Consequences of suspension of provisions of double taxation avoidance agreements with Finland

On August 8, 2023, Presidential Decree No. 585 of Russia was published and came into effect, suspending the provisions of certain international treaties on taxation issues with a number of countries, including Poland, the United States, Sweden, the United Kingdom, Norway, Finland, Germany, France, and Japan.

It is important to note that we are discussing the suspension of specific provisions, not the entire agreements. The consequences of the suspension need to be considered for each individual agreement.

How the DTT with Finland now works

Which articles are suspended

For example, in the agreement with Finland, articles 5-21 are suspended, which establish rules for recognizing a permanent establishment, taxation of certain types of income (dividends, interest, royalties), as well as article 23, which defines non-discrimination obligations.

It should be noted that the agreement with Finland does not provide for a procedure to suspend its individual provisions, but this ambiguity might be resolved later in the negotiation process.

Taking into account the presidential decree and the provisions of the federal law dated July 15, 1995, No. 101-FZ “On International Treaties of the Russian Federation,” the suspension of obligations is effective from August 8, 2023. Accordingly, from this date, taxation will take into account the suspension of specific provisions.

The presidential decree suspends only certain provisions of the agreements; therefore, some provisions not mentioned in the decree continue to be in effect.

In the agreement with Finland, in particular, Article 4 “Permanent Establishment” is in effect, which sets a number of important rules for determining tax residency, as well as Article 22 “Elimination of Double Taxation,” which outlines the procedure for crediting tax paid in the other contracting state.

Taxpayers need to assess how these articles, considering the suspension of specific provisions and the application of national tax law, will affect their tax obligations in conditions of double taxation.

Consequences of the suspension

Let’s consider the most significant consequences using the example of the agreement with Finland.

Through the presidential decree, the following provisions are suspended: Article 6 “Income from Immovable Property,” Article 7 “Profit from Business Activities,” Article 10 “Dividends,” Article 11 “Interest,” and Article 12 “Income from Copyrights and Licensing.”

Regarding dividends, the application of reduced rates will become impossible, and interest and royalties will be subject to taxation at the source:

Income type	Taxation according to international treaty	Taxation according to national tax laws
Dividends	Tax is subject to withholding at the source, but reduced tax rates apply: 5% (for major investors) and 12% (in other cases)	Subject to withholding at a rate of 15%.
Interest income	Subject to profit tax only in the recipient country (not subject to withholding at the source)	Subject to withholding at a rate of 20%
Income from copyright and licensing (royalties)	Subject to profit tax only in the recipient country (not subject to withholding at the source)	Subject to withholding at a rate of 20%

Regarding the taxation of profits from entrepreneurial activities, the concept of a permanent establishment will be applied, but under the rules of Russian tax law.

Income from immovable property, which, by agreement, may be subject to taxation in Russia, will continue to be taxed in Russia but regulated exclusively by Russian tax law.

30.08.2023 We described the situation with regard to agreements with other countries in our article: Consequences of the suspension of a number of articles of the Russian Federation’s double tax treaties with unfriendly states.

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Konsu specialists are ready to provide consulting support on taxation issues related to the suspension of specific provisions of international agreements.