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.

In this overview, we would like to draw your attention to some of the issues that foreign-owned companies face in liquidating an LLC (rus. OOO) in Russia in 2023.

What is generally important to keep in mind when deciding on liquidation:

• Liquidation is not a quick process and will take up to 1 year. This term may be extended for 6 months through the court (para 6 of the article 57 of the Federal Law No. 14-FZ dated 08.02.1998 “On Limited Liability Companies”);
• As soon as the decision is made to liquidate the company, the powers of the current CEO will be terminated and the liquidator/liquidation commission will take over the management of the company (a previously acting CEO may also be appointed);
• The company will need to carry out “preparatory work”: by the time of liquidation, it will need to ensure that it has no open tax and supplier/buyer debts;
• It is necessary to plan work with personnel and terminate labor contracts;
• It will be necessary to archive documents: archiving is mandatory for certain types of documents, and the retention period should be 75 years or even more, depending on the type of a document;
• It is necessary to be prepared for a possible tax audit: the depth of the audit, as a rule, may be up to three preceding years.

In addition to the abovementioned general standards, in 2023 the companies with foreign participation from unfriendly countries must consider the following points:

• Restrictions on payments with participants from foreign (unfriendly) states.

Payments in the amount exceeding 10 million Rub. (or equivalent in other currency) per calendar month made by residents to persons from unfriendly states as a result of liquidation of Russian legal entities are subject to a special procedure: in accordance with paras 2-9 of the Presidential Decree No. 95 dated 05.03.2022, they must be made through C-type accounts. More details on C-type accounts can be found here.

Payments may be made without following this procedure on the basis of permissions issued by the Bank of Russia and the Ministry of Finance of Russia (Presidential Decree No. 737 dated 15.10.2022).

• Permission of the Governmental Commission

Based on the official explanations of the Russian Ministry of Finance, liquidation is not directly included in the list of transactions for the purpose of applying Presidential Decree No. 618 dated 08.09.2022 and does not relate to transactions that require permission of the Governmental Commission for Control over Foreign Investment in the Russian Federation (the “Governmental Commission”).

Still most notaries refuse to certify liquidation applications if there is no permission issued by the Governmental Commission, so it is necessary to take this factor into account when planning the process.

Thus, when deciding on liquidation, we recommend to consider the abovementioned peculiarities, carefully weigh the pros and cons, including considering other possible options that may help to simplify this procedure.

On July 10, 2023, Federal Law No. 316-FZ was adopted, introducing a number of significant changes regarding the legal status of foreign citizens in the Russian Federation (hereinafter referred to as “Law No. 316-FZ”).

This law entered into force on July 10, 2023, but provides for separate, later deadlines for the entry into force of a number of provisions (more details below).

According to the new rules, family members of highly qualified specialists (hereinafter referred to as “HQS”) will be required to undergo a medical examination again within 30 calendar days from the date of the decision to extend the validity of the HQS work permit or from the date of entry into the Russian Federation (if they were outside the Russian Federation on the day of such a decision). Previously, family members of HQS were required to undergo a medical examination annually.

In addition, after 180 days from the official publication of Law No. 316-FZ, the following changes will come into force:

The obligation to obtain a work permit within 30 calendar days from the date of the decision to issue (extend) it is introduced.
In the presence of documented valid reasons and a written application from the employer, a work permit may be obtained at a later date, but not exceeding 30 calendar days. After the expiration of the established period, a work permit is not issued, and the decision to issue (extend) it is canceled.

In the event of early termination of an employment or civil law contract, the HQS, as before, has the right to search for another employer or customer of work within 30 working days.
If a new contract has not been concluded upon expiration of this period, the HQS and his family members will be required to leave the Russian Federation within 30 calendar days, and their visas and residence permits (if any) will be considered cancelled.
Before the said changes come into force, HQS and their family members will be given 30 working days to leave.

