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MGI GNK Group announce important changes to Russian VAT law

15th November 2018

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Elena Kurochkina from MGI Worldwide member firm MGI GNK Group outlines significant changes to VAT law in Russia, with regards to the e-services business in the country, including relevant business dealings with companies abroad.

From 1 January 2019 foreign suppliers of electronic services to Russian legal entities will be obligated to register for VAT purposes in Russia and pay tax themselves rather than use a withholding tax agent in Russia. Russian business customers will no longer be required to act as tax agents and pay VAT with respect to e-services acquired from foreign suppliers. From 1 January 2019, the VAT rate applicable to e-services will be 16,67%.

Examples of electronic services potentially triggering VAT registration

  • Intercompany (management) charges of foreign headquarters to Russian subsidiaries that include elements of e-services (e.g. provision of rights of access to corporate platforms (such as SAP), databases via the Internet)
  • Provision of access to software, databases, platforms, data storage capacity via the Internet by foreign IT companies to Russian companies
  • Provision of software via the Internet to a Russian company for further distribution to end-users in Russia
  • Provision of a web-based platform for establishing contacts between sellers and buyers (such as Booking, Expedia, eBay and other similar platforms)

We are ready to assist foreign legal entities that sell e-services to Russian legal entities in all aspects of incorporating these new rules, including the initial diagnostic review, setting up the new process, on-going VAT compliance, communicating with the tax authorities, and preparing replies to tax requests.

Business implications for foreign companies

The business implications for foreign companies (and intermediaries) may vary depending on the role performed in the sale of e-services (i.e. as a services provider, agent, etc.) to Russian consumers. Registration of a foreign company as a VAT payer in Russia is required if it directly receives payments from B2B or B2C customers. VAT registration is also necessary when VAT-exempt e-services have been provided.

In view of the obligation to register, foreign e-service suppliers may potentially need to consider restructuring their sales channels, for example, by establishing a Russian subsidiary as the seller in Russia and transferring some of the functions of the foreign e-service supplier to that Russian subsidiary.

If a foreign section of a Russian legal entity is an intermediary in a complex e-services supply chain, it may be difficult identifying which party should act as the VAT agent for a foreign e-services supplier. This is why intermediary legal entities should structure their transactions carefully with counterparties, and pay close attention to the wording of related contracts.

Russian customers who purchase e-services subject to VAT from foreign suppliers, will not be able to claim for recovery VAT charged on respective e-services if a foreign service provider is not registered as a VAT payer in Russia.

For more information please contact MGI GNK Group here.

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