Specifics of Taxation of Electronic Services in Russia

1) What qualifies as electronic services for tax purposes? Is there a list of such services?

According to definition set out in Article 174.2(1) of the Tax Code of the Russian Federation, electronic services for tax purposes are services provided via information and telecommunication network (including Internet) using information technologies. Such services include, among others, granting rights to use software and databases via the Internet, provision of advertising services online, data storage and processing. Article 174.2(1) also specifies operations that are not classified as electronic services, such as consulting services provided by email or sale of software on physical media.

2) Is a foreign company providing services electronically required to register for VAT purposes?

In the provision of electronically supplied services to legal entities, foreign companies are not required to assess or remit VAT in respect of electronic services where the place of supply is deemed to be the territory of the Russian Federation. In such cases, VAT must be calculated and paid by the tax agent — namely, the purchaser — in accordance with paragraphs 1 and 2 of Article 161 of the Tax Code of the Russian Federation, except where the services are supplied through a Russian intermediary acting as a tax agent pursuant to paragraph 10 of Article 174.2 of the Tax Code.

In the provision of electronically supplied services to individuals, the following entities are required to register with the competent tax authority:

• foreign companies supplying electronic services to individuals within the territory of the Russian Federation;
• foreign companies established in the EAEU that sell goods to individuals in the Russian Federation through electronic marketplaces owned and operated by them (including foreign sellers and foreign intermediaries);
• foreign companies acting as personal income tax withholding agents as defined in paragraph 1.1 of Article 226 of the Tax Code of the Russian Federation (foreign tax agents).

As foreign providers of electronic services, foreign sellers, foreign intermediaries, and foreign tax agents conduct their activities in the Russian Federation remotely, their registration applications must be completed and submitted electronically to the competent tax authority via the “VAT Office for Internet Companies” service available on the official website of the Federal Tax Service of Russia.

3) How is the place of supply of electronic services determined?

Pursuant to subparagraph 4 of paragraph 1 of Article 148 of the Tax Code, the place of supply of electronically supplied services listed in paragraph 1 of Article 174.2 of the Tax Code shall be deemed to be the territory of the Russian Federation where the recipient of such services conducts business activities within the territory of the Russian Federation.

4) What VAT rates apply to electronic services?

Under Article 164 of the Tax Code of the Russian Federation, VAT rate of 22% applies to electronic services of Russian service providers rendered in the Russian Federation.

5) Are there any thresholds for mandatory tax registration?

Russian legislation does not establish revenue thresholds or other quantitative criteria that would determine the obligation for foreign or Russian providers of electronic services to register for tax purposes. The obligation to register is determined by the presence of certain conditions, the nature of the activity, and the structure of the relationship between the provider and the customer.

Foreign organizations providing services to individuals in electronic form, foreign intermediary organizations conducting settlements with individuals when providing services in electronic form, and foreign organizations from the EAEU in connection with the sale of goods to individuals within the territory of the Russian Federation through their own electronic trading platforms (the organizations are listed in subparagraphs 1 and 2 of paragraph 1 of Article 174.3 of the Tax Code of the Russian Federation) must submit an application for tax registration no later than 30 days from the date of commencement of the relevant services. For Russian organizations and individual entrepreneurs providing services in electronic form, there are also no thresholds for tax registration. Russian service providers are subject to registration under the general procedure, just like other taxpayers. The obligation to register is determined not by the amount of income, but by the fact of carrying out activities subject to taxation.

6) What reporting and filing obligations apply to providers of electronic services?

If the supplier of electronic services is a foreign entity and the purchaser is a Russian legal entity, the Russian purchaser normally acts as the tax agent for VAT and corporate profit tax; accordingly, the Russian purchaser files VAT and corporate profit tax returns (Arts. 174.2, 306, 309 of the Tax Code of the Russian Federation).

If the supplier of electronic services is a foreign entity and the purchaser is a Russian individual who is not a sole proprietor, the foreign company must register with the Russian tax authorities and independently calculate, pay, and file returns for VAT and corporate profit tax (Arts. 174.2, 306, 309 of the Tax Code of the Russian Federation).

Russian suppliers of electronic services file tax returns in accordance with the tax regime applied by the supplier.

7) How are services supplied through marketplaces and platforms taxed?

Services provided through marketplaces and platforms are subject to VAT depending on who provides the service—a Russian or foreign entity—who the buyer is—an individual or a legal entity—whether the platform acts as an intermediary or an independent seller, and whether the service qualifies as an electronic service under Article 174.2 of the Tax Code of the Russian Federation.

Russian organizations and individual entrepreneurs providing electronic services through marketplaces pay taxes in accordance with their chosen tax system. A special regime under Article 174.2 of the Tax Code of the Russian Federation applies to foreign organizations.  

If the platform acts as an intermediary, the service provider pays VAT, and the marketplace charges VAT only on its own commission. If the platform is recognized as the actual seller, the platform is liable for VAT.

8) What are the risks and penalties for non-compliance with tax rules?

Russian law provides for both tax and administrative liability for failure to file tax returns or for late filing of tax returns.

Tax liability: a penalty equal to 5% of the unpaid (not remitted) amount of tax declared, for each complete or partial month of delay. However, the penalty may not be less than RUB 1,000 and may not exceed 30% of the tax unpaid within the period prescribed by the return (clause 1, Article 119 of the Tax Code of the Russian Federation).

Administrative liability: a warning or a fine in the amount of RUB 300 to RUB 500 (Article 15.5 of the Code of Administrative Offences of the Russian Federation) imposed on the responsible official (the director, chief accountant, or other authorized officer).

In addition to monetary penalties, the tax authority may block bank accounts, the digital ruble account and transfers of electronic money if the return is filed more than 20 business days after the deadline (clause 6 of Article 6.1, sub‑paragraph 1 of paragraph 3, and paragraph 11 of Article 76 of the Tax Code of the Russian Federation).

Authors: Oksana Afanasyeva, Alena Ivanova, Vyacheslav Khorovskiy