What happened?

On July 14, 2022 the President RF signed Federal Law No. 321-FZ "On Amendments to Part Two of the Tax Code of the Russian Federation" (hereinafter referred to as the "Law"). The Law expands the range of IT companies that will be able to qualify for tax benefits and introduces new preferences for IT businesses, including:

• Accelerated depreciation.
  

The law allows the application of an accelerated depreciation factor (no more than 3) for: 

• depreciable fixed assets included in the unified register of Russian radioelectronic products;
• exclusive rights to computer programs and databases from the unified register of Russian programs.

The changes will take effect on January 1, 2023.

What does this mean in practice? Expenses for the acquisition of the above-mentioned assets can be recognized for profit taxation purposes more quickly.   

• Benefits for IT companies on income tax and insurance premiums 

Expanding the range of beneficiaries 

The law expands the range of activities from which income will be recognized as "IT revenue" for the purposes of benefits. In particular, these revenues will include: (1) revenue from providing educational services; (2) revenue from providing access to different content (e.g. movies and music); (3) revenue from selling online advertising; (4) revenue from selling developed software-hardware systems, etc. 

Restrictions on types of activities

The law explicitly states the types of activities from which income will not be counted for the purposes of the benefits. For example: (1) provision of cab services; (2) provision of goods delivery services; (3) provision of financial services; (4) provision of opportunities to participate in organized trading; (4) provision of services related to real estate transactions, etc. 

A.V. Sazanov, Deputy Minister of Finance of the Russian Federation, clearly stated his position regarding the above restrictions - "In general, all these amendments are aimed at ensuring a balanced approach between the development of IT-industry and the revenues of the RF subjects, so that some individual organizations that are already highly profitable would not receive additional preferences in the form of profit tax benefits and insurance premiums. The amendments are aimed at preventing organizations such as IT departments of banks, certain highly profitable companies such as "Yandex.Taxi" or "Yandex.Delivery" and other cab and food delivery services from applying benefits on profit tax and insurance premiums, because the margins of these businesses are quite high".

Mitigating the criteria for exemptions

In order to receive the benefits[3] an IT-company will have to meet the following conditions: (1) availability of accreditation, (2) the share of revenues from IT-activities - not less than 70% (previously it was 90%). The requirement for the number of employees has been abolished (previously there was a threshold of at least 7 people). 

Who will not be able to claim benefits? 

The Law stipulates that the following entities will not be able to apply: (1) companies established as a result of reorganization after July 1, 2022; (2) companies in which the state owns over 50%.

What does it mean for business?

The adoption of the Law shows that the trend of government support for the IT industry continues. At the same time, certain provisions give grounds for reflection, for example: 

• The Law excludes the possibility of applying a 3% profit tax rate (the current version of the Tax Code suggests that this rate will be applied after 2024).
  
• The limitation on the possibility of applying the tax exemption to companies that will be created as a result of the reorganization after July 1, 2022; we believe that such wording may eventually create a basis for disputes with the tax authorities on the issue of compliance of the Group structure (in which an IT-company functions as a separate legal entity) with the requirements of Article 54.1 of the Tax Code.
  

In view of the above, we believe that businesses should assess the provisions of the Law as to their applicability to the activities of the organization.

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[1] Amendments are made to paragraph 2 of Article 259.3 of the Tax Code

[2] Changes were made to paragraph 1.15 of Article 284 of the Tax Code and Article 427 of the Tax Code

[3] Income tax and insurance premiums