Legal risks in SaaS contracts

Over the past years, we often speak at IT conferences with reports on software licensing. As cloud services become more and more popular, we are constantly asked questions about the legal risks of the SaaS model.

Based on the definition of SaaS (software as a service), the use of software is carried out within the framework of services. However, in practice, paid access to cloud services is executed in three different agreements:

• contract for information services ,
• software license agreement, and
• PAC lease agreement.

Below you can familiarize yourself with the legal risks of applying these contracts in the relations in question.
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Rent Clouds

From the point of view of Russian legislation, a cloud service is an information system that includes a set of technical tools, information in databases, and information technologies (including software) that ensure its processing.

The main problem of applying a lease (rental) agreement to such services is the requirement of legislation on the lease of only individually determined things (Art. 607 of the Civil Code of the Russian Federation).

Equipment in the cloud service cannot be individualized, software is also not a thing, unlike its carrier.

Therefore, the PAC lease agreement under the SaaS is null and void as contrary to the direct indication of the law regarding the lease agreement.

In connection with the nullity of the lease agreement, the parties to such an agreement cannot refer to its terms in the event of civil and tax disputes.

Cloud License

Any use of software is associated with the provision of copies thereof to the actual possession of the end user (Article 1270 of the Civil Code of the Russian Federation). The functional use of the software does not relate to the method of use. Detailed substantiation of these theses for inquiring minds, we have placed in a separate section.

SaaS provides access to various information system services, including software, equipment and information in databases. That is, the software is used in combination and inextricably linked with other elements of the information system.

In this case, the software instances are not downloaded by the user, are not loaded into the memory of their devices, and are not modified, i.e. in his actual possession and use are not received. All actions with such software products are performed on the side of the owner of the service.

Therefore, the SaaS license is against the law (void) in the same way as the lease (rental) agreement.

In this regard, there is a similar risk of the impossibility of referring to license conditions in civil and tax disputes. In addition, the owner of the service, applying the general taxation system, is deprived of the possibility of applying the VAT exemption for a software license agreement.

As is known, the implementation of the software license agreement is not subject to VAT (p.26 p.2 st.149 of the Tax Code of the Russian Federation). Sales under other agreements are subject to VAT. Consequently, the retraining of a SaaS license into a service contract would entail an additional 18% VAT charge, a 20% penalty and late payment fees.

Cloud Services

Services are consumed in the process of their provision and do not lead to the creation of things. Therefore, the subject of a contract for the provision of services is an activity that can be carried out using an information system.

The activity of collecting, summarizing, systematizing information files and providing the results of processing this information is directly related by tax legislation to information processing services.

Consequently, the contract for information services in the framework of SaaS is not against the law. In this regard, it does not bear civil and tax risks.

Justification of the impossibility of licensing access to the service

As a general rule, a license agreement for the use of computer programs or databases should provide for:
1) the subject of the contract by reference to the software product, the right to use of which is provided under the contract;
2) how to use such software.

A list of the main ways of using the works is contained in paragraph 2 of article 1270 of the Civil Code of the Russian Federation. This list is open, however, allows you to define the principles of legal regulation of relations about the options for the use of works.

For software, use is considered to be:
1) reproduction (making or recording copies of software on electronic media, including in computer memory);
2) distribution (sale of another form of ownership of copies of software);
3) public display (demonstration of a copy of the software);
4) import (import of software copies into the territory of Russia for distribution);
5) rental (renting a copy of the software for rent);
6) translation or other processing (making changes to the source text of the software instance). It does not apply to the use of an adaptation of a software instance, i.e. making changes made solely for the purpose of the functioning of a computer program or database on specific technical means of the user or under the control of specific user programs.
7) making available to the public (providing access to the software instance for downloading it to the user's device).

Thus, the above methods of using software affect only operations with its instances. Recall that a copy of the software is considered to be recorded on any material medium (electronic, optical, magnetic media).

The above actions are aimed at replicating, modifying or providing such copies to third parties. That is, in relation to different types of software as objects of copyright, the authority to use them does not include the application by function.

These conclusions are directly confirmed by the provisions of paragraph 3 of Article 1270 of the Civil Code of the Russian Federation, according to which the practical application of the provisions constituting the content of the work, including those that are technical, economic, organizational or other decision . The only caveat of this rule is made in relation to the practical implementation of an architectural, design, city-planning or landscape gardening project.

In addition, in the case of software distribution on the basis of article 1280 of the Civil Code of the Russian Federation, it is enough that the lawful possession of copies of such software is necessary to perform the actions necessary for its operation. Separate permission from the copyright holder to perform these actions is not required. These provisions further confirm that copyright does not limit the use of software functionality, including for providing services on its base to third parties.

Therefore, as part of providing access to the software remotely (SaaS), the user can use the software to process the entered data on the side of the owner of the service. An instance of a computer program or database is not transferred to the user in possession, so it does not need to obtain a permit (license) to use it.

General conclusions

On the basis of clause 2, Article 170 of the Civil Code of the Russian Federation, a sham transaction, that is, a transaction that is made with the aim of covering up another transaction, including a transaction under other conditions, is void. For the transaction, which the parties really had in mind, taking into account the substance and content of the transaction, the rules relating to it are applied.

Since the implementation of a software license agreement is exempt from VAT in accordance with clause 26 of paragraph 2 of Article 149 of the Tax Code of the Russian Federation, there is a high risk of requalification of a privileged license agreement as part of a tax audit of a regular onerous service contract, under which the obligation to pay VAT.

As a result, according to the results of the tax audit, the owner of the service may be imputed on the DOS arrears, penalties and fines due to the unreasonable use of a VAT exemption on the basis of a license agreement.

Make contracts correctly!

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