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!

Since Russia has been closely interacting with China in various fields over the past decades, many Russian representatives of small and medium-sized businesses are beginning to actively cooperate with Chinese partners. Russian businessmen who are not aware of the peculiarities of the Chinese mentality may encounter serious difficulties when signing contracts with Asian partners.

In this review we would like to draw your attention to the important features of concluding contracts between partners from Russia and China, which will help you to avoid a number of mistakes:

1. The only official language in China is Chinese. Thus, it is advisable to sign the text of the contract not in Russian and English, but in Russian and Chinese (the official languages of Russia and China).

If the Chinese partners do not insist on this, this can only mean that they do not intend to register the contract with the Chinese government authorities.

2. The name of a Chinese company registered in China can only be in Chinese, and the English name of the company is not legally valid to the full extent Chinese, as well as Russian, courts do not consider claims if the documents do not indicate the real (registered) company names.

3. It is necessary to check the registration of the Chinese company by requesting from the partner a certificate of registration of a legal entity, and also make sure that its representative has the appropriate authority.

It should be kept in mind that only the legal representative of the company has the right to sign a contract without a power of attorney. This may not always be the CEO of the company. The legal representative must be indicated in the certificate of registration of a legal entity.

If someone else signs the contract on the Chinese side, they are required to present a power of attorney. Therefore, when concluding a contract with a Chinese company, it is worth asking the future partner for a power of attorney confirming the authority of the signatory.

4. It is important to check the registration (legal status) of the Chinese seal.

Each Chinese company generally has one main seal, which is strictly controlled. However, to support various types of activities, companies often produce additional types of seals, including “contract seals.” Having produced such seals, Chinese companies often do not amend the registration documents accordingly or otherwise register their legal status.

In this regard, it is recommended to check whether the Chinese partner’s seal is registered by requesting a certificate from the State Commerce and Industry Administration of the government at the place of registration of the Chinese company. It is quite easy to obtain such a certificate, and falsifying it is dangerous for a Chinese partner.

5. To protect yourself, it is recommended to check the company’s website. The site must have a Chinese version, otherwise there is a high chance of encountering scammers. You should check the domain name registration date and ownership.

6. In order to avoid difficulties with the recognition and enforcement of decisions of Russian courts in China, it is recommended to introduce an arbitration clause and include in it one of the well-known institutional arbitration centers in China, for example, the China International Economic and Trade Arbitration Commission (CIETAC), the Beijing Arbitration Commission (BAC), etc.

On the one hand, this will require additional costs for contacting Chinese lawyers or Russian specialists with experience in representing the interests of parties in Chinese arbitration. On the other hand, this will simplify the issue of recognition and enforcement of the decision under the New York Convention of 1958.

If the Chinese partners do not want to resolve the dispute in arbitration due to the high cost of the procedure, then, in order to avoid difficulties with the recognition and execution of decisions of Russian courts in China, it is better to establish a clause for those disputes, for which this is possible, regarding their resolution in a Chinese state court, since Russian courts readily recognize decisions of Chinese courts.

An increasing number of Russian banks are now suspending the opening of accounts for new customers, restricting the opening of new foreign currency accounts for existing customers, introducing commissions for keeping foreign currency in accounts, and imposing limits on foreign currency transfers or ceasing to make such transfers abroad altogether.

We continuously monitor the situation with local banks, keep track of updates on the conditions with foreign currency international transfers with European and CIS countries, and maintain a consolidated analytical register, including for banks in Russia that are in the TOP-100 of current Russian financial sector rankings.

We also provide additional comprehensive account opening support to our clients, namely:

• full communication with the bank; 
• clarification of the requirements for the package of documents to be submitted for account opening;
• preparation and verification of the set of documents required for account opening/provision of information on the documents required for account opening;
• completion of all required applications and forms; 
• control over the opening of bank accounts; 
• preparation of the documents for granting access to the online bank and connecting authorized signatories and non-signatories to the online bank.

Should you have any difficulties with international payments, account opening or other related issues, we will be happy to provide you with more detailed information upon request and offer our support.

