Exclusively for the Russian Business Guide magazine, Daria Pogodina, Managing Director of swilar presented a review article “CHANGES IN 2024: Double Taxation Agreements (DTAs), Transfer Pricing, Offshoring and other news” providing detailed step-by-step analysis of the changes and their consequences.

You can read the article online in Russian or English, or download two-language article in pdf-format by clicking the “Download ru” button below the message.

Certain provisions of taxation agreements with unfriendly countries were suspended by the Decree of the President of the Russian Federation No. 585 dated 08.08.2023.
The Decree lists 38 DTTs and names the clauses of the treaties that are subject to suspension.
The Decree entered into force from the moment of its publication, thus, from August 8, 2023, certain provisions of the articles on the avoidance of double taxation will not apply. 

Among the main consequences for foreign subsidiaries:

• royalties from the Russian Federation to these countries will be subject to taxation at a rate of 20% instead of the previously applied preferential zero rate,
• tax on dividends will be 15% instead of the previously used rate of 5%-10%.

Moreover, non-resident legal entities and individuals may expect for an increase in the amount of taxes on income in the Russian Federation (for example, interest on deposits, bond coupons).

What else may be affected by the adoption of the Decree:

• Taxes under agreements for the provision of international transportation services
• Taxes under forwarding agreements
• Taxation from the sale of property/shares in the Russian Federation, etc.
• Taxation of the transfer of expenses of the head office to a permanent establishment, etc.

The adoption of the decree entails less impact for individuals in terms of employment – the provisions for income from employment are suspended, but the possibility of offsetting tax on income from employment of residents of the Russian Federation against Russian personal income tax remains, since rates on income abroad are often higher than Russian ones. There will also be no impact on the taxes of remote employees, personal income tax rates for them having been set at 13–15%, regardless of resident status.

At the same time, some of the provisions of the current treaties remain in force – Elimination of double taxation (possibility of offsetting taxes), cross-country exchange of information, mutual agreement procedures.

As a legal basis for the suspension, the Government of the Russian Federation refers to Article 60 of the Vienna Convention on the Law of Treaties.

The full repercussions for business have yet to be assessed – the Decree provides instructions for the Government to submit a draft of the relevant Federal Law to the Duma. Also, of course, more detailed explanations will be provided by relevant departments.

On August 11, the Ministry of Finance published the first clarifications in connection with the adoption of the Decree: when paying income in the form of interest to export credit agencies and banks located in unfriendly countries, tax agents have the right to continue not to calculate and not to withhold income tax at the source (provided that such foreign organizations (agencies) have the actual right to the income received).

The relevant amendments to the Tax Code of the Russian Federation are expected to be adopted during the autumn session of the State Duma in 2023.

The reaction of countries with DTTs to the suspension

To date, most countries whose international treaties with the Russian Federation have been unilaterally suspended refrain from official actions and comments. However, the business community expects a response that is likely to involve mirror measures.

Earlier we wrote that Denmark initiated the suspension of the agreement on its part, subsequently the corresponding note dated June 19, 2023 No. 27/23 was received by the Government of the Russian Federation, thus the application of the Convention shall be suspended from January 1, 2024.

The government of Japan regrets Russia’s decision to suspend tax treaties with a number of countries and on 09.08.2023 sent a protest through diplomatic channels with the demand to cancel the developments.

We are following the situation.

Here is a consolidated overview of the latest developments in double taxation avoidance agreements (DTAAs).

Following a mutual exchange of relevant notes in June-August 2022, the double taxation avoidance agreement between Russia and Ukraine is terminated as of 01.01.2023. Relevant changes should be considered with respect to withholding taxes and other taxes for tax periods beginning on or after January 1st, 2023.

Decree 668 of September 26th, 2022 suspended the double taxation avoidance agreement with Latvia, which had previously suspended DTAA in its turn from May 16th, 2022.

Strictly speaking, the Agreement does not provide for a “suspension” option, it is assumed that it can be terminated or denounced, and The agreement was later denounced by Federal Law No. 40-FZ of 28.02.2023.

As it was – as it has become:

• interest, dividends from Russia to Latvia, paid by Russian tax agent at a rate of 5% to 10% – 20% tax on interest, royalties, 15% tax on dividends;
• it was possible to offset tax paid by a tax agent of one country in another country – now the tax must be paid in both countries as required by local law.

