an organisation as a resident of a Technology Innovative Special Economic Zone or the Industrial Manufacturing Special Economic Zone in accordance with the established procedure (see letters No. 03-03- 06/1/40180 of the Ministry of Finance of Russia dated 02.05.2023 and No. 03-03-06/1/38345 dated 26.04.2023);
• 2) according to the results of the reporting (accounting) period in the amount of all revenues of the organisation that carries out IT activities, taken into account in determining the tax base for corporate income tax in accordance with Chapter 25 of the Tax Code, not less than 70% of income from activities listed in paragraph 5 of Article 427 of the Tax Code (see also letter of the Ministry of Finance of Russia of 18.08.2022 № 03-15-06/80750).

If both of these conditions are met at the same time, an organisation that carries out IT activities is entitled to apply reduced insurance contribution rates.

An IT organisation cannot start applying the reduced insurance contribution rates before the month of receipt of the state accreditation document (see Letter No. 03-03-07/99719 of the Ministry of Finance of Russia dated 14.10.2022).

For the purposes of Paragraph 5 Article 427 of the Russian Tax Code, the amount of income is determined according to tax accounting data in accordance with Article 248 of the Russian Tax Code, and it does not include the income specified in clauses 2 and 11 of part 2 of Article 250 and clause. 4.1 of Article 271 of the Tax Code, as well as income from the assignment of debt claims that arose when recognising the income referred to in Article 427.5 of the Tax Code.

Income in the form of subsidies, except for subsidies received under a refundable agreement, are not included in the amount of IT-organisation's income for the purposes of applying p. 5 article 427 of the Tax Code (see letter of the Ministry of Finance of 09.11.2022 № 03-03-06/1/108933).

If, based on the results of the calculation period, the income share condition is not met, and if its state accreditation or resident status in a Technology Innovative Special Economic Zone or an Industrial Manufacturing Special Economic Zone is revoked, the organisation is denied the right to apply the reduced insurance contribution rates from the beginning of the calculation period in which non-compliance with the established condition was admitted, or the organisation is denied state accreditation, or an entry is made in the Special Economic Zone residents register that its resident status in a Technology Innovative Special Economic Zone or Industrial Manufacturing Special Economic Zone has been revoked. The Ministry of Finance of Russia in a letter dated 07.11.2022 № 03-03-06/1/107993 explains that the right to apply the reduced rate of insurance contributions for the reporting (accounting) periods in 2022 is confirmed by completing Annex 3 to Section 1 of the Taxpayer Contributions.

The Tax Code does not provide for the submission of an application to the tax authority for the purpose of applying the reduced insurance contribution rates and the reduced rate of income tax.

Companies that will be reorganised after 01.07.2022 or will be established as a result of a reorganisation (except for conversions) will not be able to benefit from the exemption. An exception applies to reorganised companies which already received the exemption for insurance contributions in 2022. They will be able to continue to benefit from this benefit (part 4 Article 2 of the Law No 321-FZ, see also letter of the Ministry of Finance of 28.04.2023 No 03-03-06/1/39358).

Companies in which the state directly and/or indirectly participates, and the share of such participation amounts to at least 50%, will only benefit from an insurance contribution exemption, if they obtained it in 2022 (part 4 article 2 of Act No 321-FZ, see also letter No 03-03-05/79303 of the Ministry of Finance of Russia dated 15.08.2022).

Article 2 of Law No. 321-FZ provides for transitional provisions:

• in the reporting (accounting) period of 2022 in determining the amount of all income of the organisation, taken into account in determining the tax base for income tax in order to apply paragraphs 3-6 and 8-16 of paragraph 5 of Article 427 of the Tax Code do not include income from the sale or other disposal of shares in the share capital of organisations, if at the date of sale or other disposal they were owned by the taxpayer over 1 year (part 1 of Article 2 of Law № 321-FZ);
• Taxpayers who have obtained a document of state IT accreditation and who, based on the results of the reporting periods - the first quarter and six months of 2022, subject to the provisions of Article 2.1 of Law No. 321-FZ, do not meet the income share condition provided for in paragraphs 3-6 and 8-16 of Article 5 of the Tax Code, from July 1 to 31 December 2022 have the right to apply the reduced rates for insurance premiums provided for in paragraphs 3-6 and 8-16 paragraph 5 of Art. 427 of the Tax Code, subject to the provisions of Part 1 of Art. 2 of the Act № 321-FZ, for the periods from July 1 to 30 September 2022 and from July 1 to 31 December 2022 (Sec 2 of Art. 2 of Act No. 321-FZ).