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 Russia 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 Federatio  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 suspensio

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 suspensio  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!