VAT exemption for software transactions
At the beginning of 2008, the Federal Law of July 19, 2007 N 195-ФЗ was actively discussed, which introduced an amendment to the Tax Code (NK) on the provision of VAT exemptions when exercising rights to computer programs and databases. Three years passed, the Ministry of Finance expressed its opinion on the procedure for applying benefits, developers and distributors adjusted contractual schemes for them, and passions calmed down. However, the time has come for tax audits for the period since 2008, when the industry-wide VAT avoidance schemes fall under the scrutiny of tax authorities. Do they stand in the courts? Let's try to figure it out.
Let's start with the essence of the amendment. The law establishes that VAT (exempted from taxation) is not subject to sale (as well as transfer, performance, provision for own needs) in the territory of the Russian Federation of exclusive rights to programs for electronic computers, databases, as well as rights to use the indicated results of intellectual activity based on a license agreement. At first glance, it would seem that this is not a tricky formulation, but how fully does it fall on real schemes for creating and distributing software?
As a first approximation, we see that the benefit applies at least to agreements on the alienation of exclusive rights (Article 1285 of the Civil Code (CC)) and license agreements (Article 1285 of the Civil Code). The difference between these types of contracts is as follows. Under an agreement on the alienation of the exclusive right to a computer program or database, the author or other copyright holder transfers or undertakes to transfer the exclusive right to the work belonging to him in full to the acquirer of such right. The conclusion of a license agreement does not entail the transfer of the exclusive right to the licensee, but involves the granting by the right holder the right to use a computer program or database within the limits established by the agreement.
And then everything becomes not so simple. Firstly, the transfer of exclusive rights to computer programs and databases is also not limited to those specified in Art. 1233 of the Civil Code by an agreement on the alienation of an exclusive right and a license agreement. In addition, the transfer and / or granting of the right to use the exclusive right to computer programs and databases is possible under the following types of contracts:
• contract of author's order (Article 1288 of the Civil Code);
• agreement on the creation of computer programs and databases (Article 1296 of the Civil Code);
• a contract agreement under which the software was created as a by-product (Art. 1297 of the Civil Code of the Russian Federation);
• state or municipal contract (Article 1298 of the Civil Code);
• agreement of commercial concession (Article 1027 of the Civil Code).
Are VAT exemptions applicable to them? Indeed, despite the special subject in the above agreements, the transfer or grant of the exclusive right to software on them comes down to the well-known model of alienation of rights in full or granting a license.
Secondly, the right to use the software obtained under a license agreement may be transferred by the licensee further with the written consent of the licensor on the basis of a sublicense agreement. In this case, on the basis of the law, the rules on the license agreement are applied to the sublicense agreement. Does this mean that the rule on exemption from VAT valid for a license agreement is also applied in the case of exercising the rights under a sublicense agreement?
And thirdly, the transfer of software or rights to it (as you like), as a rule, is accompanied by the provision of additional services (works), technical support and maintenance, and in relation to complex software, services for its installation, debugging and implementation may also be provided. What to do with the implementation of related services? Is it necessary to distinguish their value from the price of the contract and charge VAT?
To begin with, I propose to deal with the primary ways of acquiring software rights during its development.
Unfortunately, the discussed norm on VAT exemption contains a direct reference to only one type of contract to which it is applicable. Granting rights under a license agreement, as they say, is “out of suspicion”. But what about the rest, and first of all, those agreements on the basis of which exclusive rights arise? Alas, they are not directly named in the article, and therefore we run the risk of being denied the application of benefits if we do not convince the tax authority of its groundlessness with weighty references to civil law.
We believe that no one should have doubts (even with the tax one) about the possibility of using the privilege when selling exclusive rights under an agreement on alienation, since this type of agreement is directly indicated in the Civil Code as the main contractual design for transferring exclusive rights to software. At the same time, this agreement is far from the only reason for the transfer of exclusive rights to the new owner.
So, on the basis of Clause 2, Article 1288 of the Civil Code. a contract of author’s order may provide for the alienation to the customer of the exclusive right to software that must be created by the author, or the provision to the customer of the right to use this software within the limits established by the contract. the second is a license agreement. Thus, one can reasonably consider it necessary to apply VAT exemptions in case of obtaining rights to computer programs and a database under an author's contract agreement.
The situation is quite rare, because an author’s contract agreement assumes that the contractor is an individual (author). Therefore, the occurrence of the author’s obligation to pay VAT can, in principle, be said only if he carries out his activities as an entrepreneur. In this case, the entrepreneur usually use a simplified tax regime. But anything happens, but you can’t throw words out of a song, as they say.
More interesting is the situation with the contract for the creation of software, which is the most commonly used type of development contract.
