Friday, May 16, 2008

Doing Business in Russia, what I've learned so far...

One great way to start (and perhaps stay long term) in a new geographic market is through your channel parteners. We have several really good ones that assisted us in our journey into Russia. here is what I've learned so far........
When you think about selling software and then you think about Russia as a market, we finance types probably tend to screw our faces up and take a step backwards as we dread the amount of work and headaches that we will be toiling through in the upcoming months and years to deal with this strategic imperative.
What about the VAT implications, the customs problems, the withholding taxes, the FX risk, the IP risk and so on and so on. The thing is it's really not that bad if you focus on the details and ensure you set things up properly. To detail the steps and conversations of this would be more like a feature articles than a blog so I will summarize and you contact me if you want to discuss further or find out more but here are some of the highlights.
IP Aspects
There are certain civil codes and rules that must be followed when executing a "valid" license contract in Russia. I am told that taking shortcuts or omitting some, any or all of these points can cause significant problems and not wanting to test that hypothesis I (and I suggest you) complied. I won't list them all but they include things like:
  • including a detailed scope of the rights being licensed
  • identifying the software in more detail than we usually do
  • the term of use (and perpetual doesn't work it has to be tied to something or it will be deemed to be 5 years so you have to get creative here)
  • the type of license (ie non-exclusive, non-transferable, etc)
  • the territory (if applicable)
  • any reporting requirements of the agreement

Under the law registration of your software with the Russian patent office is NOT mandatory however, fighting infringement cases without it is near impossible without it I'm made to understand.

The governing law of your license agreement can be anywhere in the world that you would normally use. The caveat is that where there is difference between the governing law of that country, province, state and that of Russian law, Russian law will prevail. This principally applies to some of the specific items listed above and I would still recommend you use a governing law outside of Russia.

VAT, Withholding Tax, Customs

In Canada we have a double taxation treaty with Russia which means that assuming you provide your custome with proof of your company's residency when you sign the contract there will be no withholding tax requirements (otherwise it is 20%) associated with the License, Maintenance and Support and Services revenues/billings.

License fees are exempt from VAT tax but training, installation and support services are not. All are subject to an 18% reverse charge VAT assuming your company is not a resident of Russia. It is really important that you agree and document with your customer that you are going to "gross-up" your invoices for these VAT eligible services. They will then be responsible for self collecting and remitting the VAT to the Russian agency and you then receive the same payment you otherwise would have net of taxes. This also prevents you from having to setup and be a VAT filer in Russia.

Support is a little tricky and you must be careful that new versions of your product that the Russian customer would receive while on Maintenance and Support do not contain any "new software product" or and plug in type releases that can be run seperately from the software originally purchased. Enhancements are fine but there is a grey area that you should review depending on your software, release cycles, etc. If you are deemed offside on this it will result in a number of tax risks that I won't detail here.

Customs is not really an issue unless you physically ship your software to your customers. If you are like us this is not really an issue as most software can be delivered electronically through FTP download or other means.

There are a myriad of other tax issues for your Russian customer on the other side of these comments that I haven't detailed but suffice is to say it can be very punitive to their books if they intentionally or accidentally misstep along the way.

Call to Action:

The Russian market is a huge opportunity for us and we are continuing to expand into that space carefully learning and asking for help each step of the way. I would encourage you to spend some time researching and understanding what is happening with your target vertical market in Russia and scoping out the opportunity, weighing the risks and evaluating the use of your limited resources in this market. There are plenty of well known established North American businesses operating resident in Russia who would probably be interested in partnering with you. Once you make Russia successful this may open up your relationship with them in other areas of the world as well which will help drive significant growth in your business.......good luck and let me know if I can help!

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