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Businesses in the Russian Federation expected to benefit from new intellectual property tax regulation

Businesses in the Russian Federation expected to benefit from new intellectual property tax regulation

Businesses in the Russian Federation expected to benefit from new intellectual property tax regulation

Early in April 2022, Parliament passed a bill exempting the transfer of exclusive rights to inventions, utility models, industrial designs, integrated circuit topographies, know-how under a franchise agreement, and the use of intellectual activity results under a franchise agreement from VAT.

Only if a charge for the transfer of exclusive rights to the aforementioned IP assets is included in the franchise agreement fee would such exemptions apply.

VAT Exemption on Intellectual Property 

The government’s aim to help businesses that scale up their businesses using the franchise model, as well as to reduce uncertainties in the legal regulation of transactions in the transfer of IP rights within franchise relationships, necessitates such modifications.

A provision on VAT exemptions for the assignment of rights to the above commodities has long been established in Russian tax legislation. However, there was no comprehensive legislation on whether this exemption may be applied to franchise purchases until recently.

Although it includes the mandatory elements of a license, the Civil Code defines a franchise agreement as a separate type of arrangement. According to article 1027 of the Civil Code, only the rights-holder (i.e., the franchisor) has the authority to allow another party (i.e., the franchisee) access to the franchisor’s exclusive rights. This includes the right to use a trademark or service mark, as well as other rights specified in the agreement, such as trading names and know-how. As a result, under the terms of a franchise agreement, a franchisee can get numerous IP items.

The key items that will not be VAT-exempt under this new rule are trademarks and service marks. This has created difficulty with tax benefits, especially where the payments under the franchise agreement are stated as a single amount for the whole scope of rights granted. A VAT exemption may only be applied when maintaining separate records of taxable transactions and transactions that are exempt from that tax, according to national tax regulations, as stated in clause 4 of article 149 of the Tax Code. As a result, such a VAT exemption couldn’t be applicable when determining total royalties for all rights transferred under the franchise agreement.

Even though the parties to the franchise agreement have shared the full royalties for certain categories of IP assets, taxpayers may encounter some problems with the tax authorities when attempting to use a formerly effective VAT exemption. The wording of the formerly effective provision of the Tax Code, according to the tax authorities, indicated that a benefit could be applied only if the rights were issued under a license agreement rather than a franchise agreement. The newly enacted law addresses this issue by including an express provision that prevents VAT assessments on transactions involving the aforementioned IP assets and when rights are transferred to them under franchise agreements.

The new regulations will go into effect on July 1, 2022, the start of the new VAT tax period. However, as previously stated, the benefit can only be utilised if the franchise agreement cost includes a fee for the transfer of exclusive rights to the excluded IP items. In this regard, parties to franchise agreements in Russia who intend to take advantage of this benefit should change the financial terms and conditions of the franchise agreements and divide the royalty rate among the various components of the rights given.

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