Another country with which the Agreement could be suspended or terminated is Denmark (see information in our Telegram Channel).

A relevant bill has been submitted to the local parliament. If adopted, the changes would come into force on January 1st, 2024. The consequences would be similar to the abolition of the Agreement with Latvia.

At the same time, the Russian Federation has initiated a review of agreements with some “friendly” countries – the United Arab Emirates, Turkey, Malaysia and Oman. In this case, it is announced that the purpose of the revision is to create comfortable tax conditions for attracting direct investments in the Russian economy – thus, favourable changes for investors should be expected in the agreements with these countries.

The latest initiative concerns the suspension of Agreements with “unfriendly” countries (EU countries, Switzerland, UK, USA, Canada, Australia, New Zealand, Singapore, Japan and South Korea). The proposal was made by the Russian Ministry of Foreign Affairs and the Ministry of Finance in response, among others, to Russia’s inclusion in the EU “blacklist”. The initiators proposed that the agreements be suspended unilaterally. The suspension should be based on a Russian presidential decree.

The decree is expected to be signed at the end of June this year. However, no exact dates have been given.

Until the text of the document is published, there is also no complete clarity about the expected effective date of the new rules – according to general logic, the changes should not be applied before 2024, according to the beginning of the new tax period (for profit tax and personal income tax) from which all tax innovations under the Russian Tax Code usually apply.

At the same time, the press release of the above initiative states that in case the proposal of the Ministry of Foreign Affairs and the Ministry of Finance of Russia is supported, the application of reduced withholding tax rates (tax exemptions) in respect of income covered by double taxation agreements will be suspended from the date of issuance of the relevant Decree.

We are following the development of events.

For the purpose of applying the current agreements – we recommend reading the letter of the Federal Tax Service dated March 9th, 2023 No. SY-4-13/2691@ “On Taxation of Foreign Organisations Receiving Income from Sources in the Russian Federation, and the Procedure for Applying the Provisions of DTAAs”.

We remind you that, as before, as before, in order to use the preferences provided by the current DTAA, you must obtain in advance from the counterparty the necessary package of documents (usually a  certificate of residency  and proof of right to income).

We will be happy to answer your questions!

We would like to draw your attention to the recent changes in tax legislation introducing new rules for charging and paying VAT.

Currently, and until September 30, 2022, there is a procedure for paying VAT on electronic services provided by foreign suppliers, in which the foreign supplier must independently register with the Federal Tax Service of the Russian Federation, obtain a TIN, submit a VAT return and pay it. From 01.10.2022 the Federal Tax Service and the Ministry of Finance presented the former (used until 2019) procedure for the payment of VAT from electronic services. In a letter dated 08.08.2022, the Federal Tax Service also explained the changes to be introduced.

This means that VAT is paid and recovered by the Russian organization receiving the services as a tax agent. At the same time, if a registered foreign provider of electronic services also provides non-electronic services, there is no tax agent liability for Russian buyers. However, the buyer has the right to pay VAT on such services himself (Letter of the Federal Tax Service of the Russian Federation dated 24.04.2019 №СД-4-3/7937). In practice, it is easier and more convenient for a Russian organization buying any services from a foreign supplier to transfer VAT to the Russian budget as a tax agent.

For all payments made to a foreign counterparty before 1 October 2022 under the old rules, the buyer is entitled to reimburse the VAT paid to the foreign seller.

However, these changes do not exempt foreign service providers from having to register with the FTS. The procedure for this action has also undergone changes; now a foreign organization can get registered by opening a bank account.

The principle is set out in Articles 83-84 of the Tax Code as amended by Federal Law No. 120-FZ of 1 May 2022.

The application for registration is completed, certified with an Enhanced Qualified Electronic Signature by an authorized person of the Russian bank and sent to the Federal Tax Service. Once the foreign organization has been registered, the certificate of registration is also sent electronically to the bank.

Banks have been obliged to check the registration status of a foreign client in the Open and Publicly Available Information of the Unified State Register of Foreign Entities and, if no information is available in the register, to send an application for registration.

