Forthcoming VAT changes in Russia

On 5 July 2022 the State Duma passed in the third reading a bill (draft law No. 136 059−8) proposing a number of amendments to Part Two of the Russian Tax Code. Among other things, the bill envisages the following changes to the VAT rules:

What do these changes mean for businesses?

The proposed changes to the rules for the payment of VAT on electronic services would require the current approach to the payment of tax in Russia to be revised. In particular, foreign companies and tax agents would need to reconfigure their accounting systems in line with the new requirements, review current contract provisions and adjust the formats of invoices and source documents.

Also, the process of adopting the new VAT mechanism would require advance planning, since the bill does not establish a transitional period. This means that foreign companies would need to discuss the new rules (including commercial implications) with their Russian counterparties.

How can B1 help?

The B1 team can provide prompt support in discussing matters relating to changes in the VAT rules for electronic services. Our services may include:

• Analysing the provisions of contracts with counterparties, preparing necessary adjustments and making amendments to contracts
• Participating in negotiations with counterparties
• Reviewing invoice and source document templates and making adjustments as necessary
• Reviewing transition issues and preparing a roadmap (based on the volume of electronic services, the type of services (B2B or B2C), and invoices issued and paid / not paid)
• Evaluating tax risks for a foreign company and a tax agent if the company decides to deregister for tax purposes in Russia
• Assessing the need to register for tax purposes for foreign companies that are only at the stage of planning to provide electronic services to Russian companies and private entrepreneurs
• Communication with the Federal Tax Service and/or the Ministry of Finance of Russia to obtain clarifications on the new VAT rules for electronic services.

Other VAT changes

The bill adds the following items to the range of operations not deemed subject to VAT:

• The provision of free services to connect gas-using equipment to gas networks in dwellings owned by individuals (subsection 22 of clause 2 of Article 146 of the Tax Code)
• The provision of free gas transmission and transportation services to individuals if the gas is used to ensure the continuous burning of an Eternal Flame and the periodic burning of a Memorial Flame at military burial grounds and memorials (subsection 23 of clause 2 of Article 146 of the Tax Code).

Amounts of input VAT on goods (work, services) purchased for the purposes of the above operations may be reclaimed and do not have to be subsequently restored (paid back) (paragraph 1 of subsection 2 of clause 3 of Article 170 of the Tax Code).

The new rules extend / amend the list of non-taxable operations:

• VAT will not be chargeable on sales of property and property rights to an individual by a foreign entity if the individual was a controlling person and/or founder of that entity as at 31 December 2021 in accordance with clause 60.2 of Article 217 of the Tax Code (subsection 39 of clause 2 of Article 149 of the Tax Code).
• The bill makes amendments to subsection 15 of clause 3 of Article 149 of the Tax Code according to which operations involving the financing of participation in credit (a loan) in monetary form, including interest thereon, would be exempt from VAT.
• Amendments are made to subsection 9 of clause 3 of Article 149 of the Tax Code which provide a VAT exemption for sales of precious metals in ingot form and polished natural diamonds by banks to individuals.

A 0% VAT rate would apply to sales of rough and polished diamonds to the State Precious Metal and Precious Stone Fund of the Russian Federation, regional precious metal and precious stone funds and banks (and to other organisations in the case of sales of rough diamonds) by taxpayers which carry out the extraction of precious stones (subsection 6.1 of clause 2 of Article 164 of the Tax Code).

The bill makes amendments to subsection 10 of clause 1 of Article 164 of the Tax Code according to which a 0% VAT rate would also apply to sales in 2022 of vessels owned by a Russian leasing company and registered in the Russian International Register of Vessels, provided that the documents specified in Article 165 of the Tax Code are submitted to the tax authorities.