On 1 January 2019, Federal Law No. 303-FZ of 3 August 2018 should come into force, providing of an increase of the basic VAT rate in Russia from 18% to 20%. The VAT rate applied by Russian tax agents (estimated tax rate) will increase from 15,25% (18/118) to 16,67% (20/120). The reduced VAT rate in Russia for certain groups of goods should be preserved at 10%. The reduced VAT tax agent rate (estimated tax rate) should remain at 9,09% (10/110). The reduced VAT rates are applied to social goods (services), food, children goods, periodicals and books related to education, science and culture, as well as to medicines and medical products. Also, the new law does not imply changes to the existing VAT benefits.
The increase of the VAT rate in Russia entails an increase in the tax burden on both Russian and foreign entities.
Under the Russian tax law foreign entities are liable to pay VAT in the following cases:
The sale of goods and services in the Russian Federation through a permanent establishment (PE)
Foreign entities performing business activities in Russia through a permanent establishment are required to obtain Russian tax ID and pay VAT itself to the Russian budget according to general Russian VAT rules and applying general tax rates (18%, 20% since January 1, 2019, and 10%).
The sale of specific work and services in Russia without a PE if Russia is recognized as the territory of the sale
The sale of the following work and services is subject to Russian VAT:
1.Work and services directly related with the real estate located in Russia including construction, installation, repair, restoration, landscaping, rental services;
2. Work and services are directly related with the movable property including air and water vessels, located in Russia. Such work and services include, in particular, installation, assembly works, repair and maintenance;
3. Services in the sphere of culture, art, education (training), physical culture, tourism, recreation and sports actually provided in the territory of the Russian Federation;
4. Specific work and services if the customer is located in Russia
The following work and services are recognized as sold on the Russian territory if the customer is located in Russia:
- Provision of patents, licenses, trademarks, copyrights or other similar rights;
- Development of computer programs and databases, their adaptation and modification;
- Provision of consulting, legal, accounting, auditing, engineering, advertising, marketing services, information processing services;
- Secondment services (if employees work in the place of activity of the customer);
- Lease of movable property (with some exceptions);
- Provision of services of the agent attracting the person (an entity or an individual) for provision of the abovementioned services.
The amount of VAT from the foreign company income received from provision of the services mentioned in (1) – (4) should be withheld by the Russian customer as a tax agent.
5. Digital services provided to Russian customers (entities, self-employed entrepreneurs and individuals)
- Russian tax law contains a wide range of digital services provided through the Internet sale of which is subject to Russian VAT (ex. provision of using rights for software, advertising services etc.).
- Foreign providers of digital services should be registered on the special Internet-portal of Russian tax authorities and receive tax ID.
- If the customer is a Russian entity or self-employed entrepreneur, such customer withholds VAT from price paid for received services.
- If the customer is a Russian individual the foreign company (provider of digital services) should pay VAT itself through a special Internet – portal of Russian tax authorities. If the payment for digital services is proceeded by an intermediary between the individual (customer) and the provider of digital services, such intermediary acts as a tax agent and withholds VAT.
Russian tax law contains many cases when foreign companies performing business directly with Russian customers or through intermediaries should be recognized as taxpayers of Russian VAT. Underpayment of Russian taxes (including VAT) might lead to penalties and fines. We recommend to revise your business relationships with Russian partners to identify possible VAT risks at the Russian level.
WTS Russia team has wide and comprehensive experience on indirect tax consulting services and is glad to solve complicated VAT issues for you and your clients. If you have specific questions about the new VAT rate in Russia please do not hesitate to contact the WTS experts in Russia!
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