As a reminder, tax registration and tax payment are different processes. As the regulators have not yet provided any other explanations, we recommend to maintain a conservative stance and continue to file zero VAT returns for foreign entities registered with the FTS, even considering the transition to the tax payment procedure via a tax agent.

We will be happy to answer your questions!

On 14 July 2022, Law No. 263-FZ on Amendments to Part One and Part Two of the Tax Code of the Russian Federation was published.

The main change is the introduction of the concepts of a Single Tax Account (STA) and a Single Tax Payment (STP), as well as new practices of tax payment administration. 

The new rules come into force from 01.01.2023 and are binding for all taxpayers.

The single tax account is maintained for every natural person and every organization that is a taxpayer, payer of charges, payer of insurance contributions and/or a tax agent.

Thus, the settlement of each individual tax, contribution, or other charge is turned into an aggregate liability to the tax authority. The aggregate liability for payment is formed on the payer’s STA on the basis of submitted tax declarations, revised tax declarations, and notifications on the calculated amounts of taxes, fees, advance payments of taxes, insurance premiums, and decisions of the tax authority.

The law introduces a single date for submission of tax returns and notifications – the 25th of the month following the reporting month, for quarterly taxes – the last month of the reporting quarter.

to help keep an overview of what is important for doing business in the vast flow of information, we have summarised the news and practical advice essential for foreign businesses in Russia on payments, deliveries of goods and other aspects to pay attention to. 

More detailed and up-to-date information is regularly posted on swilar’s Telegram channel t.me/swilar.

The information is posted in Russian, but with the translation function in Telegram you have access to the most up-to-date news in the language of your choice.

DELIVERIES

List of goods restricted for export

As a reminder, with the imposition of sanctions, a large number of goods have become restricted both for export fr om the EU territory and for export fr om the territory of the Russian Federation.

To view the current list of EU restrictions on the export of goods, please click here. To check whether your goods are subject to restrictions, you can contact your Chamber of Commerce and/or the responsible approval authority (BAFA, SECO or other, depending on the country of residence of the sender).

The Russian Federation has also imposed export restrictions on a number of goods in recent months. The latest Resolution of the Government of the Russian Federation No. 850 of 11 May 2022 (published on 12.05.2022) clarifies the list of goods restricted for export from the Russian Federation. Some of the previous restrictions have been lifted, and the customs codes (TN VED codes) of the EAEU for commodity items from Resolutions No. 311, 312, 313 have also been clarified. 

To find out whether your goods can be exported from the territory of the Russian Federation under this regulation, you need to check whether your TN VED code is in the list of customs codes in the regulation.

Licences, certificates and permits for importing goods into the Russian Federation

Government Resolution No. 353 of 12.03.2022 extends the validity of a number of permits and licences and simplifies the conditions for importing and certifying products in the Russian Federation:

– It postpones the need to undergo periodic conformity assessment for products for a year in many industries;

– It also makes it possible to use documents from foreign certification bodies or foreign laboratories as proof that products are safe.

To find out whether you can benefit from this measure, you should check whether your licences and certificates are included in the list of permits renewable under the Resolution.

Please note that the Resolution applies only in the Russian Federation and not in other EAEU Member States.

Permission of parallel imports

On 19.04.2022 the Ministry of Industry and Trade signed Order No. 1532 approving the list of goods for which the protection of the exclusive rights to the results of intellectual activity expressed in such goods and the means of individualization with which such goods are marked will not be applied (the Order entered into force on 07.05.2022). A list of goods provided for inclusion in the list of parallel import authorisations can be found here.

The list contains both customs codes and names of specific brands/trademarks. The ministry suggested that more than 50 groups of goods should be sold without the permission of the rights holder. In total, the document contains about 200 items.

According to further comments from the Ministry of Industry and Trade it is understood that the list may be updated: foreign brands that continue to operate on the Russian market may be excluded from the list.

INTERNATIONAL PAYMENTS

In the list of frequently updated restrictions, it is not easy to pick out important details. For your convenience, we have compiled an overview of the experience we have gathered with regard to the payment situation.

As a reminder, 7 Russian banks have been cut off from SWIFT. The latest (6th) sanctions package also includes new restrictions on the banking sector. The list of banks to be excluded from SWIFT was extended by 3 Russian banks: Sberbank, Rosselkhozbank and Moscow Credit Bank, which will be cut off on 14.06.2022.

