What taxes should be paid by a foreign company when selling services in Russia? All details about VAT in Russia. Part 1 of 2

Russia’s potential is huge, and it is not surprising that many foreign companies opening their branches and representative offices here.  Accordingly, one of the important issues facing foreign entrepreneurs is taxation in the provision of services in Russia.  In this article, we will try to understand this issue and reveal all the possibilities of taxation for foreign businesses.

 

Realization of works and services by foreign companies

The two main taxes that are levied on organizations are a value-added tax (hereinafter-VAT) and income tax. But in this article, we will focus on the first and consider how it is calculated, by whom and when it is paid.

The management of a foreign organization that has decided to fight for the Russian consumer must understand the specifics of the Russian market and tax legislation. And although the concept of VAT is familiar to almost any inhabitant, the order of work with this tax has its own characteristics in each country.

The Russian Federation is no exception in this sense: the activities of foreign companies are subject to taxation (including the already mentioned VAT). That is why, before expanding the area of its presence, it is necessary to understand how VAT is paid when selling services in the territory of the Russian Federation.

At the moment, there are two options: In the first case, the company independently calculates and transfers the amount of tax to the budget, in the second, all the same, is done by an intermediary-a tax agent. It all depends on whether the foreign organization is registered with the Russian tax authority-the Federal tax service (hereinafter-the FTS) or not.

In Russian legislation, there are such concepts as resident and non-resident.

 

A RESIDENT IS A NATURAL OR LEGAL PERSON REGISTERED AND REGISTERED ON THE TERRITORY OF THE RUSSIAN FEDERATION, AND NON-RESIDENTS INCLUDE ALL THOSE WHO DO NOT HAVE REGISTRATION (INCLUDING IN THE FEDERAL TAX SERVICE) IN RUSSIA.

 

If a foreign company is registered with the Federal tax service, the interaction with the tax office will fall entirely on its shoulders. Otherwise – if there is no registration with the tax authorities-sooner or later buyers of its services will have to think about what to do with VAT.

The tax code of the Russian Federation (hereinafter – the tax code) leaves no choice: the tax, in any case, must be paid. And this is exactly the situation when the buyer will act as a tax agent who solves all issues with transfers to the budget.

 

If services are provided to a non-resident

Let’s consider the reverse situation when the service is provided by a Russian legal entity to a foreign one, and find out how VAT will be paid in this case.

It’s quite simple: if the service was implemented in the territory of the Russian Federation, then VAT is payable in the prescribed manner. If it happened outside the Russian borders, taxation is not made. Now let’s move on to the logical question: what is the place of sale of services and how it is determined.

In Russia, such a form of business organization as individual entrepreneurship (hereinafter – IP) is quite common, which is usually referred to as the so-called small business. The activity of an individual entrepreneur can be connected with both the sale of goods and the provision of services.

Ambitious IP owners tend to strive for continuous development not only within the Russian borders but also beyond them. This explains their interest in whether the IP can provide services to foreign firms. And I must say that in this case there are no prohibitions: individual entrepreneurs, as well as legal entities, can enter into contracts, provide services, and conduct settlements with foreign companies. The order of taxation will not change either. The only point that needs to be taken into account concerns currency control: in the case of IP, it is more thorough.

 

Place of service

For the correct calculation of taxes, the place of rendering services is of great importance. The General rule can be formulated something like this: taxes should be transferred to the budget of the country in which the services were provided. For tax purposes, it is customary to distinguish several features that determine the place of sale of services.

The location of the property

This sign suggests that the services were associated with any property. The territory of the country where the property was located at the time of implementation of services will be considered the place of their provision. Accordingly, taxes will be calculated according to the legislation of the specified state.

Place of actual provision of services

This criterion is typical for services related to certain areas and objects of everyday life. As a rule, these include those services that are provided in stationary public institutions and organizations.

Buyer’s place of business

The place of sale of services can be recognized as the territory of the country where the buyer operates. It is important that this activity must be registered in accordance with the laws of the state.

Supporting documentation

The place of rendering services is confirmed by the following documents:

  • Contract;
  • Documents confirming the provision of services (for example, acceptance certificates, receipts, etc.);
  • When providing services in the electronic form to individuals (not IP) – registers of transactions indicating the cost of services.

 

Russian Federation: features of recognition of the place of rendering services

We consider what kind of taxation is subject to services that were provided in the territory of the Russian Federation. How to determine that the work or services were implemented on the territory of Russia? This issue is regulated by article 148 of the Tax Code of the Russian Federation.

IndicationWhen the Russian Federation will be considered a place of services
At the location of the property

1. Real estate (it includes everything that cannot be moved: buildings, structures, land, etc.) – construction, installation, restoration, landscaping, rent, repair, construction, and installation work.

2. Movable property, vessels (sea, air, inland navigation) – maintenance, processing, Assembly, installation, repair, processing.

