What's happened
From January 1, 2024 Russia will introduce a withholding tax on fees for intercompany services and on income resulting from transfer pricing (“TP”) adjustments.1
Simultaneously, a grace period will be introduced for withholding tax on payments to independent counterparties from “unfriendly” jurisdictions, with which the double tax treaties were suspended in 2023.2 Some of these payments may be taxed at preferential tax rates or be exempt from withholding tax until the end of 2025.
It is also planned to significantly tighten the TP rules.
In detail1. Withholding tax on intercompany services
From January 1, 2024, a 15% withholding tax will apply to intercompany services fees. The withholding tax may be avoided if the double tax treaty between Russia and the jurisdiction of the foreign counterparty is fully effective. Counterparties from “unfriendly” jurisdictions with which tax treaties were suspended in 2023 will not be able to use this relief.
2. Withholding tax on adjustments under TP rules
From January 1, 2024, the difference between the actual and market price under a transaction with a related foreign counterparty will be recognized as dividends received by the foreign counterparty and will be subject to the withholding tax.
The withholding tax will not apply if the foreign counterparty returns the adjustment amount to the Russian taxpayer to its Russian bank account before the Federal Tax Service issues a decision to conduct a transfer pricing audit.3
3. Withholding tax on settlements with independent counterparties
From August 8, 2023 to December 31, 2025, there will be a grace period for income received by independent counterparties from “unfriendly” jurisdictions with which tax treaties were suspended. During this period, tax exemptions and reduced tax rates provided for by the suspended tax treaties will continue to apply, in particular in relation to (1) interest income paid to foreign banks and export credit agencies, (2) royalties for use of certain types of intellectual property, (3) income from the rental (leasing) of aircraft vehicles, (4) income from international transportation services, (5) income from sale and rental of sea vessels.4
4. Transfer pricing-related changes
Safe-harbor rules for interest rates on controlled loans under Article 269 of the Russian Tax Code will be changed. The TP rules will be also tightened, namely:
- for TP tax assessments, the median value of the market interval will apply;5
- the Federal Tax Service will have a right to request TP documentation for specific transactions before commencing a TP audit;
- TP documentation for transactions with basic commodities will have to be submitted simultaneously with the Notification of controlled transactions (until May 20 of the year following the reporting one);
- tax penalty in case of TP tax assessments on controlled transactions with foreign persons will be increased from 40% to 100% of the underpaid tax amount;
- tax penalties for failure to submit all types of TP reporting and documentation within the statutory deadline will be significantly increased.
Practical recommendations
In light of the expected changes, we recommend the following steps:
1. analyze existing contracts and determine which payments may be subject to the new rules;
2. analyze the pricing structure of intercompany agreements and consider splitting the price into payments subject to and exempt from withholding tax;
3. reconsider the intercompany service structure, including possible engagement of independent contractors or contractors from jurisdictions with which tax treaties were not suspended;
4. additionally review the arm's length nature of prices under transactions considered as “controlled” for TP purposes;
5. consider supplementing existing agreements with tax clauses that split the economic burden of paying withholding tax between the parties.
1. These and other changes are envisaged by Draft Law No. 448566-8 “On amendments to Parts One and Two of the Tax Code of the Russian Federation, certain legislative acts of the Russian Federation and annulment of certain provisions of legislative acts of the Russian Federation” adopted in the second reading (https://sozd.duma.gov.ru/bill/448566-8).
The changes will become effective according to the timeline above if the draft law is adopted by the State Duma, approved by the Federation Council, signed by the President and officially published within November 2023.
2. Decree of the President of the Russian Federation dated August 8, 2023 No. 585 “On suspension by the Russian Federation of certain provisions of international tax treaties of the Russian Federation”.
3. If the return is made after the expiration of the statutory deadline for paying tax for the period to which the adjustment pertains, the Russian taxpayer must also pay corporate profits tax on the amount of imputed income in the form of interest accrued on the adjustment amount.
4. For certain types of payments, the grace period applies only to agreements concluded before the suspension of the tax treaties, and for income from the rental (leasing) of aircraft - only to agreements concluded before March 5, 2022.
5. The value that is in the middle of the range of comparable transactions (as opposed to the current rules of applying the minimum or maximum value of the market interval).
Contacts:
Sergei Zhestkov, partner, Moscow
Arseny Seidov, partner, Moscow
Kirill Vikulov, partner, Moscow
Maxim Kalinin, partner, St. Peterburg