On the side of the EU

Other than this, there are no current EU restrictions on payments to counterparties in the Russian Federation. However, the majority of payments are processed manually by banks in Europe and/or include additional compliance checks to avoid money transactions involving sub-sanctioned individuals or entities. The sender/receiver of a payment from the Russian Federation may therefore need to provide additional explanations, disclose more detailed information and the processing of the payment may be delayed.

On the side of the Russian Federation

The Russian Federation has introduced a number of restrictions that need to be taken into account when planning payments.

In particular, there are restrictions on (the list is incomplete and is based on the most frequent questions from companies):

• the refunding of loans and interest to foreign legal entities from unfriendly countries (carried out in rubles, for amounts exceeding 10 million rubles per month a special type C account must be opened and authorised by a special Government commission).

• purchase of currency by foreign residents in the Russian Federation and transfer of foreign residents’ own funds abroad (representative offices and branches are restricted from transferring funds to the head office).

• Payment of dividends from both AOs and OOOs. According to Presidential Decree No. 254 of 04.05.2022, dividends are subject to the same regulation as loans (see above).

• Payment of royalties and remuneration for the use of intellectual property/individualisation tools. Presidential Decree No. 322 of 27.05.2022provides that in relation to this type of payments to foreign right holders who meet certain criteria (e.g. who have ceased business in Russia) payments will have to be made in rubles using a special type O account.

It should be taken into account that the restrictions, however, do not apply to payments for goods under supply contracts. With regard to foreign currency payments, significant relaxations have been introduced in the currency control regulations of Russian banks.

For payments for services, there is a lim it on prepayments (not more than 30% of the total amount to be paid). However, the lim it does not apply to a certain list of services or to contracts of less than USD 15,000 (or its equivalent in another currency).

The regulation on compulsory sale of foreign currency earnings introduced in February (initially 80% of incoming funds were to be sold within 3 days of crediting; later the regulation was gradually relaxed to 50% within 120 days) was officially abolished starting from 10.06.2022. The decision was taken by a sub-committee of the governmental commission for the control of foreign investments in Russia, which was authorised to do so by a Presidential Decree of 09.06.2022.

FORCE MAJEURE

At the moment there is no clear understanding as to whether the current restrictions on both parties constitute force majeure.

That said, under the general procedure in Russia, the parties concerned (the party to the contract who has not fulfilled/unduly fulfilled the obligation) are entitled to apply to the Chamber of Commerce and Industry of the Russian Federation (or the subject of the Russian Federation) to obtain an opinion on force majeure circumstances occurring in the territory of the Russian Federation.

In this case the decision on the acceptance/non-acceptance of the received opinion will be made by the counterparty independently. If the counterparty disagrees, the dispute will be resolved in court, with the CCI opinion being one of the pieces of evidence of the party’s inability to meet/properly meet its obligations.

Information on how to apply, deadlines and fees, as well as all contact details are available on the official website of the Chamber of Commerce and Industry of the Russian Federation.

If the foreign supplier company can produce a force majeure certificate from its authorised body, the Russian buyer will not need to apply to the CCI of the Russian Federation separately. A foreign certificate of force majeure can also be presented in the Russian Federation.

OTHER

Moratorium on bankruptcy

С From 1 April to 1 October 2022 there is a moratorium on initiating bankruptcy proceedings at the request of creditors in Russia. The moratorium applies to all companies as well as sole proprietors with the exception of property developer debtors.

Companies covered by the moratorium are prohibited from:

• paying out dividends,

• paying out the actual value of shares,

• repurchasing own shares,

• terminating monetary obligations by setting off a counter claim of the same kind (if this violates or is likely to violate the order of priority for the satisfaction of creditors’ claims).

These restrictions can be avoided by submitting a simple waiver of the moratorium by the company through a personal account on the Fedresourcewebsite.

Business support measures in the Russian Federation

The Russian Federation has introduced a number of both tax and non-tax related support measures for businesses.

The measures include:

• deferral of the payment of insurance premiums;

• special treatment of exchange rate differences for the period 2022-2024;

• accelerated VAT refund procedure;

• and others.