At the place of actual realizationIf the organization or place where the service is provided is located in the territory of the Russian Federation. This criterion is applied to activities in the fields of art, culture, education, physical culture, sports, tourism, and recreation. Examples include holding various exhibitions, seminars, courses, buying design services, implementing services for organizing sports events, recreation centers, children’s and health camps, etc.
At the place of activity of the buyer of servicesThe place of activity of the buyer is the Russian Federation, if:
  1. There is a state registration;
  2. There is no state registration, but the territory of the Russian Federation is a place:
  • Specified in the constituent documents;
  • location of a permanent Executive body of the company;
  • The permanent establishment of the organization;
  • Organization management;
  • Residence of an individual.
This criterion applies to the following services:
  • Development of computer programs and databases;
  • Grant and transfer of licenses, patents, trademarks, copyrights, and similar rights;
  • Provision of personnel;
  • Accounting, consulting, auditing, legal, marketing, advertising, engineering, information processing;
  • Rental of movable property (except land vehicles);
  • Agency services;
  • Services in electronic form through telecommunication networks.

 

Exceptions

Special conditions apply for services related to transportation and transportation. They can be provided by both Russian companies and individual entrepreneurs, and foreign organizations that do not have registration with the Federal tax service. The Russian Federation will be recognized as the place of sale of such services in the following cases:

  • If vehicles for transportation (air and sea vessels, inland navigation vessels) are provided by Russian companies or individual entrepreneurs, and the point of departure and/or destination are located in the territory of Russia;
  • Transportation of goods under the customs transit procedure is carried out by organizations or individual entrepreneurs whose place of activity in Russia;
  • Pipeline transportation is provided by Russian organizations;
  • Transportation by air is carried out by Russian airlines.

 

Tax agents for VAT payment

A tax agent is an intermediary who calculates, withholds from the taxpayer and transfers the amount of VAT to the budget. A taxpayer is an organization whose activities are taxed under the legislation of the Russian Federation.

 

IN OUR CASE, A TAXPAYER IS A FOREIGN COMPANY PROVIDING PAID SERVICES, BUT NOT REGISTERED WITH THE TAX AUTHORITIES OF THE RUSSIAN FEDERATION.

 

It is because of the lack of registration with the Federal tax service that VAT for a foreign legal entity is paid by a tax agent.

 

The duties of a tax agent include:

  • Timely and correct calculation of tax, its deduction, and transfer to the budget;
  • Accounting of accrued and paid income to taxpayers;
  • Control of taxes (calculation, deduction, transfer to the budget);
  • Written notification of the tax Inspectorate about the inability to withhold tax and the amount of the taxpayer’s debt. The notification is sent to the inspection at the place of registration of the tax agent, the period of an informing-1 month from the moment when the agent learned about the formation of debt;
  • Providing supporting documentation;
  • Storage of documents on the basis of which tax calculations were carried out for 4 years.

A tax agent may be held liable for failure to perform its functions:

  1. In accordance with article 123 of the tax code. This occurs if the agent has not withheld/transferred or withheld/transferred the tax, not in full amount. A preventive measure-a fine of 20 % of the amount to be withheld/transferred.
  2. In accordance with article 199.1 of the Criminal code of the Russian Federation. This occurs if the failure to perform the duties of the tax agent was committed in personal interests. Information on how the number of outstanding liabilities for calculation, deduction, and transfer of taxes is classified and on the impact measures for non-fulfillment of obligations is presented in the tables below.

 

In large amountsAmount of taxes:
  • for three financial years in a row is more than 5 million rubles (while 25% of taxes payable are not calculated, withheld or transferred to the budget);
  • more than 15 million rubles.
In an especially grand amountAmount of taxes:
  • for three financial years in a row is more than 15 million rubles (with 50% of taxes payable are not calculated, not withheld and not transferred to the budget);
  • more than 45 million rubles.

 

Preventive measures depend on the amount of outstanding obligations.

Outstanding tax liabilitiesPossible measures of responsibility
In large amounts
  • fine from 100 to 300 thousand rubles or in the amount of income of the convicted person for the period from 1 to 2 years;
  • forced labor;
  • deprivation of liberty for a term of up to 2 years (it is also possible to deprive the right to hold certain positions or to carry out certain activities for a term of up to 3 years);
  • or arrest for up to 6 months.
In an especially grand amount
  • a fine of 200 to 500 thousand rubles or in the amount of income of the convicted person for a period of 2 to 5 years;
  • forced labor for up to 5 years (may also be deprived of the right to hold certain positions or carry out certain activities for up to 3 years);
  • or imprisonment for up to 6 years (it is also possible to be deprived of the right to hold certain positions or to carry out certain activities for up to 3 years).

To be continued  Subscribe to our news to be the first to know about the continuation of the article (the subscription form is located at the bottom of the web-page).

Please contact the BRB Ramo Group experts to discuss this topic or any other development issue for your business.

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