How Can a Taxpayer on the Simplified Tax System (STS) Refuse the 5% or 7% VAT Rate in 2026

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Starting from January 1, 2026, amendments to the Russian Tax Code came into force affecting the application of reduced VAT rates of 5% and 7% for companies and individual entrepreneurs using the Simplified Tax System (STS). The new rules allow certain taxpayers to отказаться from applying these special VAT rates earlier than previously permitted under the law.

These changes are particularly relevant for businesses that started applying VAT under the STS in 2025 and are currently assessing the efficiency of their chosen tax model, overall tax burden, and the impact of VAT on relationships with counterparties.

When an STS Taxpayer Is Required to Pay VAT

According to Clause 1 of Article 145 of the Russian Tax Code, as amended effective January 1, 2026, companies and individual entrepreneurs applying the STS lose their VAT exemption if their total revenue for 2025 exceeds RUB 20 million.

In such cases, the taxpayer becomes obligated to calculate and pay VAT. At the same time, the legislation allows the application of reduced VAT rates:

  • 5% — subject to the established revenue thresholds;
  • 7% — in cases предусмотренных by the Tax Code.

For many businesses, the transition to reduced VAT rates became a compromise solution allowing them to retain the STS while complying with VAT obligations. However, in practice, this regime may not be beneficial for every taxpayer.

General Rule for Applying the 5% and 7% VAT Rates

The Russian Tax Code establishes a mandatory minimum period for applying reduced VAT rates. A company or individual entrepreneur that begins applying the 5% or 7% VAT rate must continue using it for at least 12 consecutive tax periods (quarters).

The counting period starts:

  • from the first quarter;
  • for which a VAT return was submitted;
  • reflecting transactions taxed at the 5% or 7% rate.

In practice, this rule significantly limited the ability to quickly revise the selected tax model after transitioning to the reduced VAT rates.

What Changed in 2026

As of January 1, 2026, the legislator introduced an exception to the general rule. Companies and individual entrepreneurs applying the STS for the first time with the 5% or 7% VAT rate are now entitled to refuse the application of these rates within the first four consecutive tax periods.

This right applies to:

  • taxpayers who first started applying the 5% or 7% VAT rate in 2026;
  • companies and individual entrepreneurs that started applying these rates in 2025, provided that, as of January 1, 2026, the four-quarter period has not yet expired.

At the same time, the Russian Ministry of Finance separately clarified that companies and individual entrepreneurs that switched to the 5% or 7% VAT rate starting from Q1 2025 cannot use this new mechanism. For them, the general rule requiring the application of the selected VAT rate for at least 12 consecutive quarters remains in force.

Key Considerations for Businesses

The decision to refuse the reduced VAT rate requires not only verification of formal eligibility criteria but also a comprehensive analysis of the company’s tax model.

In practice, refusing the 5% or 7% VAT rate may be beneficial if:

  • the company mainly works with counterparties applying the general taxation regime;
  • the business incurs significant VAT-input expenses;
  • the company plans to scale operations and increase turnover;
  • counterparties are interested in receiving full VAT deductions.

At the same time, retaining the reduced VAT rate may remain a more practical option for businesses primarily working with individuals or customers who are not entitled to VAT deductions.

Businesses are also advised to assess:

  • current and projected tax burden;
  • the impact of VAT on pricing;
  • the need to amend contractual documentation;
  • additional accounting and administrative workload.

Practical Recommendations

Under the current conditions, companies and individual entrepreneurs using the STS should already conduct a preliminary tax analysis and verify the date of the first VAT return submitted with the 5% or 7% VAT rate. This will help determine whether the right to refuse the special VAT rate is still available.

Additionally, businesses are recommended to:

  • perform tax modeling for 2026–2027;
  • assess the financial impact of changing the VAT model;
  • analyze the structure of customers and suppliers;
  • prepare internal processes and contractual documentation for possible changes.

A timely assessment of the tax model allows businesses to reduce risks, avoid unnecessary tax burden, and select the most efficient VAT structure based on the specifics of their operations.

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