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.

Recently, there have been an increasing number of cases in which Russian companies that are part of an international group of companies have been asked to submit the global documentation (so-called master file) to the Russian tax authorities, especially in the context of the formation of the regular transfer price declaration and documentation.

As a reminder: the global documentation (master file) must be provided to the supervisory authority upon their request within 3 months fr om the date of having received an according notice. The file is to be provided in Russian language.

The master file may be requested not earlier than 12 months and no later than 36 months after the end of the reporting year, so e.g. starting from 01.01.2022 till 31.12.2024 for the year 2020. The documentation must comply with the requirements of Article 105 16-4 of the Russian Tax Code.

Please note that the violation of the rules of the Tax Code – failure of the taxpayer to submit global documentation in time (paragraph 2 of Article 129.11 of the Tax Code) may result in a fine in the amount of 100,000 rubles.

From 2020 onwards, the benefits of the so-called “Transitional period” (2017-2019), for which no fines were imposed, no longer apply. From 2020, failure to comply with the requirement to submit the master file to the authorities upon request can result in a maximum amount of fine.

In order to provide the required information to the tax authorities on time, if requested, we recommend the Russian member companies of international company groups to fulfill the following steps in advance:

• request the Global Documentation from the parent company,
• check it for compliance with the requirements of Article 105 16-4 of the Tax Code of the Russian Federation and, if necessary, supplement the File;
• translate the Global Documentation into the Russian language, if applicable.

Expert comment

Eugenia Chernova, Project Leader at swilar: “Not every taxpayer who is a member of an international group of companies may be required to provide global documentation. The existing limits are bound to the total revenue of the group. The lim it depends on the country of residence of the parent company.” If you have any questions about the necessity of global documentation for your company, swilar specialists will be happy to give you qualified advice.

We would like to inform you that in accordance with the Decree of the President of the Russian Federation dated 23.04.2021 No. 242 non-working days will be established in the period from 1 to 10 May 2021 (in contrast to the initially planned state holidays on 01.05.-03.05., 08.05.-10.05.2021). Herewith 11.05. will be the first working day after the holidays.

However, the decree retained the right for organizations to determine the number of employees to support the functioning of the organization during the specified period.

Our recommendations in connection with this decree:

• to monitor the deadlines for the payment of salaries, taxes and other mandatory payments carefully; better is to proceed these payments before the start of the specified period;
• to analyze and check the working schedule of employees at your Russian branches/subsidiaries during the newly specified non-working period;
• to request in advance information about the working schedule of your Russian business partners on those days.

We are at our disposal in case of any questions or inquiries!

We would like to inform you that in accordance with the Order of the Russian Government № 814-rs dd 31.03.2021 starting with the April 1, 2021 the flights with Germany were resumed.

According to the official announcement of the Russian Government dd. 25.03.2021 the flights are resumed on the following routes:

• Frankfurt am Main – Moscow – Frankfurt am Main – 5 times a week;
• Frankfurt am Main – St. Petersburg – Frankfurt am Main – 3 times a week;
• Moscow – Berlin – Moscow – 5 times a week;
• Moscow – Frankfurt am Main – Moscow – 3 times a week.

Thus, citizens of Germany with a valid visa to Russia (including business visa) can enter the Russian Federation.

Please note that according tothe Order of the Chief State Sanitary Inspector of theRussian Federation from 27.07.2020 № 22 for foreign citizens it is necessary to have a negative PCR-test made not earlier than 72 hours before the flight to Russia. The requirement (point 6.1. of the mentioned above Order №22) to keep a two-week quarantine for citizens arriving from Germany in order to perform employment activities is still in force.

We will be happy to answer your questions!

Client Information

In August 2020, the Russian Federal Tax Service issued a Letter detailing the tax authorities’ approach to the analysis of in-house services. In particular, it drew attention to the fact that in-house activity can be considered as service if it provides economic benefit to the company-taxpayer, is not a shareholder activity and similar services can be purchased from the third parties.

In-house services include administrative support, financial services, legal advice, internal control and audit, services related to the development of production and sales, and information technology support.

Nevertheless, taxpayers still have questions regarding shareholder activities.

In February 2021, the Federal Tax Service published another Letter further defining the term “shareholder activity”.

As defined by the Federal Tax Service, shareholder activity:

• is based on the needs of the shareholders themselves, not the individual members of the group of companies;
• economic benefit from such activities is evident for the whole group;
• the members of the group of companies would not engage third independent parties to provide such services against payment.

In addition to the characteristics, the Letter also included a list of specific functions related to shareholder activity.

Strategic management functions:
1. drafting of the development strategy of the group of companies;
2. market research;
3. evaluating the relevance and costs in implementing investment projects.

Business planning and control functions:
1. strategic planning and budgeting;
2. consolidated financial and management accounting;
3. analysis of the effectiveness of investments in the group of companies;
4. controlling of the financial and business activities of the group;
5. financing of the group of companies;
6. developing standards, methods, guidelines and/or other internal regulations to be applied to group of companies;
7. implementing and controlling compliance with such standards, methods, guidelines and/or other internal regulations;
8. approval of significant decisions and transactions.

However, in practice, some of the functions mentioned above may not be related to shareholder activity. Taxpaying organizations in Russian Federation should take an individual approach to each specific case.

The test to identify shareholder activity includes three questions:

• Has the subsidiary in Russia received a benefit from the service rendered, and if so, what kind of benefit?
• Is the benefit obvious and defined, and how is it expressed?
• Would a subsidiary in Russia pay an independent company to provide a similar service?

Please note that if the nature of payments abroad is disputed, expenses may be excluded from the income tax base and the relevant payments may be reclassified as dividends or other passive income with an additional withholding tax charge in Russia (up to 15% for countries without a signed CIT). It is also possible that fines and penalties of up to 20% of the underpaid tax will be imposed.

Our experts are ready to provide you with expert assistance in analyzing the current situation with regard to in-house services and assessing the need for changes in documents and processes.

In March, www.karenina.de published an interview with Dr. Georg Schneider, “Geschäfte mit Russland? Aber ja!”.  Journalist Peter Kopf asked the General Director of swilar a number of questions about opportunities and problems of business-cooperation with Russia.

The key issues of the interview:

•  Whether import substitution policy in Russia is a problem for German companies;

• Whether it is possible to say that the state runs the economy in Russia;

• How German companies may use the huge gap which exists in Russia between individual and serial production;

• How to gain the trust of business partners in Russia and why it is so important to conclude a framework agreement;

• Whether banks hinder German companies from doing business in Russia;

• How customs issues affect business;

• How risky it is to invest in Russia at the moment;

• U.S. sanctions and the rate of their impact on German-Russian business;

• Pharmaceutical industry and the Sputnik V vaccine as the oil of tomorrow – fantastic opportunities for economic cooperation.

The full text of the interview is available on the website. Enjoy reading!

For reference

KARENINA www.karenina.de is the online edition of the German-Russian discussion forum “St. Petersburg Dialogue”, which began to develop during the pandemic. The goal of the online platform is to establish internal communication between forum members and working groups, as well as to make the association, founded in 2001, visible to the outside world through its own journalistic activities

On February 24, 2021 the President of Russia signed a law which allows conducting of general meetings (including also annual) in 2021 for JSCs and LLCs by a form of absentee voting.

According paragraphs of Federal Law No. 208-FZ of 26 December 1995 “On Joint Stock Companies” and Federal Law No. 14-FZ of 8 February 1998 “On Limited Liability Companies” which do not allow holding general meetings of shareholders/participants in form of absentee voting on several issues, were herewith suspended till the end of 2021.

Thus, the general meeting of LLC participants, the agenda of which includes approval of annual reports and annual balance sheets, in 2021 can also be held in the form of absentee voting (by questioning).

Meanwhile, the new regulation does not extend the deadline for annual meetings, as it was done in 2020 (at that time the deadline for annual meetings was extended up to September 30).

In this regard, when planning the annual meeting and approval of the financial statements for 2020, standard terms stipulated by the legislation should be taken into account: the general annual meeting shall be held not earlier than 2 months and not later than 4 months after the end of the financial year (i.e. within the period from March 1 to April 30).

Proceeding of the annual meeting by a form of absentee voting shall be approved by the executive body of the LLC. The procedure for convening the meeting and its protocol shall fully comply with the conditions applicable for the year 2021.

 We will be glad to answer your questions and to support you on the issue if needed!

RECOMMENDATIONS

• Due to the continuing restrictions on cross-border travel, we recommend to consider the possibility of holding general meetings (including annual meetings) in 2021 by absentee voting.

• When planning the meeting to approve the results of 2020, please note that the deadline (differently than in 2020), remained standard: from 01.03. to 30.04.2021.

• We also recommend to pay special attention to the execution of the relevant documents when holding the general annual meeting in the form of absentee voting.

Multiple entry for highly qualified specialists allowed

According to Decree of the Government of the Russian Federation No. 258-p dd. 06.02.2021 foreign Highly Qualified Specialists (HQS) as well as their family members are allowed multiple entries into the territory of the Russian Federation.

