VAT on construction follows a special rule — the work is taxed where the property sits, not where the buyer is. For a foreign contractor, that can mean owing Russian VAT you didn't expect, buried inside an EPC contract.
Your construction or installation work is on immovable property in Russia — the place-of-supply rule overrides the usual reverse charge for foreign suppliers.
Establish the place of supply, set up the VAT-agent mechanism so it's accounted for not assessed, and split the VAT across an EPC contract's components so it's recovered where it can be.
Why construction VAT is different
Place of supply: the fundamental rule
VAT registration requirements
EPC contracts: allocation of VAT between components
VAT recovery for foreign contractors
Construction, installation and engineering services in Russia are subject to specific VAT rules that differ significantly from the general VAT framework. Foreign contractors performing construction work in Russia — including EPC (Engineering, Procurement, Construction) contractors, equipment installation companies, and technical supervisors — frequently make errors in this area that result in VAT assessments and penalties.
The key distinction: for most services, Russia applies VAT based on the buyer's location (reverse charge). But for immovable property-related services — including construction, installation, renovation and technical supervision at a site — the place of supply is where the work is physically performed. If the site is in Russia, the service is subject to Russian VAT regardless of where the contractor is based.
Under Article 148 of the Russian Tax Code, construction and installation services are "services related to immovable property." The place of supply is where the immovable property is located.
A Turkish construction company building a warehouse in Moscow → Russian VAT applies to the contract
A Chinese equipment installer commissioning machinery at a factory in Yekaterinburg → Russian VAT applies
A German engineering firm providing remote design services (no site presence) → typically not Russian VAT, as design is not "related to immovable property" under Russian rules
Technical supervision services performed at a Russian site → Russian VAT applies
The distinction between on-site and remote services is critical. Russian tax authorities focus on whether the foreign contractor's personnel were physically present at the Russian construction site.
A foreign contractor performing construction services in Russia has two VAT compliance paths depending on whether it creates a permanent establishment:
Pick what applies — we'll tell you the VAT:
If the foreign contractor does not create a PE in Russia (e.g., the project is short-term, under 12 months), the Russian customer becomes a VAT tax agent. The Russian customer:
Withholds VAT from the contract price at 20/120 of the payment amount
Remits the VAT directly to the Russian budget
May then deduct this VAT as input tax (subject to conditions)
The foreign contractor in this case does not need to register for VAT in Russia — the obligation is shifted to the customer.
If the project lasts more than 12 months (or the contractor has other grounds for a PE), the foreign contractor must register as a VAT payer in Russia:
Register with the FNS at the location of the construction site
File quarterly VAT returns
Charge VAT at 22% on invoices to the Russian customer
Recover input VAT on materials and subcontractors
EPC contracts create complex VAT issues because they combine multiple components with different VAT treatment:
For EPC contracts with a single contract price, the FNS expects a breakdown of the price between components. If the contractor cannot demonstrate the allocation, the entire contract price may be treated as subject to Russian VAT.
Foreign contractors registered for VAT in Russia (due to PE creation) can recover input VAT on:
If the work is on immovable property in Russia, generally yes — construction and installation are taxed where the property sits, which overrides the usual reverse-charge rule that would otherwise shift it to the customer. Establishing the place of supply is the first step.
It depends on the structure — often a VAT-agent mechanism applies, meaning it's accounted for at source rather than assessed later. Setting this up correctly before the contract is what avoids an assessment with interest down the line.
Each component can be treated differently, and VAT can get buried across the contract. Structuring the split deliberately is what lets you recover VAT where it's recoverable rather than losing it, so the VAT position should be built into the contract before signature.
This explains VAT on construction services. The question that changes your price is place of supply — because property-related work in Russia is taxed where the property sits, not where you are, and that flips the VAT position.
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