Presidential Decree No. 585 “On Suspension by Russia of Certain Provisions of Russia’s International Treaties on Taxation Matters” (the Decree) was published on 8 August 2023. This Decree represents a natural development of the initiative announced by the Ministry of Finance and the Ministry of Foreign Affairs of Russia to unilaterally suspend Double Taxation Treaties (the DTT, the Treaty) in response to the European Union’s decision to place Russia on the list of jurisdictions that do not cooperate with the EU on taxation matters.
From what date will certain provisions of DTT be suspended?
Suspension of DTTs takes effect on the date of the Decree’s publication.
The Government is instructed to introduce a relevant federal draft law to the State Duma and take measures to mitigate the impact of such suspension on the Russian economy. However, this does not affect the date of the Treaties’ suspension.
Therefore, the new tax treatment will apply to any earnings paid since 8 August 2023.
What particular DTT are affected?
Certain provisions of DTTs with “hostile” countries are suspended: Australia, Austria, Albania, Belgium, Bulgaria, United Kingdom, Hungary, Germany, Greece, Denmark, Ireland, Iceland, Spain, Italy, Canada, Cyprus, Korea, Lithuania, Luxembourg, Macedonia, Malta, New Zealand, Norway, Poland, Portugal, Romania, Singapore, Slovakia, Slovenia, USA, Finland, France, Croatia, Montenegro, Czech Republic, Switzerland, Sweden, Japan.
What are implications of DTT curtailment?
The amendment affected the rules governing taxation of all types of earnings, including the “Other Income” Article of the DTT. At the same time, general rules continue to be effect, for example, those on mechanisms to eliminate double taxation, on information exchange, etc.
The most noticeable implications of suspension:
Reduced rates of the withholding tax cannot be applied to payments of passive income abroad (dividends, interest and royalty). The rates contemplated by the Russian Tax Code (15-20% depending on the type of income) will apply.
! As a matter of practice, payments of passive income abroad to any persons linked to “hostile” countries” were previously limited by the anti-sanction regulation in many cases.
Under many of the articles of the Treaties, only the country of residence of the person who earned income was authorised to tax income. After the Decree’s enactment, this is no longer the case.
The language of the Decree implies preservation of one’s ability to offset a tax paid abroad (particularly, individuals who are Russian tax residents). Previously, the Russian Ministry of Finance focused in its comments on the need to preserve individuals’ entitlement to the foreign tax offset.
! The wording of the offset provisions in certain DTTs refers to the income that may be taxable overseas “pursuant to the Treaties” (for example, DTT with Cyprus, Switzerland, Germany and other). Given the suspension of the DTT provisions on taxation of various incomes, such a wording could potentially give rise to difficulties in the exercise of one’s right of setoff. However, given the general views of the Ministry of Finance declared earlier, one can only hope that its practical implementation will favour taxpayers.
Despite the Government being instructed to come up with measures to mitigate the adverse effect of such suspension on the economy, as of today 38 DTTS are already suspended. Therefore, we recommend considering at least the following options of tax burden alleviation:
Devising an alternative structure of asset ownership, for example, through redomiciliation of a foreign company to the countries that do not take any “hostile” acts and do not support sanctions in relation to Russia;
Redomiciliation of a foreign company to SARs (special administrative regions on Russky Island and Oktyabrsky Island);
Individuals who are Russian tax residents with substantial income from a foreign source could consider alternative jurisdictions for their tax residency with the acceptable level of taxation of relevant incomes.
Individuals who are not Russian tax residents should think of alternative options to structure their ownership of Russian assets and potentially revise the structure of employment (if there is an employment contract with a Russian employer).
Authors: Senior Associate Olga Morozova, Junior Associate Lyaysan Khabibulina, Paralegal Zlata Zvyaginsteva.
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