How Does the Russian VAT System Work?

Value-Added Tax, or VAT, is a form of consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The Russian Federation utilizes a VAT system that applies to a wide array of goods, works, and services transacted within its jurisdiction.

Applicability of Russian VAT

Taxpayers include Russian-domiciled legal entities and individual entrepreneurs. Organizations and entrepreneurs using the Simplified Taxation System (STS) are also recognized as VAT payers if their income for the preceding calendar year exceeded 60 million rubles. Foreign companies can also become VAT payers if they operate through a registered permanent establishment in Russia or if they supply certain electronic services directly to Russian customers.

VAT liability is triggered by specific taxable transactions. The most common of these is the sale of goods, performance of works, or rendering of services within the territory of the Russian Federation. This scope also extends to the transfer of property rights and the importation of goods into the country. For a transaction to be subject to Russian VAT, the “place of supply” must be determined to be within Russia.

For goods, the place of supply is Russia if the goods are physically located within the country at the moment ownership is transferred. The rules for services are more varied and often depend on the location of the recipient. For many professional services, such as consulting, legal, accounting, and engineering, as well as for digital and electronic services, the place of supply is deemed to be Russia if the customer is located or has its main business activities in Russia.

If a U.S.-based software company sells a license to a customer in Russia, that transaction’s place of supply is Russia, obligating the U.S. company to register and account for VAT. This principle ensures that tax is applied based on the location of consumption, a standard practice in international VAT regimes.

VAT Rates and Calculation

The Russian tax system employs several VAT rates, with the applicable rate depending on the specific nature of the goods or services being sold. The standard VAT rate, which applies to most transactions, is 20%.

In addition to the standard rates, a different structure applies to certain taxpayers on the Simplified Taxation System whose income exceeds 60 million rubles. A 5% rate applies to those with annual incomes between 60 million and 250 million rubles, and a 7% rate is used for incomes between 250 million and 450 million rubles. A key feature of these rates is that taxpayers using them are not entitled to deduct the input VAT they pay on their business expenses.

A reduced rate of 10% is applied to certain socially significant goods. Categories of goods that qualify for the 10% rate include many basic foodstuffs, a range of products designed for children, and specific medical supplies and equipment.

A 0% VAT rate also exists, which is distinct from a VAT exemption. The zero rate is primarily applied to the export of goods from Russia and to international transportation services connected with these exports. While no VAT is ultimately collected from the final customer on these sales, the transaction is still considered a taxable supply. This allows the exporting business to recover any input VAT it paid on its own costs associated with producing or acquiring the exported goods.

Calculating the VAT amount is a direct process based on the tax base, which is typically the selling price of the goods or services, excluding the VAT itself. The formula is straightforward: the tax base is multiplied by the applicable VAT rate to determine the VAT amount. For example, if a service with a net price of 10,000 rubles is subject to the standard 20% rate, the VAT amount would be 2,000 rubles, making the total price for the customer 12,000 rubles.

VAT Exempt Goods and Services

Certain transactions fall entirely outside the scope of the VAT system and are classified as exempt. It is important to distinguish this from the 0% rate; while zero-rated supplies are technically taxable, exempt supplies are not. A significant consequence of this distinction is that a business making only exempt supplies cannot recover the input VAT it pays on its related business expenses.

The Russian Tax Code specifies numerous categories of goods and services that are exempt from VAT. A prominent category includes many medical services and the sale of specific, vital medical equipment. Educational services provided by non-commercial, licensed institutions are also typically exempt from VAT.

Financial services represent another major area of VAT exemption. Most operations conducted by banks and other financial institutions, such as issuing loans, managing securities, and processing payments, are not subject to VAT. The provision of insurance and private pension fund services also falls under this exemption.

VAT Registration and Invoicing Requirements

Entities are required to register for VAT when they engage in taxable activities. For Russian entities, this is often part of the general business registration process. Foreign companies supplying electronic services or operating through a permanent establishment must complete a separate application with the Federal Tax Service, submitting an application form along with supporting documents.

A central document in the Russian VAT system is the official tax invoice, known as the schet-faktura. This document is mandatory for all VAT-able transactions and serves as the primary evidence for the buyer to claim a deduction for the input VAT they have paid.

The schet-faktura must contain specific, mandatory information to be considered valid, and official formats must be followed precisely. This includes:

• Sequential invoice number and date
• Full names and addresses of both the seller and the buyer
• Respective Taxpayer Identification Numbers (TIN)
• A clear description of the goods or services
• The quantity and the price per unit
• The total tax base
• The applicable VAT rate
• The final calculated VAT amount

Filing VAT Returns and Payment Procedures

Businesses registered for VAT in Russia are required to file tax returns on a quarterly basis. The deadline for submitting these returns is strictly set for the 25th day of the month that follows the end of the reporting quarter. For example, the return for the first quarter (January to March) must be filed by April 25th.

Submission of VAT returns must be done electronically. Paper filings are generally not permitted, making it necessary for businesses to use either the official online portal provided by the tax authorities or government-approved third-party software.

After the VAT return is filed, the calculated tax liability must be paid to the Federal Tax Service. The deadline for payment of the total VAT liability for the quarter is the same as the filing deadline. Payments are made via bank transfer to the accounts of the tax authority.

It is common for the tax authorities to conduct a desk audit of the submitted return. This automated review compares the data in the return against the vast amount of data collected from other taxpayers’ invoices. If discrepancies are found, the tax authority will issue a request for clarification or additional documentation.