04.02.08

Starting January 1, 2008 software developers received permission not to pay VAT on software license sales. However, the exemption does not extend to retail sales of software sold in individual boxes, according to a letter by Deputy Finance Minister to the Information and Computer Technologies Industry Association. Thus, experts believe the exemption offered to innovating companies is mostly neutralized.

The federal law #195 “On Introducing Amendments to Individual Legislative Acts of the Russian Federation as Part of the Formation of Beneficial Taxation Conditions for the Financing of Innovative Activities” was passed by the State Duma in the summer of 2007 as an attempt to create tax incentives for IT-companies. The law includes provisions for VAT exemption of sales of scientific, research-and-development, design, experimental and engineering projects aimed towards creation of new or improvement of already existing products or technologies. Under the law amendments were made to the Tax Code concerning the profits tax and the VAT procedure was simplified. A total of 3-4 billion rubles in tax savings is foreseen for IT-industry due to the amendments.

Implementation of new chapter of the Tax Code entailed many questions from market participants. The Information and Computer Technologies Industry Association addressed the Ministry of Finance with a request to explain, whether VAT must be paid on retail sales if a store sells not only licenses but also a physical medium (disc) and user manual in the box.

The Ministry of Finance replied with a letter on December 29, 2007, explaining that, since at the time of retail purchase of software in a box, the software is not being used and the license agreement is not completed. Therefore, operations to transfer exclusive rights to packaged computer programs are subject to VAT, unless written license agreement is signed at the time of purchase. It means that VAT on retail sales of “boxed” software must be paid according to the standard procedure.

Software distributed through commercial agents (dealers, distributors), where a transfer of rights from the manufacturing company through agents to the end-user based on completed license agreements, according to the Federal law # 195, is now freed from VAT.

This explanation from the Ministry of Finance did not seem too exciting for the market participants. Meanwhile, manufacturers and sellers divided their assortment of products into two categories: boxed software will continue to be sold with VAT, and licenses – without it. Manufactures expect final sale prices for all categories to remain the same.

At the same time with the tax-exemptions law, starting January 1, 2008, Part IV of the Civil Code came into force, introducing stricter responsibility for copyright violations, including use of unlicensed software. Violators may be charged 10,000 rubles to a maximum of 5 million rubles. 

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