04.04.08

Taxation In Russia: Giving IT A Break?
Elizaveta Titarenko,
Audit Specialist, Alinga Consulting Group

The Russian government has pledged to do more to support and nurture the information technology (IT) industry as a valuable and growing part of the Russian economy. As such, taxation for IT is currently in flux. There are a handful of specific tax breaks already in place, although they have done little to actually spur the industry or to significantly reduce its tax burden. More tax breaks are being considered, but the likelihood they will be passed – or effective – is unclear.

IT Companies should take advantage of any tax breaks they qualify for and should be aware of what legislation may soon affect their industry. This article will strive to bring readers up-to-date on these two fronts.

IT is defined by Russian law as processes or methods for search, collection, storage, processing, assignment, and propagation of information and the ways of implementing and using such processes and methods. This is according to Article 2 of Federal Law # 149-FZ from 27 Jul 2006 titled "On Information, Information Technologies and the Protection of Information."

For tax purposes in Russia, those companies working in the IT sector are those which develop and sell software, whether on disk or via electronic transfer. The type of contract it is sold under is not important for qualifying for this status.

Companies rendering services or providing work towards developing, adapting, or modifying software, including installation, testing, and maintenance are also included.

The Russian State Duma is considering adding a new chapter to the Tax Code titled "A System of Taxation for Organizations Operating in the Information Technology Sector." The law would create an opt-in special system of taxation for the IT industry. This system would replace profit tax, property tax, and the Unified Social Tax with a single "IT Tax," calculated at 6% of gross profit. In addition, VAT would be applicable only to goods and equipment imported by the company, but not in any other instance. Other taxes and duties would remain in accordance with the general tax regime. This new chapter has not yet become law and has been under debate since 2006.

The current Tax Code offers IT companies a few tax beaks that can be used today. For example, Point 6 of Article  241 states that the regressive scale for calculating Unified Social Tax (UST) for employees of IT companies moves down when the tax base is 75,000 RUR or more. For other types of companies, this reduction occurs only at 280,000 RUR. See the table below for details.

Table 1.
The Regressive Scale for Unified Social Tax

Tax base for individual employees, calculated from the beginning of the year	Federal Budget	Social Insurance  Fund	Mandatory Health Insurance Fund		Total
			Federal	Local
< 75,000	20.0%	2.9%	1.1%	2.0%	26.0%
75,001 < 600,000	15,000 + (S - 75,000) *7.9 %	8120 + (S - 75,000)*1.0%	3080 + (S - 75,000) *0.6%	5600 + (S - 75,000)*0.5%	19,500 + (S - 75,000)*10.0%
> 600,000	56,475 + (S - 600,000)*2.0%	7,425	3,975	7200	72,000 + (S - 600,000)*2.0%

Note: S = taxable salary of the individual
Note: All numbers not indicated as percentages indicate amounts in Russian Rubles
Note: figures in red indicate maximum annual payments to the fund

This special tax scale can only be used by IT companies, not resident in one of Russia's Technology-Innovation Special Economic Zones, which have their own special tax structures. Companies not resident in those zones and hoping to qualify for the tax breaks, must satisfy the following conditions established in Point 8 of Article 241 of the Tax Code:

1. The IT company must obtain state accreditation from the Ministry of Information Technologies and Communications.
2. For nine months of the previous year, earnings from the development of software must comprise not less than 90% of company earnings. Moreover, 70% of earnings from IT-activities must be received from companies based outside of Russia. In this case, the client companies can be shareholders in the IT company. It also does not matter if the entire 70% comes from one customer – even if that customer is also a shareholder. The earnings from foreign companies should be documented by a contract and with documentation of the completed work. The earnings can also be proven by an export customs declaration with documentation on the release of the goods.
3. The last condition to qualify for the special UST rate is that, for at least nine months of the previous year, the company must have had at least fifty employees.

All three conditions must be met; if even one of them is not met, the company is not eligible for the reduced rates. In this case, a company may have to recalculate taxes due from the beginning of the year. Newly created companies may use the income and number of employees for the current tax period, rather than the previous year.

Since the beginning of 2008, IT companies selling software licenses can also qualify for zero-percent VAT (according to Article 149 of the Tax Code).

The Ministry of Finance has specified that, for these purposes, licensing only occurs with a written agreement between the licensor and the licensee (Letters from the Ministry of Finance from 29.12.2007 № 03-07-11/648 and from 25.12.2007 № 03-07-11/640).

It is important to note that software sold on a retail level is still subject to VAT. (Letters from the Ministry of Finance from 15.01.2008 № 03-07-08/07 and from 29.12.2007 № 03-07-11/649). This is partly to protect the rights of the software developer. Rights to use software, bought by a customer, cannot be re-licensed to someone else by the customer; according to Point 4 of Article 454 of the Criminal Code of the Russian Federation, software distributors and distributors must work only on the basis of buying and selling. As they cannot sell license agreements, they are not eligible for the tax incentive.

Lastly, IT companies meeting the requirements laid out for UST benefits are also eligible for breaks on profit tax.

IT companies can write off from their profit tax base the full cost of any computer technology purchased, including installation costs and other costs required to putting the investment into use. This is done by taking advantage of Paragraph 15 of Article 259 of the Tax Code, which allows IT companies to elect not to use the method of amortization described by Article 259 with respect to computer technology purchases. If an IT company chooses this option, investments in computer technology can then be treated as expenses under Point 3 of Paragraph 1 of Article 254 of the Tax Code.

 
While these tax breaks may not be enough to truly spur the growth of the industry (which is rapidly growing despite the lack of effective spurring), the tax breaks can help to reduce a company's individual tax burden. We can only hope that in the future, more effective legislation will be passed. As always, a company's best approach to legally reducing its tax base and boosting profits is to consult with a good tax accountant who is carefully following the changing legislation.  

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