New tax regime for IT assets in 2021 - Possible solutions and risks in business restructuring
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
New tax regime for IT assets in 2021 Possible solutions and risks in business restructuring The development of information technologies and the growth of the IT sector of the Russian economy has been one of the priorities of the economic policy of the Russian Government for several years. For example, companies developing and maintaining computer programs have been using reduced rates of insurance premiums for more than ten years. In addition, VAT exemption for the transfer of software rights based on license agreements has long been valid. In 2020 against the background of an economic decline due to coronavirus the Government of the Russian Federation decided to conduct an IT maneuver in the Russian IT industry. Its main features are enshrined in the Federal Law No. 265-FZ[1], of 31 July 2020, which amends the Tax Code of the Russian Federation (hereinafter referred to as “the Law”). Key provisions of the Law come into force on 1 January 2021. Even more significantly the Law reduces the rates of insurance premiums for IT companies (from 14% to 7.6%) and establishes a reduced income tax rate of 3% for them decreasing the overall tax burden of IT companies and making them more competitive than other tax jurisdictions. At the same time, these tax benefits for IT companies are of indefinite nature and allow IT businesses to build long-term financial and tax business models. Keep in touch [1] The Federal Law № 265-FZ of 31 July 2020 “On amendments to the second part of the Tax code of the Russian Federation”
Income Social
tax contributions
Standard rates
20 % 30 %
Standard rate
Reduced rates for
14 % software developers
7,6 %
Reduced rate
from 2021 3% Reduced rates
from 2021
At the same time Russian IT companies or deeply integrated and localized businesses with foreign
capital will be able to benefit from new regulations even more by means of use of a new format of
VAT exemption for the transfer of rights to software and databases, which is now applicable only
in case such software and databases are registered in a special Russian software register.
It is also important to understand that such a preferential tax regime creates certain fiscal and
strategic expectations for financial regulators. Thus, the Ministry of Finance of Russia notes in its
press release: “The IT sector will not only be the driver of the economy now, but also in the future
will act as insurance in case of a repetition of unforeseen situations that the whole world faced, for
example, during a pandemic”.[2]
Nevertheless, we are convinced that the Law provides good opportunities for developing and
increasing the financial liquidity of the business of a wide range of companies involved in the IT
sphere, which will allow those companies to gain competitive advantages.
1. Companies that will be able to take advantage of preferences for
income tax and insurance premiums
The new tax regime applies equally to two main and interrelated areas of the IT industry, namely:
▪ companies providing software development
▪ companies providing hardware development and design
Moreover, while for IT companies, in fact, only the income tax rate and insurance premium rates
are being reduced, and the criteria in this sector are well known, for hardware developers this
regime is being introduced for the first time.
It is necessary to notice that due to the digital transformation of business,
many manufacturing and trading groups of companies have created their
own IT intragroup companies developing and supporting the use of
software.
These IT divisions can also apply the new tax regime if they meet the
regime requirements and undergo the necessary restructuring (see
paragraph 3 of the Alert).
[2] https://minfin.gov.ru/ru/press-center/?id_4=37115-o_nalogovom_manevre_v_it-otrasli
2
(а) Requirements for software developers
The requirements for applying reduced insurance premium rates have been known and some IT
companies have been applying them for over 10 years. Therefore, for this category of companies,
the main positive news will be the indefinite duration of such measures and the reduction of the
tax burden on income tax to 3%. For companies that think about starting to apply preferential
treatment, the actual criteria will be applied, complicated in some cases by existing controversial
issues and risks.
For the purposes of applying the new regime, the following Russian companies are recognized as
“IT companies”.
:
90% «IT income»
In particular, there are three main groups relating to “IT income”, namely income from:
1) transfer of rights to developed software and databases
2) provision of services (execution of works) for the development, adaptation and
modification of software, databases, programming features and information
products of computer technology
3) provision of services related to installation, testing and maintenance of software
and databases that were developed by the organization or adapted / modified by it
However, several important questions remain open today related to the qualification of income
as IT income for the purposes of applying the benefit. For example, in accordance with the civil
law, software or database development can be carried out by re-development of existing
(original) software or database. Although it is not known how the tax authorities will
characterize income from such “re-developed sources” for the purpose of benefit application,
especially if the sources are of foreign origin or derived from a related party.