When a computer program or database is created under a contract the subject of which was its creation (by order), the exclusive right to such a program or such a database belongs to the customer, unless otherwise provided by the contract between the contractor (executor) and the customer (Article 1296 of the Civil Code )
In this case, the legislator, in order to further protect the customer of the software development, as in the case of creating an official work, established the presumption of exclusive rights to the work to the customer.
From this provision, the tax authorities conclude that, under the said agreement, exclusive rights are not transferred, since the customer has exclusive rights to software developed under the agreement by virtue of the law (see Letter of the RF Ministry of Finance dated January 22, 2008 N 03-07 -11/23, Letter of the Ministry of Finance of the Russian Federation of 01.04.2008 N 03-07-15 / 44, Letter of the Federal Tax Service of the City of Moscow of August 11, 2008 N 19-11 / 75222).
However, this position is not perfect. Firstly, in the Tax Code there is no indication of a specific type of agreement on the transfer of exclusive rights to computer programs and a database on which the application of benefits is possible. Secondly, the conclusion that it is impossible to transfer exclusive rights to software under a contract is in doubt.
In development of the second thesis, we can refer to the fact that, in terms of the subject, the contract for the development of programs and databases does not differ from the contract of authorship. The distinction is again made only according to the subject composition: the contractor (art. 1296 of the Civil Code) acts as a legal entity, and in the contract of authorship (art. 1228 of the Civil Code) - an individual. At the same time, the article on the contract of author’s order contains a reference to the application of the provisions of the contract on the alienation of exclusive rights or license agreement, while article 1296 of the Civil Code explicitly indicates that the rights belong to the customer, if the contract between the contractor (contractor) and the customer is not provided otherwise.
The copyright in a work in full is originally owned by its author. Thus, an organization acting as an executor under a work contract, the subject of which was its creation (by order), must first obtain such rights from the author under a copyright contract or on the basis of the provisions of the law on official work. Thus, exclusive rights to the software cannot arise at the customer without their transfer from the author and contractor.
Similarly, the issue can be resolved also under work contracts by which the creation of software for the customer was not provided when the parties provided for the transfer of such right to the customer.
Nevertheless, due to the lack of law enforcement practice on this issue, in order to minimize tax risks, we can only recommend that when creating programs and databases, acquire exclusive rights to them on the basis of a separate agreement on the alienation of exclusive rights. The above-mentioned rules of law and the principle of freedom of contract do not prevent the parties from concluding a contract providing for the financing of work on creating software with the subsequent transfer of exclusive rights to them to the customer for a separate fee.
This concludes the first part of the article. Further, with the interest of the public, questions of applying VAT will be considered:
• when transferring rights under a chain of sublicensing agreements;
• under purchase and sale contracts for box software and as part of OEM products;
• for additional support and software support services;
• as well as on foreign economic transactions.
Let's start with the essence of the amendment. The law establishes that VAT (exempted from taxation) is not subject to sale (as well as transfer, performance, provision for own needs) in the territory of the Russian Federation of exclusive rights to programs for electronic computers, databases, as well as rights to use the indicated results of intellectual activity based on a license agreement. At first glance, it would seem that this is not a tricky formulation, but how fully does it fall on real schemes for creating and distributing software?
As a first approximation, we see that the benefit applies at least to agreements on the alienation of exclusive rights (Article 1285 of the Civil Code (CC)) and license agreements (Article 1285 of the Civil Code). The difference between these types of contracts is as follows. Under an agreement on the alienation of the exclusive right to a computer program or database, the author or other copyright holder transfers or undertakes to transfer the exclusive right to the work belonging to him in full to the acquirer of such right. The conclusion of a license agreement does not entail the transfer of the exclusive right to the licensee, but involves the granting by the right holder the right to use a computer program or database within the limits established by the agreement.
And then everything becomes not so simple. Firstly, the transfer of exclusive rights to computer programs and databases is also not limited to those specified in Art. 1233 of the Civil Code by an agreement on the alienation of an exclusive right and a license agreement. In addition, the transfer and / or granting of the right to use the exclusive right to computer programs and databases is possible under the following types of contracts:
• contract of author's order (Article 1288 of the Civil Code);
• agreement on the creation of computer programs and databases (Article 1296 of the Civil Code);
• a contract agreement under which the software was created as a by-product (Art. 1297 of the Civil Code of the Russian Federation);
• state or municipal contract (Article 1298 of the Civil Code);
• agreement of commercial concession (Article 1027 of the Civil Code).
Are VAT exemptions applicable to them? Indeed, despite the special subject in the above agreements, the transfer or grant of the exclusive right to software on them comes down to the well-known model of alienation of rights in full or granting a license.
Secondly, the right to use the software obtained under a license agreement may be transferred by the licensee further with the written consent of the licensor on the basis of a sublicense agreement. In this case, on the basis of the law, the rules on the license agreement are applied to the sublicense agreement. Does this mean that the rule on exemption from VAT valid for a license agreement is also applied in the case of exercising the rights under a sublicense agreement?