Separately, we would like to note that in order to enter the territory of the Russian Federation these foreign citizens must be included in the list (with an indication of the checkpoint across the state border of the Russian Federation and the date of entry) sent to the Federal Security Service of Russia and the Ministry of Internal Affairs of Russia by the federal executive authority, which competence the organization – employer or customer of works (services) is.

Decree № 5-UM of the Mayor of Moscow suspends from January 27, 2021 the obligation of Moscow employers to transfer at least 30% of employees to remote work.

Decree № 5-UM of the Mayor of Moscow dd. January 27, 2021 (hereinafter – the Decree) suspends from January 27, 2021 the obligation of Moscow employers to transfer at least 30% of employees to remote work. Nevertheless, employers are advised to keep in force the measures taken on transferring employees to remote working mode.

Please note that the requirement for Moscow employers to transfer all employees over the age of 65 to remote work, as well as citizens with diseases, the list of which is determined by the Department of Health of Moscow, except for citizens whose presence in the workplace is critical, remains in force.

Also, the requirement to submit data on changes in the number of employees transferred to remote mode in electronic form using a personal account on the official website of the Mayor and Government of Moscow in accordance with clause 2.4.3. of the Decree remains in force.

The Ministry of Labor and Social Protection of the Russian Federation has prepared a draft of amendments to Federal Law № 125-FZ dd. 24.07.1998 and Federal Law № 255-FZ dd. 29.12.2006, which will come into force from January 1, 2021 in terms of payment of benefits for temporary disability, maternity and childhood.

 “Direct payments” is a project implemented by the Social Insurance Fund of the Russian Federation since 2011. During this time, 77 regions of the Russian Federation have already joined it. The remaining 8 largest regions (Moscow, St. Petersburg, Krasnodar and Perm, Moscow, Sverdlovsk and Chelyabinsk regions, the Khanty-Mansi Autonomous District) will move to direct payments from January 1, 2021.

Thus, the system of “direct payments” will be effective throughout the Russian Federation from January 2021.

The point of the amendments is that from 1 January 2021 all benefits (with few exceptions) will be paid directly to employees by the Social Insurance Fund (FSS).

Besides, employers will transfer insurance payments to FSS (including contributions for accidents at work and occupational diseases) in full, i.e. without reducing the amount of benefits paid to employees.

Direct payments of employee benefits from the Social Insurance Fund, which are considered in the draft, include:

Temporary disability benefits for the first 3 days of an employee’s illness will be assigned and paid, as before, only by the employer.

With subsequent reimbursement from the Social Insurance Fund, the employer will assign, and pay to working citizens the following types of benefits (the mechanism remains the same):

The mechanism of direct payments is as follows:

1. The employee must submit to the employer:

• a certificate of the amount of earnings (if he/she worked for other (other) employers during the calculation period);

• confirming documents (certificate of disability for work, certificate of registration at a medical institution in the early stages of pregnancy, certificate of birth of a child, etc.);

• application, wh ere details for the transfer of the allowance are specified.

Please be awared, that allowance will be paid by FSS only to the card of payment system MIR.

Important! The term for submission of the sick leave and other documents confirming the occurrence of an insured event is 6 months after the sick leave is closed.

2.The employer within 5 calendar days sends a package of documents to the FSS.
3. The FSS within 10 calendar days checks the documents provided by the employer and makes a decision on the assignment or refusal to pay the allowance.
4. If the decision is positive, the allowance is transferred to the employee’s current account or sent by mail.
5. If the documents are insufficient or incorrect, the FSS sends a notification to the employer. Within 5 calendar days the insured is obliged to replace them, or provide the missing documents.

The way of sending data to the FSS depends on the average number of employees:

The amount and methodology of benefit calculation remain the same.

 Monthly child care allowance awarded in 2019-2020 and continuing into 2021 are paid as follows:

• The employer pays the December 2020 allowance to the employee in the regular order;

• To process an allowance payment from 2021 directly from the FSS:

·         the employee must submit to the employer an application for the allowance directly from the regional branch of the FSS in the standard form and the necessary documents;

·         the employer within 5 calendar days is obliged to transfer the data (inventory, application and documents from the employee or register) to the FSS.

The monthly child care allowance will be transferred from the 1st to the 15th of the month following the month for which the allowance is paid. The allowance for care of the child till 1,5 years at transition to direct payments from FSS, is not subject to recalculation, the sum of the allowance appointed till 01.01.2021, does not change.

We will be happy to answer your questions!