Tax Preferences for IT Business in Russia
In his speech to the population on 23 June 2020, the President of the Russian Federation proposed to implement the so-called tax maneuver in IT sector providing for (i) a major reduction of the current tax rates and (ii) social security contributions for IT business (including for IT start-ups) with no time limit:
- for income tax: from 20% to 3%, and
- for social security contributions: from 14% to 7.6%.
The Federal Law dated 31.07.2020 No. 265-FZ “On making amendments to second part of the Tax Code of the Russian Federation” (hereinafter “Law”) was drafted by the Government, duly approved by the Parliament and the President and officially published on 31 July 2020.
Pursuant to the provisions of the Law, the income tax rate is supposed to be reduced from 20% to 3% and social security contributions — from 14% to 7.6% for Russian IT companies effective from 1 January 2021. The preferences mentioned above will be unlimited in time.
According to the Law, a company willing to use these preferences must meet the following criteria:
- be registered in Russia;
- operate in IT sector, e.g. develop and sell software and databases and/or provide software / database development, adaptation, modification services, install, test, and support software programs and/or databases;
- be certified by the Ministry of Digital Development, Communications and Mass Media of the Russian Federation. Certification is a formal and simple procedure consisting of the submission of an application and a statement certifying that the company does IT-related business issued by its director;
- have an average staff of 7 employees throughout the year at least; and
- generate at least 90% of its revenue from a certain type of IT activities, e.g., from sale of software / databases, software development and/or database installation, testing, support services, etc.
In addition, the Law contains other provisions, in particular, regarding adjustments of the preferences earlier adopted for IT industry.
Preferential Tax Regimes in Other Countries’ IT Sectors
Multiple foreign jurisdictions have already adopted and used special tax regimes, reduced tax rates, and other preferences for IT sector and other companies focusing on intellectual property assets e. Specifically, IT companies enjoy preferential regime in Cyprus, Ireland and India.
In 2012, Cyprus introduced a preferential tax regime for revenue from intellectual property assets. This regime has become known as “Intellectual Property Box” (abridged as IP-Box) and proved to be among the most attractive regimes of this kind in Europe in terms of substance. Effective from 1 July 2016, IP-Box was subject to major amendments due to the need to comply with the requirements of the Organization for Economic Cooperation and Development, but nevertheless, it continuously enjoys high popularity among IT companies located in Cyprus.
Under the framework of IP-Box, 80% of the so-called “qualifying profits” generated from “qualifying assets” is exempt from income tax. The remaining 20% of these profits is taxable at the rate of 12.5%. Thus, the effective tax rate is 2.5%.
Qualifying assets under the IP Box regime include:
- copyrighted software programs, and
- other intangible assets that are non-obvious, useful and novel.
As regards the qualifying profits, the IP Box regime adopts the ‘Nexus’ approach. Other intangible assets that are used in the applicant’s business and do not qualify for the IP Box regime may still benefit from other provisions of the Cyprus tax law, in particular, capital allowances and/or notional interest deduction (NID).
LawBridge Cyprus has extensive customer advising experience regarding creation of new companies in Cyprus to benefit from IP-Box regime, possibility of applying the regime to existing companies and groups, and structuring business to benefit from this regime.
We will keep you posted on the matters regarding further legislative changes concerning taxation of IT companies.