In this review, we have summarized the rules governing the required notifications and reports that must be filed in the Russian Federation if you have (or are acquiring) a share in a foreign organization.

When creating/acquiring a share in a foreign organization: notification

When a share in a foreign organization arises (or changes), regardless of the size of the share, an individual who is a tax resident of the Russian Federation must file a notification of participation in foreign organizations (on the establishment of foreign structures without forming a legal entity).

This notification must be filed no later than three months from the date of the emergence (change in share) of participation in a foreign organization.

Failure by a taxpayer to submit a notification of participation in foreign organizations to the tax authority within the prescribed period or submission of a notification of participation in foreign organizations containing inaccurate information entails a fine of 50,000 rubles for each foreign organization.

What is considered a controlled foreign organization (CFO)?

A controlled foreign company is a legal entity or a structure without the formation of a legal entity, the place of tax residence of which is a jurisdiction other than the Russian Federation, controlled by a legal entity or an individual who is a tax resident of the Russian Federation.

When creating / acquiring a share in a CFC (controlled foreign organization)

When a share in the CFC arises (changes) the individual must submit a notification of controlled foreign companies to the tax authority at the place of registration during the reporting year, but no later than April 30 of the year following the reporting year. The deadlines for sending an annual notification of a CFC to the Federal Tax Service for individuals are set out in Article 25.14 of the Tax Code of the Russian Federation.

The notification form is set out in legislation.

In addition to the notification form itself, it is necessary to collect a package of documents on the controlled foreign company and its participant. Typically, this list includes:

1. Certificate of registration of the organization and an extract from the trade register;

2. Certificate of the state – tax registrar;

3. Financial statements of the CFC, prepared in accordance with the personal law of such a company for the financial year. In case of its absence, it is necessary to submit other documents that confirm the profit or loss of the company;

4. Auditor’s report on the financial statements of the CFC, if the audit is mandatory or the company voluntarily conducted an audit;

5. Copy of the passport of the CFC participant;

6. Notarized power of attorney in case of notification by a third party.

If the original documents are attached not in Russian, a notarized translation is required.

Calculation of the tax base for the CFC

The minimum amount of CFC profit that can be used as a taxable base is 10 million rubles, CFC profit below this amount is not taxed in the Russian Federation and is not subject to declaration.

If the profit of a controlled foreign company exceeds 10 million rubles, it is used as a tax base for calculating income tax and is filled in the 3-NDFL declaration (Sheet B) for individuals. Information on each CFC is submitted separately, the data is not summarized. Declarations must be submitted to the Federal Tax Service as part of the normal procedure for filing declarations along with other sheets of the document.

Particular attention should be paid to determining the date of receipt of profit from the CFC by the controlling person – December 31 of the year following the tax year of the foreign organization. The dates of receipt of profit and reporting on it are clearly presented in the diagram:

Cross-border transfer of personal data: new rules

On 30.12.2022 an extract from the minutes of the meeting of the sub-commission of the Government Commission for Control of Foreign Investment in the Russian Federation (hereinafter the “Sub-Commission”) No. 118/1 dated 22.12.2022 was published on the official website of the Russian Ministry of Finance.

According to the information contained in this extract, the Sub-Commission sets out the conditions that must be complied with in order to obtain permission to carry out transactions involving company shares. In particular, these include:

• independent assessment of the market value of the assets;
• sale of assets at a discount of at least 50% of the market value of the relevant assets as indicated in the asset assessment report;
• establishment of key performance indicators for the new owners;
• availability of an instalment payment for 1-2 years and/or an obligation to make a voluntary contribution to the federal budget of at least 10% of the amount of the transaction.

Please be reminded that our previously published regulations on transactions with limited liability company shares can be found in detail here.

In addition, the Sub-Commission lists conditions that will be taken into account when deciding on issuing permissions to organisations for payment of dividends to foreign participants in cases stipulated by Presidential Decrees No. 95 dated 05.03.2022 and No. 254 dated 04.05.2022, when the payment exceeds 10 million roubles per calendar month or the equivalent of this amount in foreign currency at the official exchange rate of the Central Bank of Russia set on the 1st day of each month. These include, in particular: