In recent years, interest in Russia as a jurisdiction for the development, delivery and operation of software and digital services has continued to grow.

At the same time, more and more foreign companies – from owners of global platforms to developers of niche SaaS solutions – face very specific tax issues when entering the Russian market. One of the most acute and underestimated of them is the procedure for taxation of so-called royalties in the context of subparagraph 4 of paragraph 1 of Article 309 of the Tax Code of the Russian Federation.

What does this provision say and why does it deserve special attention both for foreign suppliers and their Russian partners?

The essence of the rule: what exactly is taxable?

Subparagraph 4 of paragraph 1 of Article 309 of the Tax Code of the Russian Federation states: income of a foreign organization from sources in the Russian Federation includes income from the use of rights to intellectual property objects. This concerns payments for the granting of the right to use patents, trademarks, copyrights, models, drawings, know-how and even specialized information – for example, under technical consulting agreements.

Such payments are equated to royalties and are subject to withholding tax – that is, the Russian party must withhold tax from the amount transferred to the foreign right holder. The default rate is 20%, but in the presence of a valid double taxation treaty (DTT) and with proof of residency, the rate can be reduced to 10%, 7.5%, and sometimes even 0%.

SaaS mishaps: service or royalty?

The difficulties begin when it comes to providing access to software under the SaaS (Software as a Service) model. Formally, no exclusive rights are transferred under such a contract – the user is only given remote access to the service. However, in practice, the tax authorities (including the Federal Tax Service and the Ministry of Finance) are increasingly inclined to the interpretation that SaaS services are also subject to subparagraph 4, paragraph 1 of Art. 309. 4, paragraph 1, Article 309 of the Tax Code of the Russian Federation.

For example, Letter No. 03-08-05/38846 of the Ministry of Finance of Russia dated 27.04.2023 expressly states that if a contract provides for the granting of the right to use software, even in the form of access via the Internet, such a service may be regarded as an object of taxation in the form of royalties. In this case, the Russian client must withhold tax from the payment.

We should add: if a SaaS contract does not contain wording on the transfer (or granting) of rights to use IP, but such access is actually granted, the tax authorities have the right to qualify the relationship as taxable royalties.

Case studies: what the documents say

A number of letters from the Russian Federal Tax Service, the analysis of which is presented in the attached materials, emphasize that it is critically important what exactly is reflected in the contract. Thus, for example:

  • Technical support and administration services for web services, as stated in the summary opinion, are not recognized as subject to par. 4, paragraph 1, Article 309 of the Tax Code of the Russian Federation, as they are not accompanied by the transfer of rights. This is confirmed in Letter No. 16-15/056376@ dated 09.06.2011, where income from technical maintenance of a software product was not qualified as royalties.
  • Providing identification data for access to a service is a more controversial case. Formally, it is only a question of providing a login and password, but if the contract mentions “granting the right to use software”, there is a high probability that the tax authorities will see this as royalties. And here the tax consequence is a 20% withholding tax at source in the Russian Federation if there is no certificate of residence.
  • Sublicense agreements, especially when several foreign parties are involved (for example, a Korean, Lithuanian and Russian company), as described in the letter dated 16.05.2011 №16-15/047450@, often create a multi-level structure, where the question arises: who has the actual right to income and from whom tax should be withheld. The answer to this question determines not only the rate of taxation but also possible penalties in the event of an error.

What is not considered royalty: differentiation of services

In practice, hybrid contracts are often found where technical support, administration or customization services are specified along with the transfer of rights (or access to IP). However, such related services do not fall under subparagraph 4, paragraph 1, Article 309 of the Tax Code if they are not accompanied by the transfer of rights.

Thus, the Department of the Federal Tax Service for Moscow in Letter No. 16-15/056376@ dated 09.06.2011 indicated: technical support services for web services and programs that are not accompanied by the transfer of exclusive rights are not royalties and are not subject to taxation at the rate of 20%.

Practical conclusions and recommendations

  1. Analyze the text of the contract carefully. Even a single word – “granting the right to use” – can have tax consequences in the form of a 20% withholding at source.
  2. Check the country of residence of the counterparty. If the Russian Federation has a double tax treaty with that country, there is a chance of applying a preferential rate. But only if there is a proper certificate of residence issued by the competent authority.
  3. Distinguish between services and royalties. If the contract includes SaaS access, technical support and other related services, separate them in the structure of the contract to avoid disputes with the tax authorities and reasonably exclude non-taxable components.
  4. Formulate SaaS contracts carefully. Foreign software vendors should avoid language that explicitly states the granting of usage rights. Instead, constructions such as “providing access to the functionality of the web platform” are appropriate.
  5. Consult if necessary. In an increasingly regulated international environment, consulting with tax lawyers can prevent additional tax, penalties and blocked cross-border payments.

Conclusion

The digital services market is no longer just the future: it is today’s reality. But it is in such technological and fast-growing sectors that the lag between fiscal logic and business reality is most evident. And while tax practice has not yet developed an unambiguous approach to cloud services, businesses should be proactive, clearly separating royalties and services, as well as putting language in contracts that can withstand an audit.

Because knowing the tax implications is not just about reporting. It’s about the sustainability of the cross-border model and control over cash flow.