In 2021, we wrote and talked a lot about the IT maneuver and tax benefits for IT companies with respect to income tax and insurance contributions that started to apply starting January 1, 2021. As a reminder, a criterion for receiving these benefits is the involvement of a company in adaptation and/or modification of computer software and databases (hereinafter the “S&DB”).

Throughout 2021, the Russian Ministry of Digital Development gave periodic explanations as to the new terminology. On September 7, it published a letter defining the terms “development,” “installation” and “support” in relation to S&DB, and on October 11, it published a letter on the criteria for qualifying companies developing S&DB for tax benefit purposes.

However, a year after the IT maneuver law was implemented, the interpretation of the terms “adaptation and modification” turned out to be the key issue, since a company’s right to enjoy tax benefits largely depended on how the inspection authorities interpret these terms.

Meanwhile, the Russian Tax Code provides no definition for these terms, and civil law regulations have become considerably outdated in this respect.

The absence of clear criteria led to the situation where during 2021, in order to take advantage of the benefits, businesses took careful measures to adapt their operating structures and relations with clients to the new conditions, while sending endless queries for clarification of these terms to the Russian Ministries of Finance and Digital Development and relying on the old Russian tradition of happy-go-lucky attitude.

Finally, on January 27, 2022, the Russian Ministry of Digital Development published Letter No.P11-2-05-200-3571 (hereinafter the “Letter”) with explanations and examples defining the meaning of “adaptation” and “modification.” In particular, according to the Ministry:

• “Modification of S&DB” means any alterations, including translation of a program from one language to another;
• “Adaptation” means comprehensive configuration, integration or upgrading of S&DB according to the specific requirements of an organization. Moreover, adaptation and modification may include changes in the source code, executable object code or related documents.

The Ministry of Digital Development also notes that the adaptation and modification requirement that organizations need to fulfill to receive benefits does not mean that as a result of these services a new finished product, e.g. a modified or adapted S&DB, needs to be created or developed.

In addition, the Letter states that such services may be rendered under contracts of any kind, since priority is given to the substance of services rendered. It seems that by doing so the Ministry of Digital Development expresses in its own words a well-known “substance over form” principle, which is a long-time favorite with tax specialists. Despite the obviousness of this remark, such expressed mention in the Ministry’s Letter sheds light on numerous questions which inevitably arose throughout the past year as to what kind of agreement to enter into and how the tax authorities would regard it.

Furthermore, the Ministry of Digital Development provides the list of documents that can be used to confirm that adaptation and modification services have been rendered, which includes any documents that specify the manner of services and describe how services on support, testing and installation of S&DB relate to the “adaptation” and “modification.”

In our opinion, there is another important remark that should be noted, since it allows to resolve frequent concerns of the business community and to avoid an overly narrow interpretation of the conditions for applying the tax benefits. In particular, the Ministry’s Letter states that adaptation or modification can both precede (including under previous agreements) and intermediate or be part of S&DB installation, testing or support. Accordingly, the Ministry admits that these actions are often part of a single process due to the specifics of the industry, and businesses engaged in such activities can apply for benefits too.

We presume that the new explanations of the Ministry of Digital Development will to a great extent help IT companies receive tax benefits, since the Ministry gives quite a broad definition of the services that can be considered “modification” and “adaptation.”

Early last year, while assessing prospects of the benefits, we revealed many gaps in the legal provisions in this area. Currently, we can say that a series of letters has at least provided clarifications on the main pillars of the IT maneuver, thanks to which we can now be more confident about whether a company is entitled to benefits or not, relying on the position of the Ministry of Digital Development.

We believe these clarifications will be helpful in reviewing the business model changes already made in 2021 and in planning future changes. Our tax associates would be glad to offer their expertise and conduct a comprehensive assessment of your business to determine whether you can apply for the relevant benefits.