The Russian Government launched a program on June 28, 2021 to support rightsholders by reimbursing the cost of providing Russian software to small and medium businesses at a reduced cost (Government Decree No. 1031 dated June 28, 2021). This measure confers a significant advantage to Russian rightsholders although it gives rise to additional tax and other risks. We have outlined below the most significant risks and how to minimize them.

How to get reimbursement for reduced cost

Who is eligible for reimbursement?

Any Russian organization that has exclusive rights to Russian software can apply for support if the following requirements are met:

  • The organization is not subject to reorganization (except for affiliation), liquidation, bankruptcy proceedings, and the organization’s activities have not been suspended;
  • The organization is a tax resident of the Russian Federation;
  • The organization is registered in the Russian Federation;
  • The organization has not received and does not receive funds from the federal budget under other programs for similar purposes;
  • The organization is not a foreign legal entity or a Russian legal entity, in the share capital of which the participation share of foreign legal entities whose place of registration is an offshore zone, exceeds 50% in total;
  • The organization has no unfulfilled obligation to pay taxes, fees, insurance contributions, penalties and fines and no arrears on the repayment of subsidies, investments to the federal budget or other overdue (unsettled) debt on monetary obligations to the Russian Federation;
  • The organization’s head, board members, general director, manager, or chief accountant are not disqualified;
  • The average number of employees of the rightsholder applying for support cannot be fewer than 15 people for the previous calendar year;
  • The rightsholder’s proceeds from the sale of goods (work, services) for the previous calendar year, excluding VAT, amounts to at least RUB 10 million.

Application form on the Russian IT Development Foundation website

Applications are considered by a commission which determines the recipients of support with whom the Russian IT Development Foundation will enter into an agreement for cost compensation. The commission held 7 sessions from October to the end of December 2021. Extracts from the session minutes with lists of winners are published on the Russian IT Development Foundation website.

What software can be provided at a reduced price?

The list of programs that can be purchased by SMEs at a discounted price can be found on the Russian IT Development Foundation website: https://рфрит.рф/msp#soft. The Government Decree sets out that it is possible to provide such benefit when selling to small and medium businesses only for software programs that meet the following requirements:

  • The software program is included in the Register of Russian Software Programs and Databases;
  • The software program is used via the cloud;
  • The software is intended for one or more of the following purposes:
    • Increase in productivity, accuracy, or other essential features of technological and/or business process;
    • Improvement in quality or other essential characteristics of manufactured (supplied) goods, services rendered and performed works;
    • Increase in labor productivity;
    • Cost reduction (including by reducing defects) in the production (supply) of goods, provision of services and performance of work;

The Foundation providing this support as agreed with the Russian Ministry of Digital Development, Telecommunications and Mass Media (further the “Ministry of Digital Development”) may set out additional requirements for Russian software, and these requirements should be indicated in the selection notice.

So, for the selection announced in September 2021, the Foundation has already provided for updated software requirements. According to the classification provided by the Ministry of Digital Development, the following software programs are eligible:

  • Data storage software;
  • Information system for discipline-specific tasks;
  • Communication software;
  • Electronic document management software;
  • Process management software.

What documents need to be provided?

To apply for support, rightsholders must provide the following documents:

  • Application form;
  • Documents and information confirming compliance of the rightsholder and software with the provisions on application documentation;
  • Consent to the publication of information about the applicant, the submitted application, and other information related to the application.

The notification of the selection may also contain Other mandatory documentation may be specified in the notice of selection.

To whom can software programs be sold at a discounted price?

Any small and medium businesses may enjoy this benefit. The main eligibility requirement for purchasing software programs at a discounted price is for companies to be recorded in the SME register. Companies do not need to submit any reporting and/or documentary evidence.

Risks

1. The amount of compensation depends on the average market price. The average market price is determined based on a standard reimbursement agreement which can be found on the Russian IT Development Foundation website:

“The fixed software price is determined as follows:

  • in the authorized organization/rightsholder’s internal documents setting a recommended retail price, signed no later than three (3) months before the month of filing the application for participation in rightsholder selection and published on the authorized organization/rightsholder’s website or any other public resource on the Internet;
  • by a documented transaction for the transfer of Russian software to small and medium businesses in at least ten (10) transactions over the last three (3) months before the month of filing the application for participation in rightsholder selection.”

