Taxation of foreign company income from services

Contents:

Taxation of foreign company income from services in Russia is a complicated question which requires detailed review of accounting and legal bases. This article provides information about taxation of foreign company income from services. Also, basic legal norms will be analyzed, and the conclusion will be made according to regulations.

What applies to the foreign company services?

According to Russian laws, services which are provided by foreign company, must be subjected to VAT. Russian companies that have to pay VAT for foreign companies services will obtain status as tax agents. The main difference in taxation of foreign company services is that existence of duty to pay VAT will be even those who is exempt from VAT. This rule is about Individual Entrepreneur and companies which use simplified tax system. Entity must calculate, retain and pay VAT when there are two factors:

• The place of realized services is Russian Federation
• Foreign companies are not registered in tax authorities or registered only due to the location of their real estate, transport or bank accounts in Russian Federation.

There are many different categories of services:

• Consulting.
• Marketing.
• Advertisement services.
• Transactions with real estate. The provision of the service is determined by the location of the company. Not for sea vessels.
• Transactions and other services with chattel. Refers to installation, repair, assembly, recycling and other types of maintenance at the location of the company. It is important to understand that if for repair company have to go to Russia, it will be VAT tax agent.
• Services in culture and art. They need to be on Russian territory.
• Services of foreign transporter (not EEU countries). The place of service realizing will be  Russian Federation if it is the end of the transportation. When it is a transit trough Russia there is no need to pay VAT.  Exemption is transportation services of passengers and luggage, which is provide by foreign entities not through their representative offices. If the logistic treaty concluded with taxpayer from EEU, the place of realization will be Belarus, Kazakhstan, Armenia or Kirgizstan.

According to the tax law Russian territory is not a place where foreign companies can realize Russian services or good. Also, it is about intermediaries which are not from EEU and which buying goods for Russian partners. This companies will not pay VAT to Russia respectively.

If the buyer is Russian taxpayer who purchase patents and licenses, consultations, legal or accounting services, contracted company will be VAT payer.

There are special factors:

• In the provision of foreign entities’ internet-services which are not from EAEU VAT will be defined “on purchaser”. If the work is with EAEU partners, the provision of internet-services will be important to identify the realization place. If the work is with EAEU countries, there will be no VAT.
• If the realization territory of services is Russia and EAEU country is registered in FTS, VAT payer will be identified through belonging these services to electronic. However, it is important to remember that Russian consumer can carry out the tax agent duties voluntarily.
• If the realization place of EAEU company services is Russian territory but these firms have to be registered in FTS, customers will pay VAT regardless of service type – on-line or off-line.
• If the foreign firm provide several service’s types  and realization is an additional services to main, the place of additional services’ realization will be the place of main services’ realization.

The contract and the certificate of work performed can confirm the fact of work or services.

How to identify the services realization place

In order to determine the place of sale of services, it is necessary to clarify which legal norms will be applied in this or that case.

In some cases, the priority of law will be with international agreements of Russia, so, for example, for services within the EAEU the country where the work is being realized or the country in which the company receiving the services is a taxpayer will be recognized as the place of sale.

In other cases, it is necessary to be guided by the provisions of Article 148 of the Tax Code of the Russian Federation.

Here are some examples related to different objects of taxation:

• Services related to real estate and chattel. The place of sale of such real estate-related services is determined by the location of the real estate or chattel. Accordingly, if services are provided on real estate objects within Russia, then the Russian customer will be a VAT tax agent.
• Services of a foreign carrier. Russia will be the place of sale of such services, provided that the point of departure and destination are located within its borders of the Russian Federation. However, it is also necessary to take into account the regulation established at the EAEU level. If a contract of carriage is concluded with a taxpayer of a member state of the EAEU, the place of sale will be considered the territory of this EAEU state. So, concluding a contract for the carriage of goods with a taxpayer of Belarus, Kazakhstan, Armenia or Kyrgyzstan, a Russian organization should not perform the duties of a VAT agent, regardless of the route of such a carrier.
• Services of foreign intermediaries. When foreign companies sell services of Russian companies or assist them in the sale, Russian companies will not be VAT tax agents. Russia will not be recognized as a place of implementation. In the current tax legislation, the definition of the place of sale of many services “by the buyer” is fixed. This means that the place of sale is the country of which the buyer is a taxpayer.

