The Russian Ministry of Finance has issued the first official clarifications on the new VAT regime on electronically supplied services provided by foreign suppliers ("ESS" or "e-services"), which enters into force from 1 January 2019.1

Vat Payment Mechanism Under B2B Transactions

  • According to the new rules, foreign suppliers providing e-services to Russian companies and individual entrepreneurs ("B2B customers") will be required to tax register in Russia, collect, report and pay VAT on their sales to Russian customers. Currently, Russian B2B customers act as tax agents, withhold the applicable VAT and transfer it to the Russian budget.
  • Previously, it was not clear whether Russian B2B customers were required to act as tax agents if a foreign supplier of ESS was not tax registered in Russia. The Ministry of Finance clarified that Russian B2B customers do not have such an obligation, regardless of whether the foreign ESS supplier is tax registered in Russia.2

Eligibility to Recover Vat

  • Starting from 1 January 2019, Russian B2B customers will be able to recover the "input" VAT paid to foreign ESS suppliers based on the following documents: (i) an agreement and/or a transaction document that separately indicates the applicable VAT amount, tax ID ("INN" in Russian) and basis for tax registration ("KPP" in Russian) of the foreign ESS supplier; and (ii) a document confirming the payment (including of applicable Russian VAT) to the foreign ESS suppliers.
  • The following base options are now possible:
    • Russian B2B customers will have the right to recover the "input" VAT only if the foreign supplier of ESS is tax registered in Russia.
    • If the foreign supplier is not tax registered in Russia, Russian B2B customers will have no right to recover the "input" VAT in any event, including when voluntarily paying the applicable VAT to the budget as tax agents.

Recommended Actions 

  • Review cross-border agreements to check if they provide for ESS:
    • if this is an intragroup charge, then start planning to tax register the foreign ESS provider entity in Russia and consider opening a bank account for that entity with a Russian bank for VAT payment purposes. In parallel, analyze whether such intragroup ESS can be segregated from non-electronic services and contractually re-routed through another legal entity;
    • if this is a third-party charge, ensure that the service provider be tax registered in Russia. Otherwise, consider sourcing the services from an alternative provider or renegotiating commercial terms, given that the embedded Russian VAT cost will be non-recoverable for the Russian customer.
  • Explore alternative structuring opportunities, which may include:
    • relying on specific exemptions from the definition of electronic services (e.g. a service ordered through the Internet, but physically provided without the use of the Internet), or
    • retaining a local cash collection agent (that also can be a related party

Through various business associations Baker McKenzie's Moscow Office is continuing to work on providing further expert recommendations and formulations of the draft law aimed at amending these rules, which have not yet come into effect and that potentially will be problematic for many companies operating in Russia.

For a more detailed overview of the application of Russian VAT regime on ESS from 1 January 2019, please see our previous Legal Alert of March 2018.


1. The changes are introduced by Federal Law No. 335-FZ "On the Introduction of Amendments into the First and Second Parts of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation" of 27 November 2017.

2. Russian Ministry of Finance Letters No. 03-07-05/65680 of 13 September 2018 and No. 03-07-08/62624 of 3 September 2018.

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