And thirdly, the transfer of software or rights to it (as you like), as a rule, is accompanied by the provision of additional services (works), technical support and maintenance, and in relation to complex software, services for its installation, debugging and implementation may also be provided. What to do with the implementation of related services? Is it necessary to distinguish their value from the price of the contract and charge VAT?
To begin with, I propose to deal with the primary ways of acquiring software rights during its development.
VAT on contracts for the creation of computer programs and databases
Unfortunately, the discussed norm on VAT exemption contains a direct reference to only one type of contract to which it is applicable. Granting rights under a license agreement, as they say, is “out of suspicion”. But what about the rest, and first of all, those agreements on the basis of which exclusive rights arise? Alas, they are not directly named in the article, and therefore we run the risk of being denied the application of benefits if we do not convince the tax authority of its groundlessness with weighty references to civil law.
We believe that no one should have doubts (even with the tax one) about the possibility of using the privilege when selling exclusive rights under an agreement on alienation, since this type of agreement is directly indicated in the Civil Code as the main contractual design for transferring exclusive rights to software. At the same time, this agreement is far from the only reason for the transfer of exclusive rights to the new owner.
So, on the basis of Clause 2, Article 1288 of the Civil Code. a contract of author’s order may provide for the alienation to the customer of the exclusive right to software that must be created by the author, or the provision to the customer of the right to use this software within the limits established by the contract. the second is a license agreement. Thus, one can reasonably consider it necessary to apply VAT exemptions in case of obtaining rights to computer programs and a database under an author's contract agreement.
The situation is quite rare, because an author’s contract agreement assumes that the contractor is an individual (author). Therefore, the occurrence of the author’s obligation to pay VAT can, in principle, be said only if he carries out his activities as an entrepreneur. In this case, the entrepreneur usually use a simplified tax regime. But anything happens, but you can’t throw words out of a song, as they say.
More interesting is the situation with the contract for the creation of software, which is the most commonly used type of development contract.
When a computer program or database is created under a contract the subject of which was its creation (by order), the exclusive right to such a program or such a database belongs to the customer, unless otherwise provided by the contract between the contractor (executor) and the customer (Article 1296 of the Civil Code )
In this case, the legislator, in order to further protect the customer of the software development, as in the case of creating an official work, established the presumption of exclusive rights to the work to the customer.
From this provision, the tax authorities conclude that, under the said agreement, exclusive rights are not transferred, since the customer has exclusive rights to software developed under the agreement by virtue of the law (see Letter of the RF Ministry of Finance dated January 22, 2008 N 03-07 -11/23, Letter of the Ministry of Finance of the Russian Federation of 01.04.2008 N 03-07-15 / 44, Letter of the Federal Tax Service of the City of Moscow of August 11, 2008 N 19-11 / 75222).
However, this position is not perfect. Firstly, in the Tax Code there is no indication of a specific type of agreement on the transfer of exclusive rights to computer programs and a database on which the application of benefits is possible. Secondly, the conclusion that it is impossible to transfer exclusive rights to software under a contract is in doubt.
In development of the second thesis, we can refer to the fact that, in terms of the subject, the contract for the development of programs and databases does not differ from the contract of authorship. The distinction is again made only according to the subject composition: the contractor (art. 1296 of the Civil Code) acts as a legal entity, and in the contract of authorship (art. 1228 of the Civil Code) - an individual. At the same time, the article on the contract of author’s order contains a reference to the application of the provisions of the contract on the alienation of exclusive rights or license agreement, while article 1296 of the Civil Code explicitly indicates that the rights belong to the customer, if the contract between the contractor (contractor) and the customer is not provided otherwise.
The copyright in a work in full is originally owned by its author. Thus, an organization acting as an executor under a work contract, the subject of which was its creation (by order), must first obtain such rights from the author under a copyright contract or on the basis of the provisions of the law on official work. Thus, exclusive rights to the software cannot arise at the customer without their transfer from the author and contractor.
Similarly, the issue can be resolved also under work contracts by which the creation of software for the customer was not provided when the parties provided for the transfer of such right to the customer.
Nevertheless, due to the lack of law enforcement practice on this issue, in order to minimize tax risks, we can only recommend that when creating programs and databases, acquire exclusive rights to them on the basis of a separate agreement on the alienation of exclusive rights. The above-mentioned rules of law and the principle of freedom of contract do not prevent the parties from concluding a contract providing for the financing of work on creating software with the subsequent transfer of exclusive rights to them to the customer for a separate fee.
This concludes the first part of the article. Further, with the interest of the public, questions of applying VAT will be considered:
• when transferring rights under a chain of sublicensing agreements;
• under purchase and sale contracts for box software and as part of OEM products;
• for additional support and software support services;
• as well as on foreign economic transactions.