Obligations of a foreign organization in relation to taxation

A foreign organization which is providing services on the territory of Russia is obliged to register with the Federal Tax Service of Russia and obtain a unique identification number for making tax payments. In addition, it is also obliged to keep accounting records, submit monthly reports to the tax authorities and pay the appropriate taxes.

Taxation of the foreign country services

The amount of taxation of services of a foreign organization in Russia is established by the Tax Code. Foreign organizations are required to pay value added tax (VAT) in the amount of 20% of the amount received for services rendered. If Russian company is a VAT tax agent, it is obliged to calculate VAT in transferring funds to the account of a foreign company. This applies both to the transfer of prepayment and to the payment of services already rendered.

In 2023, the terms of VAT payment for tax agents were changed. VAT payments must be received within the framework of a single tax payment, in the amount of 1/3 of the calculated amount no later than the 28th day of each month following the last quarter.

How Russian companies should report about VAT

Companies that are VAT payers and are tax agents because of receiving services from a foreign company, submit a regular VAT declaration to the tax office, including section 2: “The amount of tax payment to the budget, according to the tax agent.” Section 2 of the Declaration is filled in separately for each foreign person.

Companies that are not VAT payers (applying the USN, PSN, as well as exempt from fulfilling the duties of a taxpayer according to Articles 145 and 145.1 of the Tax Code of the Russian Federation) must also submit a VAT declaration to the tax office at their place of registration no later than the 25th day of the month following the expired quarter in which the payment was transferred.

Regarding filling out the declaration, it is mandatory for these companies to fill out the title page and section 2 of the declaration. If there are no indicators to fill in section 1 of the declaration, dashes are placed in its lines.

For these companies, it is mandatory to fill out the title page and section 2 of the declaration. If there are no indicators to fill in section 1 of the declaration, dashes are placed in its lines.

Specific of taxation according to legal relations form

Taxation of services of foreign organizations may vary depending on the form of legal relations between the customer and the performer. For example, if services are provided under a contract, taxation is carried out according to established rule in contract.

Time to pay taxes

When buying or ordering works, the tax agent is obliged to charge VAT in one of two cases: when transferring an advance payment or after full payment upon completion of the work. In the case when the work is completed, but there was no calculation, there is no need to pay VAT. The tax is charged only at the same time as the payment for the work rendered and not earlier than this period.

Since January 1, 2023, there were different changes in Russian legislation. From this period, VAT is transferred in a general within the framework of a single tax payment: 1/3 of the calculated amount of VAT and no later than the 28th day of each month following the last quarter.

How to charge VAT

It is important to know that the VAT base for settlements with foreigners is the amount of income from the sale of these services, taking into account the Russian tax. The rate is 20%. Often foreign legal entities do not include VAT in the price of services, explaining that their cost does not reflect indirect taxes of another country. Then, in order to determine the tax base, it is necessary to increase the value specified in the contract by the amount of Russian VAT. The same is done if the foreign contract does not take into account the payment of Russian VAT. The legislation of the Russian Federation excludes the possibility of obtaining a avoid for non-payment by a foreign company.

Another key fact is that if companies are calculated in foreign currency the VAT base in rubles should be determined at the exchange rate of the Central Bank of the Russian Federation, effective on the date of payment for services. The VAT tax agent, when calculating the tax, must draw up an invoice according to the Russian model. Despite the fact that the deadline for issuing an invoice for a tax agent is not set by the norms of the Tax Code of the Russian Federation.

The document should reflect:

• In lines 2 and 2a — the full or abbreviated name and address of the foreign seller under the contract.
• In line 5 – the number and date of the advance payment for the transfer of payment to a foreign partner.
• Other lines are filled in in the usual order.

It is important to remember that if a Russian buyer independently calculated the VAT tax base by adding 20% over the cost of services in column 7 of the invoice you need to specify the estimated tax rate, and in column 9 – the cost of services including VAT.

The issued invoice must be registered in the sales book, in the quarter when the obligation to pay VAT arose.

Conclusion

Taxation of foreign companies services in Russia is one of the main and inextricable part of taxation system in Russia. Foreign companies which provide services in Russian territory must be ready to comply with the relevant tax obligations and pay taxes. A comprehensive study of the Russian regulation of taxation of services of foreign companies can help entrepreneurs minimize risks and ensure successful activity in the Russian market.

In case of problems or disputes related to difficulties in the taxation of companies, it is necessary to seek the help of competent lawyers. VALEN specialists will provide the necessary services related to the verification or preparation of documents, as well as conduct the necessary consultations.