In briefThe Russian Ministry of Finance and Foreign Affairs Ministry have suggested that the President temporarily suspend tax treaties with countries that have imposed sanctions against Russia.
If the President decrees such “temporary suspension”, some 40 tax agreements may temporarily cease to apply in Russia. For corporate and individual taxpayers this might mean a substantial increase in their tax burden in Russia and potentially abroad without any grace period. As the “temporary suspension” is not provided for under the tax treaties, it is unclear if contracting states would continue enforcing the treaties.
Implications for businesses
Tax treaties currently envisage reduced tax rates on income sourced in Russia and in contracting states, as well as tax credits and exemptions to eliminate double taxation, and regulate mutual agreement procedure and information exchanges on the tax matters.
Should the treaties be “temporarily suspended”, the above benefits will no longer apply in Russia. Dividends, interest, and royalties paid by Russian companies abroad, as well as capital gains on the sale of companies with substantial real estate will be taxed in Russia at ordinary rates (15% for dividends and 20% for other types of income) with no available reductions.
If foreign countries likewise suspend or initiate termination of the agreements (this was the approach taken by Latvia and Ukraine), income payable from abroad to Russian taxpayers will likewise be taxed at the foreign states’ domestic rates, which are often higher than Russian tax rates. Russian taxpayers may not credit in Russia the taxes they pay abroad. The substantial tax burden increase may cause Russian businesses to close their operations in “unfriendly” states, if these businesses cannot be shifted to Russia or to “friendly” countries. Even if such relocations are commercially feasible, it will take considerable time, be costly and disrupt routine manufacturing and supply processes.
Implications for individualsIndividuals may face not only double taxation of their income abroad and in Russia (such as interest yield on deposits with foreign banks, rental charges, foreign employment income, etc.) with no tax credit in Russia, but also a high risk of simultaneously becoming tax residents in multiple states.
Unlike Russia which applies the 183-day test, foreign jurisdictions employ combined tests, including "center of vital interests" or "habitual abode". These are tax treaty tie-breaker rules that eliminate tax residency conflicts.
The suspension or termination of tax treaties may trigger situations where several jurisdictions along with Russia will recognize a person to be their tax resident and tax all of her or his income rather than only the portion derived in a particular country - without crediting tax payments made elsewhere.
Next stepsConsidering the possible rapid onset of adverse tax consequences already in 2023 should the proposed initiative go forward, we recommend that you promptly do the following:
- analyze the structure of your assets and income and estimate the likelihood of double taxation in Russia and abroad
- assess the possibility of transferring your assets or business) to Russia or to “friendly” states
- determine your tax residency status in all countries where you spend time and take measures to avoid double taxation.
Sergei Zhestkov, Partner, Moscow
Arseny Seidov, Partner, Moscow
Kirill Vikulov, Partner, Moscow
Maxim Kalinin, Partner, St. Petersburg