The question also remains open as to whether the list of IT income is closed or it may include
income from other services, for example, if the service or activity is an integral part of a
directly named service.
Based on our practice of structuring contracts and activities within groups of companies, the
range of income taken into account as “IT income”, can be successfully and reasonably
expanded considering the peculiarities of a particular business activity, and such an approach
will most likely be applied in practice in 2021.
Accreditation in the Ministry of Digital Development, Communications and
Mass Media
To get accreditation, it is required to check the formal features of the company's activities
(Russian Classification of Economic Activities (OKVED) codes, Charter requirements, etc.) for
compliance and send a package of documents to the Ministry of Digital Development,
Communications and Mass Media of the Russian Federation. It should be taken into account
that after adoption of the Law the number of applications for accreditation has significantly
increased, which in practice may lead to an extension of the monthly period for making an
accreditation decision.
Personnel requirements
The average number of employees for the reporting (tax period) should be at least seven
people. The Law does not contain any other requirements for staff, but based on our practice
of applying the existing edition of the IT benefit, the structure and qualifications of staff are
important, for example, the ratio of IT and other specialists, the compliance of the
qualifications of IT specialists with the developed software or database, etc. Individual
discrepancies may result in tax risks of making claims against the reality of the received IT
income.
In this regard, before applying the preferential tax regime, it is necessary to analyze the
company's employment documents (employment contracts, job descriptions, etc.), as well as
clearly define the structure and nature of the activities of subcontractors. 3(b) Requirements for hardware developers
For Russian organizations engaged in the design and development of electronic component base
products and electronic (radio-electronic) products, the preferential tax regime provided by the
Law is an innovation. Not all the conditions for its application have been detailed at the level of
by-laws now. At the same time, the approach is largely based on the experience of the application
of benefits on insurance premiums by IT companies, in particular, the following similar
requirements are imposed:
90% of the income consists of the development and design of “hardware”
In particular, the amount of income from services (work) realization for the design and
development of electronic component based products and electronic (radio-electronic) products
according to the results of the reporting (tax) period should be at least 90% of the total
income. It should be noted that the Law does not provide for any restrictions in relation to the
customers of such services and the origin of equipment, therefore, income from the
development and design of electronics for a foreign customer should also be taken into
account.
Inclusion in the register of the Ministry of Industry and Trade of the Russian
Federation
At the moment, a regulatory framework is being developed for the formation and
administration of the register of companies that provide services for the development and
design of hardware. In particular, the Draft Decree of the Government of the Russian
Federation has been published, which establishes the procedure for forming a register of
hardware developers [3]. Inclusion in the register assumes limitation of foreign investments
into the developer company, however, it does not exclude the possibility of applying a
preferential tax regime by companies that design and develop foreign products (hardware).
Also, the Draft Decree of the Government of the Russian Federation in fact expands the list of
products, services and the income from which should be taken into account in order to apply
the benefits within the framework of the concept of the “Electronics Design Center”. However,
it is not clear to what extent such an expansive approach will be perceived by the tax
authorities in practice.
Personnel requirements
The average number of employees for the reporting (tax period) should be at least seven
people. As well as for an IT company, the Law does not establish any additional requirements
for employees, their qualifications, etc. In this regard, before starting to apply the preferential
tax regime developers and designers of “hardware” should make sure of the correct execution
of the workforce and the structure of subcontractors.