A summary overview of support measures in Russian can be found on the Russian Government website. More information is also available on our website.

Transactions with shares in Russian companies

In a number of cases, transactions with shares (sale, withdrawal of a participant, call option) may require authorisation from a special Government Commission.

However, this rule does not apply to all transactions: a number of exceptions have been named in the Presidential Decree of 04.05.2022. There are also differences in the regulations for joint stock companies and limited liability companies.

We are actively working with these issues for our clients and will be happy to provide further information on request. We make every effort on our part to help keep processes stable for our clients, and we always stay in touch.

More up-to-date information in our Telegram channel.

On 29 November 2021, with the adoption of Federal Law No. 382-FZ, changes to the tax treatment of leasing transactions were introduced.

Changes affecting the calculation of property tax – clause 49 of Law 382-FZ makes amendments to Article 378 of Chapter 30 of the Tax Code, meaning that the tax for rented property, including finance lease (leasing) agreements, is payable by the lessor.

Changes affecting the calculation of profit tax:

• Law 382-FZ (clause 21) excludes clause 10 of Article 258 of the Tax Code, which allows the lessee or lessor to depreciate the leased property depending on who records the leased asset on their balance sheet under the terms of the agreement. In other words, the lessee will no longer be able to depreciate the leased asset in tax accounting starting from 2022, as was the case previously if the lessee accounted for the leased asset on their balance sheet – with the introduction of the changes, the leased asset will only be considered depreciable property by the lessor in tax accounting;
• clause 23 of the adopted law also changes the procedure for calculating profit tax in terms of how expenses under leasing agreements are recognised (sub-clause 10, clause 1 of Article 264 of the Tax Code) – if the payments under the agreement include the purchase price of the leased asset, which passes into the lessee’s ownership after the agreement ends under a sales agreement, the leasing payments are recognised as expenses less the purchase price;

Accounting for the purpose of paying transport tax does not change with the entry into force of Law 382-FZ.

The Federal Law comes into force on 1 January 2022.

We remind you that starting from January 1, 2021 important changes concerning the transport tax came into force.

For your convenience, we have made an overview of the main changes and recommendations on their application.

From January 1, 2021 the obligation of organizations to provide tax returns on transport tax for 2020 and subsequent tax periods (clause 17 of Article 1 of the Federal Law № 63-FZ of 15.04.2019, Federal Tax Service Order of 04.09.2019 Nr. MMV-7-21/440) was canceled.

Also, from this date uniform deadlines and advance payments for payment of transport tax were introduced for all organizations:

• the tax is to be paid no later than March 1 of the year following the expired calendar year;
• advance payments, if they are introduced by the law of the Federal subject of the Russia, are to be paid not later than the last day of the month following the expired quarter.

Starting from 2021 organizations must calculate and pay transport tax on their own (clause 1, Article 362 of the Tax Code of the Russian Federation).

The total amount of tax is calculated for each transport vehicle as the multiplication of tax base and tax rate with the multiplying coefficient (clause 2, Article 362 of the Tax Code of the Russian Federation).

The rates are set by the Federal subjects of Russia within the limits specified in the Article 361 of the Tax Code of the Russian Federation.

Organizations that have the right to transport tax benefits must send to the tax authority an application for a tax benefit (Article 361.1 of the Tax Code of the Russian Federation). At the same time organizations are also entitled to submit documents confirming the right to this benefit with the application.

The form of an application for a tax benefit is prescribed by Order No. ММВ-7-21/377@ of the Federal Tax Service dd. July 25, 2019.

From 2022, taxpayers will submit to the tax authority an application for a tax benefit in the form as amended by Order of the Federal Tax Service of Russia No. ED-7-21/574@ of 18.06.2021.

The Tax Code does not set a deadline for filing an application.

An application for tax benefit shall be considered by the tax authority within 30 days from the date of its receipt. This period can be extended in case of necessity for the tax authority to request information confirming the taxpayer’s right to tax benefit from other authorities and persons who have such information. In this case, the taxpayer shall be notified of the extension of the deadline for review of the application.

After considering of the application, the tax authority shall send to the taxpayer:

• notification on granting tax benefit;
• notification of refusal with the explanation of the grounds for refusal.

