3% corporation tax for tech companies in this country! – But is it worth it? A look at another country being hidden from the rest of the world

We’ve all heard of Kaspersky, a lot of us have heard of Abbyy and even some will know Dr Web.

All of these companies are large Russian companies that have gone global. Kaspersky are strong players in the anti virus sector, Abbyy are strong in the OCR solutions and Dr Web was the first anti virus / anti malware solution to be created in Russia in 1992.

Alongside these known companies there is a plethora of Russian only solutions that are within the market. Is the Russian market so hard to penetrate that it needs its own developers to create solutions specifically for that market?

The answer is in the way that the Russian government favors Russian solutions over solutions developed outside of Russia.

In January 2021, Russia has lowered the corporation tax of technology companies to 3% from 20% as long as the software being developed is being produced and has it’s IP registered in Russia.

Doing this aims to attract outside developers to setup shop in Russia to make quality solutions that can be labeled as Russian solutions.

This, in theory, is creating an isolated market that restricts companies in other countries from penetrating the country.

Where did this leave the outside companies?

Alongside the reduction in tax for software companies inside of Russia, the tax was changed for companies selling into Russia where the distributor on the ground would need to charge additional taxes and thus increase the price of the solutions for the end users.

This is essentially making it more difficult for companies outside of Russia to operate within Russia without actually moving their operations to Russia.

A work around for the vendors outside of the country is to have separate price lists for Russia than the rest of the world but when it comes to types of software, the barriers increase even more.

We have heard anecdotal stories of source codes needing to be vetted before they can be sold into Russia. This presents a problem for vendors that don’t want to release their source code and especially to a country that has a perceived low level of trust.

Government lists of vendors that are approved to be sold into the country are made available to companies so they ensure they comply to the strict regulations.

When making inquiries about this previously, we have been advised to host in Russia, spin up a Russian entity and charge a licence fee to the parent company outside of Russia. Hosting part of the solution in Russia can make the product known as a “Russian solution” and thus be able to be sold into Government and large corporate entities.

Is this a light decision to make?

If you hand over your entire source code to the products that you have been building for years into a market that you have never dealt with before, would you feel comfortable?

The development market in Russia is extremely strong and it wouldn’t take much for solutions to be copied.

Where can we host our solutions in Russia?

The largest technology company in Russia is Yandex which runs very similar to how Google operates. Yandex own a search engine, maps, data centres etc. Very similar to how Google operates.

Yandex also has its own marketplace where solutions can be hosted and sold into the country.

Distribution is also strong in Russia. The distribution market is made up a few large distributors such as Axoft and Aflex which are owned by Softline who are the largest reseller on the ground in Russia. We also have 1C who double up as software vendor, distributor and reseller, with 100+ vendors in their own portfolio.

We have other smaller distributors over there such as Rainbow technologies who operate out of Moscow but have reach into all Russian speaking markets.

The resale market is strong but the problem is getting your products in front of the people due to restrictions on what can and can’t be sold into Russia.

Is it worth the effort of entering the Russian market?

Russia is currently 11^th on the list of countries ranked by GDP. One place above Australia and one place below South Korea. With complications on local language requirements, software language requirements and tax complications without the setting up of a local entity, it begs the question as to whether it is worth attempting Russia as a market.

It appears that they want to keep their software development in-country without any outside influence or they want to attract foreign companies to Russia with more attractive tax benefits than almost everywhere in the world. Could the tax reduction backfire and lock them away from the rest of the worlds solutions or will companies start flocking to Russia by the masses?

With LinkedIn and other sites we use for content being blocked within Russia, I don’t believe this article will get much reach into Russia but from an outside Russia perspective:

Are you selling into Russia?

Have you considered selling into Russia?

Would you start a company in Russia?

Would you be comfortable hosting in Russia?

Do you think it’s worth the effort?