Russia temporarily reduces VAT on domestic flights

The Russian government has reduced the VAT for Russian airlines operating domestic flights to help to stabilise the carriers after they reported significant losses at the end of 2014.

The reduced VAT rate – from 18% down to 10% - will apply for all domestic routes except flights from mainland Russia to Crimea.

The Russian government took the step earlier this year to support national air carriers facing shrinking passenger demand and financial difficulties. Russian President Vladimir Putin approved the reduction in April as a temporary measure to remain in effect until 31 December 2017.

A fall in the ruble, as well as reducing population incomes, has seen many Russian airlines experience a great drop in demand on tickets for international flights and tour companies cancelling charter flights. Losses faced by domestic airlines between January 2015 and April 2015 reached RUB 4.6bn; losses are growing due to changes in the market structure and a rise in fuel prices of up to 20% in recent months.

Transport Minister Maxim Sokolov says the measure will reduce the tax burden on the airlines about 20bn rubles.

Though this action of the government will reduce the federal budget income it was an inevitable step. Due to the international isolation and sanctions imposed by western countries over the Ukraine crisis most Russian airlines are suffering from decreasing passenger numbers, the contracting economy, the sharp decline of the travel market and the most spectacular drop in value of the ruble. Some of them are close to bankruptcy, such as Russia's third-biggest airline UTair.

The reduced VAT rate could help to boost the domestic passenger transport and support the struggling airlines, however considering the current financial situation of the market, the reduction might not enough. Whether further steps will be required or not will depend not only on the VAT rate, but the economic climate as a whole.

Read more about our VAT services for companies, or about doing business in Russia.

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