So, the amount of compensation may actually be less than the amount of the discount provided by the rightsholder to a small and medium business. This can be viewed as a risk for software suppliers given, for example, the possible changes in market conditions in a year (or during the validity term of the agreement with the Russian IT Development Foundation). The maximum amount of reimbursement is determined by the agreement concluded between the rightsholder and the Russian IT Development Foundation.

2. Risk of denial of reimbursement associated with tax risks. One of the conditions for receiving compensation is the absence of unfulfilled obligations to pay taxes, fees, insurance contributions, penalties, and fines. There may be situations where the rightsholder will be denied a refund of the discount if, for example, one of the regulatory authorities finds misstatements in the reporting on taxes, fees, insurance contributions, etc. So, tax risks and possible penalties will end up being even greater if the discount compensation is not received and will in fact entail a loss of 50% in revenue for such transactions.

Moreover, the Russian IT Development Foundation may under certain conditions demand the reimbursement of previously granted compensation. The standard agreement provides as follows: 

“5.2. If the Support Recipient fails to fulfill the objectives, procedure, and conditions for provision of support as identified by mandatory checks conducted by the Operator, the Russian Ministry of Digital Development, Communications and Mass Media and/or the state financial control authority, the Support Recipient undertakes to return to the Operator the support funds (part of the support funds) provided for reimbursement of costs.”

To reduce this risk, rightsholders may conduct additional interim audits of financial statements and consider the possibility of covering this risk with a liability insurance for the in-house accounting department or the outsourcer.

3. Additional unscheduled checks. Clause 3.7 of the draft standard agreement with the Russian IT Development Foundation provides as follows:

“Reimbursement is granted only with the Support Recipient’s unconditional consent for the Foundation, the Russian Ministry of Digital Development, Communications and Mass Media and/or the state financial control body to conduct mandatory checks of compliance with the objectives, conditions, and procedure for reimbursement of costs.”

We recommend rightsholders to ensure that they have all appropriate reporting and evidence to support the objectives and procedure for granting discounts.

Inspections with the participation of independent organizations and experts could also be possible:

“The Operator is entitled to:
4.4.2. Involve independent organizations or experts to perform control measures.”

4. Rightsholders must file reporting with the Russian IT Development Foundation as set out in the agreement with the Russian IT Development Foundation. The draft standard agreement with the Russian IT Development Foundation provides as follows:

“3.4. The following circumstances serve as grounds for returning Reporting Materials for revision to the Support Recipient:
3.4.1. Submission of reporting materials drawn up in a form not provided for in Appendices No. 2 and No. 3 to the Agreement and/or with the required information and/or signed by an unauthorized person;
3.4.2. Submission of reporting materials without all the documents (information, details) confirming the information specified in the reporting materials;
3.4.3. Submission of reporting materials containing contradictory and/or inaccurate details/information;
3.4.4. Errors and/or omissions made by the Support Recipient found in reporting materials.”

Failing to meet the deadlines for reporting to the Russian IT Development Foundation is also a ground for denying compensation:

“3.5.2. The Support Recipient has repeatedly submitted reporting materials for the reporting period after the deadlines specified in clause 4.1.6.3.1 of the Agreement, or without taking into account the comments previously sent by the Operator in accordance with clause 3.4 of the Agreement”

5. Risks related to the interaction with the Russian IT Development Foundation and the Ministry of Digital Development, as well as the risks associated with the Russian IT Development Foundation.  In this case, the Foundation acts as an intermediary for the distribution of subsidies, and in case of violations in its activities, companies may also face risks of non-return of compensation under agreements.

What is the timeframe for selecting rightsholders for support?

The Government Decree provides that the deadlines for support recipients are specified in the agreement for subsidies concluded between the Ministry of Digital Development and the Ministry of Finance, provided that recipients are selected within at least 30 calendar days of the date of publication of the selection announcement, and the date of publication of the list of winners (this list is published on the website of the Russian IT Development Foundation as extracts from the minutes of commission meetings) must be no later than the 14th calendar day after the commission meeting.

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