In order to ensure the full payment of tax, from 2021 the tax authorities will send taxpayers messages about the amount of tax calculated by the tax authorities (paragraph 4 of Article 363, paragraph 5 of Article 363 of the Tax Code).

The tax will be calculated basing on the information available at the tax authority:

• from the authorities that register vehicles – the Traffic Police;
• according to the information about the declared tax benefits received from the owners of vehicles.

Deadlines for mailing tax notices:

• Six months from the date the tax payment deadline expired (e.g., the notification for 2020 must be received by the taxpayer no later than September 1, 2021);
• Two months from the date of receipt of information on the recalculation of the tax;
• One month from the date of receipt of information from the Unified State Register of Legal Entities (EGRUL) that the company is being liquidated.

Tax notification is sent to the taxpayer via telecommunications, personal account on the website of the tax office, or by regular post (if it is impossible to notify by other means).

However! Please note that the above-mentioned notification is informative in nature and is sent to the taxpayer after the expiration of the tax period and the deadline for tax payment, and, consequently, does not cancel the obligation of the taxpayer to calculate and pay the tax on his own in the accordance with the law requirements.

Shall the tax amount independently calculated and paid by the taxpayer not match the data specified in the tax notification, within ten working days from the date of receipt of the message about the calculated tax amount the organization (tax payer) can send to the tax inspection its explanations and documents confirming: the correctness of the calculation, completeness and timeliness of the tax payment, the validity of the use of lower tax rates, tax benefits or the existence of the grounds for tax exemption (paragraph 6 of Article 363 of the Tax Code).

The term for considering the application is one calendar month. Shall the term take longer, the tax authorities are obliged to notify the taxpayer.

According to the results of consideration the taxpayer will receive:

• A message on recalculation of the amount to be paid, considering the explanations, evidence and arguments provided;
• A demand for additional payment if the taxpayer’s explanations are not accepted by the Federal Tax Service.

Also, starting from 2021 taxpayers are obliged to send a report on the owned transport vehicles which are considered to be objects of taxation. This obligation applies in case of non-receipt of a message about the amount of transportation tax calculated by the tax authorities concerning objects of taxation for the whole period of their ownership (Letter of the Federal Tax Service of Russia of 29.10.2020 N BS-4-21/17770@).

A report must be sent to the tax authority by the 31 December of the year following the expired tax period with the attachment of documents confirming the state registration of vehicles.

Wrongful non-submission (untimely submission) of the report leads to the fine at the rate of 20% of the unpaid tax amount of the vehicle, the report about was not submitted (untimely submitted) (clause 3 of article 129.1 of the Tax Code of the Russian Federation).

The standards for filling in the report on the owned transport vehicles have been determined by the Order of the Federal Tax Service No. ED-7-21/124@ dated 25.02.20.

Sending the above-mentioned report is not required if organization sends an application for a tax exemption in relation to the relevant object of taxation.

If you have any questions, we will be happy to offer you additional information on this topic.

The latest news regarding the revision of double taxation avoidance agreements (DTAAs)

The DTAA protocol with Luxembourg was ratified in February, thus the protocol entered into force on 5 March 2021 and its provisions will apply from 1 January 2022 (the changes were previously expected to be adopted from 1 January 2021).

The protocol increases the withholding tax rate on dividend and interest income to 15%, with some exceptions for institutional investments.

In 2020, protocols to make similar changes to the DTAA were also signed with Cyprus and Malta, with effect from 1 January 2021.

On 26 May 2021, the law No. 1147902-7 on the denunciation of the double taxation avoidance agreement with the Netherlands was approved and published. The adoption of the law leads to the fact that parent companies registered in the Netherlands will pay tax on dividends at a rate of 15% instead of 3-5%, and the rate for interest and royalties will be 20%.

On June 7, 2021 Russia notified the Netherlands about denunciation of the agreement, the changes will come into force on January 1, 2022.

Switzerland is the next major jurisdiction in the negotiation process initiated by Russian Ministry of Finance. There are 2 more key jurisdictions remaining for revising the DTAAs, said Deputy Finance Minister Alexei Sazanov, namely, Hong Kong and Singapore.

There have been no official announcements of changes to other DTAAs yet.