[3] Draft Decree of the Government of the Russian Federation "On maintaining the register of organizations providing services
(performing work) for the design and development of electronic component base products and electronic (radio-electronic)
products"
42. Change in VAT exemption: who will win, who will lose?
In 2021 VAT taxation exemption for transfer of exclusive rights and rights to use software and
databases stipulated by Subclause 26 of Clause 2 of Article 149 of the Tax Code of the Russian
Federation will undergo a significant change. In particular, the said exemption will be subject
exclusively to the transfer of rights to software and databases included in the special Unified
Register[4] (hereinafter – “the Register”) administered by the Ministry of Telecom and Mass
Communications of Russia. The main requirements for inclusion in the Register are as follows:
▪ restrictions on foreign participation in a Russian company that owns an IT asset;
▪ lawful introduction of IT assets into civil commerce on the territory of the Russian
Federation;
▪ a sufficient degree of localization in the development of an IT asset (not more than
30% of a foreign element)
In 2021 the transfer of rights to software and databases from foreign suppliers in practice will be
subject to VAT at a rate of 20%. If the products (part of the products) of a foreign company are
closely related to the Russian market the management is ought to think about restructuring the
supply chain in order to be included in the Register and localize key IT products.
For Russian companies starting from 2021 the inclusion of software and databases in the Register
will be a question of not only participating in public procurement, but also exemption from VAT in
order to maintain a competitive price.
We believe that the issue of the inclusion of software and databases to the Register should be
decided by the company's management based on the status of customers, the structure of VAT in
the company and current business needs.
Use of software for online advertising and websites
The new preferential treatment for IT companies does not apply to the transfer of rights to
software and databases that are used to distribute advertising information over the Internet and
(or) gain access to such information, as well as for the operation of websites. In particular,
proceeds from the sale of these products are not included in the company's “IT revenues” and are
subject to VAT taxation that cannot be exempt.
For this reason, it is very likely that from 2021 the monetization of IT products through
advertising or the freemium model will become less commercially attractive for some companies.
[4] https://reestr.minsvyaz.ru/reestr/
53. Restructuring for the purpose of applying
a preferential tax regime
Contacts:
A significant reduction in the tax burden on income tax and
insurance premiums as well as changes in the VAT taxation
of the transfer of software products can be a trigger for the
start of restructuring of the group's divisions that have
accumulated IT assets.
The most common and cost-effective way to combine IT
assets today is to create an IT hub in the Russian
Andrey Grachev
Federation. Based on our experience IT hubs created as a Head of Tax Practice in Russia, Сounsel
Center of Excellence, Shared Service Center or their
hybrid version will fall under the preferential tax regime in T: +7 495 662 6434
2021. M: +7 903 157 0912
andrey.grachev@
It is important to consider the general tax anti-evasion
eversheds-sutherland.ru
rules provided in Article 54.1 of the Tax Code of the Russian
Federation, in particular the requirement for a reasonable
business purpose as the main goal pursued in the
implementation of any restructuring. Therefore, the
absence of a correctly formulated and documented concept
that reflects the business goal of restructuring IT assets
may lead to refusal of the tax authorities to apply a
preferential tax regime and recalculating of the company's
tax liabilities.
Anton Borisichev
The restructuring of IT assets is a complex procedure that Senior associate
should be carried out subject to the rules of corporate, tax,
labor and commercial legislation taking into account the T: +7 495 662 6434
peculiarities and procedures for the transfer of intellectual M: +7 903 173 5025
rights. anton.borisichev@
eversheds-sutherland.ru
The legal practice of Eversheds Sutherland in Russia
successfully provides its clients with such complex solutions
with the involvement of lawyers from different practices,
which allow them to restructure IT assets in the most
complete and efficient way.
eversheds-sutherland.ru
© Eversheds Sutherland 2020. All rights reserved.
Eversheds Sutherland LLC is part of a global network
that functions as various legal entities under the
brand Eversheds Sutherland. Eversheds Sutherland
LLC's Taxpayer Identification Number (INN) is
7703618107. The information provided in this legal
alert may not be considered as professional advice or
legal services and is not advice related to a specific
situation. This information is intended for the general
review of the users in relation to issues that may be
of interest to them. Eversheds Sutherland is not liable
[4] https://reestr.minsvyaz.ru/reestr/
for incomplete information.You can also read