A HQS who has worked in this capacity in the Russian Federation for at least two years and his family members who have a residence permit will be issued an indefinite residence permit if the following conditions are met:
The HQS and family members reside in the Russian Federation with a residence permit;
during the period of the HQS’s employment, the employer calculated, withheld and transferred taxes to the budget system of the Russian Federation.
It is envisaged to issue a work permit for highly qualified specialists to carry out labor activities in two or more constituent entities of the Russian Federation if the following conditions are met:
work in other constituent entities is provided for by the provisions of an employment or civil law contract for the performance of work (provision of services);
a foreign citizen carries out labor activities in separate divisions of an organization, branches or representative offices of a legal entity or with related parties located in these constituent entities.
A ban on the employer to attract foreign highly qualified specialists to labor activities in the Russian Federation for two years in the event of failure to provide the tax authorities with information on the amounts of personal income tax calculated and withheld by the tax agent in relation to highly qualified specialists after 6 months, as well as if the information provided turned out to be fake or counterfeit.

In addition, from 01.03.2024, the level of wages (remuneration) of highly qualified specialists will increase to 750 thousand rubles per quarter. Before the changes were introduced, the threshold was 2 million rubles/year.

At the same time, Law No. 316-FZ does not cancel the previous reduced wages required to attract highly qualified specialists who are medical, teaching staff, participants in the implementation of the Skolkovo project, and employees of resident companies of special economic zones.

We are closely monitoring the development of the situation and innovations in legislation and will be happy to answer any questions you may have!

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.

We would like to remind you that in order to keep SME status companies with foreign participation should apply the list of required documents for entry into the register.

As for now, SME status is still available for those companies in which foreign participation exceeds 49%.

At the same time the necessary condition for entry is the compliance of both the foreign parent company and the Russian subsidiary with the criteria of small and medium-sized businesses set in the Russian Federation (in terms of headcount and income not exceeding the threshold for medium-sized businesses) – according to the Federal Law of 24.07.2007 N 209-FZ:

• the size of the average number of employees for the previous calendar year does not exceed 250 people (the maximum threshold for medium-sized enterprises);
• The amount of income from business activities in the previous calendar year does not exceed 2 billion roubles (maximum threshold for medium-sized enterprises).

For companies with foreign participation the data for inclusion in the register must be input by the authorized auditing organization in the period from July 1st  to July 5th , 2023.

Expert comment from Olga Grigorieva, CEO of the audit company Sterngoff Audit:

“The authority to confirm information for the SME registry and to submit it to the tax authority is the function of auditing organizations (part 6.2 of Article 4.1 of the Federal Law “On the Development of Small and Medium Entrepreneurship in the Russian Federation”).

That’s why the support from the auditors should be obtained. The auditors will conduct the necessary auditing procedures, check the data of the subsidiary and the parent company, and, in case the criteria are met, the auditing company will submit information to the register.

We submit the information monthly from the 1st to the 5th calendar day of the month. IMPORTANT NOTICE – the status previously obtained must be confirmed annually!”

Organizations which fail to provide information to the tax authority or which no longer meet the SME criteria will be removed from the register annually on July, 10th.

As a reminder, if SME status has not previously been obtained or has been lost, an application for status can be submitted any month.

The SME registry will be updated on the 10th day of each month (in the period from July 10th to December 10th – on the basis of reporting for the previous calendar year; in the period from January 10th to June 10th – on the basis of reporting for the calendar year before).

It is important to remember that regardless of the month in which the company was entered in the register, its status must be confirmed in the period from 01st to 05th of July of the following year. 

Should all the criteria for SME status be met, it is worth to think on the preferences available to SMEs:

• Reduction of the amount of insurance and social contributions to be paid from the payroll (from 30% to 15% in the part exceeding the minimum wage level); 
• Support measures from the federal authorities, such as a simplified procedure for filing certain forms of tax and statistical reporting, preferential lending for SMEs, reducing the supervisory burden (for example, a moratorium on non-tax audits until 31.12.2023, etc.);
• Support measures from regional authorities (there is a need to check at the place of company registration).

What should be done now:

• Submit a request to the auditing organization for a list of required documents;
• Request necessary documents from the foreign parent company to confirm that the criteria are met;
• Prepare data from the side of russian company.

If you need assistance in preparing of the necessary document package, we will be glad to provide you our support on the issue.

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.