As a result, dividends, interest, and royalties paid by Russian companies to counterparties in “unfriendly” countries, as well as capital gains from selling shares in entities with prevailing real estate share in their assets, will be taxed in Russia with withholding domestic rates: 15% for dividends and 20% for other types of income.
The suspension covers provisions of DTTs on reduced withholding tax rates, trading income, permanent establishment rules, and other critical treaty and related protocols provisions, such as non-discrimination.
The suspension, however, does not affect provisions in DTTS containing definitions, elimination of double taxation, exchange of information, or mutual agreement procedures.
The Russian Government is expected to develop measures mitigating the impact of the DDTs’ suspension on the Russian economy. This unilateral action by Russia may be treated as a breach of the Vienna Convention on the Law of Treaties, since the tax treaties do not specifically provide for any such “suspension”. This may give grounds for the contracting states to terminate tax treaties with Russia.
Confirming the suspension of tax information exchange with "unfriendly" countries may be a step towards the temporary suspension or termination of tax treaties. We covered this topic in more detail in our Alert as of March 21, 2023.
Implications for businesses
Tax issues previously resolved in the tax treaties, including permanent establishment criteria, taxation of other income, etc. will be governed by the domestic rules only. The impact of these changes will need to be reviewed on a case by case basis.
If the foreign countries likewise suspend or initiate termination of tax treaties, the income of Russian residents originating in such countries may be taxed at higher domestic rates.
In the absence of tax treaties, the income of foreign entities from Russia may be taxed twice – in Russia and in the residency state.
These measures are likely to increase pressure on companies from “unfriendly” states who are still doing business in Russia to expedite their exit plans or reorganize structures through which they hold Russian assets, to “friendly” jurisdictions.Implications for individuals
The implications for individuals may depend on the “mitigation” measures being developed by the Russian Government, e.g., allowing the setting off of foreign taxes in Russia. If affected foreign countries also suspend the DTTs, this may result in double taxation of Russian individuals working abroad.Mutual suspension or termination of tax treaties will result in Russia and other jurisdictions treating a person as their tax resident and lead to substantial increase in taxes for persons working abroad and earning salaries, lease payments and interest on deposits from Russia.
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1. President’s Decree No. 585, dated August 8, 2023
2. See our Legal Alert (March 21, 2023)
Contacts:
Sergey Zhestkov, Partner, Moscow
Arseny Seidov, Partner, Moscow
Kirill Vikulov, Partner, Moscow
Maxim Kalinin, Partner, St. Petersburg
