On February 14, 2023, the Council of the European Union (“EU Council”) released a press release stating that Russia has been included in the “blacklist” of non-cooperative jurisdictions for tax purposes. According to EU authorities, Russia is not striving to resolve issues related to a special regime for international companies in special administrative regions to meet the criteria of effective tax management of the European Union.

Consequences of being included in the “blacklist”

Russia’s inclusion in the EU’s “blacklist” means that EU member states will have the right to apply administrative and legal measures against Russia. Each EU member state must choose at least one administrative measure and one legal measure. However, the application of all measures from the specified list simultaneously is not mandatory, but may be at the discretion of the specific EU member state.

Administrative measures include:

  • Enhanced monitoring of certain transactions between EU residents and Russian entities;
  • Increased audit risks for EU taxpayers using structures or transactions involving Russian entities.

Legal measures include:

  • The impossibility of tax resident companies in EU countries to deduct expenses incurred in transactions with Russian entities for tax purposes;
  • Application of CFC (controlled foreign company) rules to EU residents who may not have previously applied these rules under national legislation;
  • Application of source taxation on income paid to Russian entities that were previously exempt from taxation;
  • Limitations on the application of the exemption rules for distributed profits received from Russian entities for EU shareholder residents.

Suspending double taxation avoidance agreements

As a retaliatory measure, the Russian Ministry of Finance and Ministry of Foreign Affairs proposed to suspend the application of the DTAs. If the proposal is supported, the application of reduced tax rates (tax exemptions) for income covered by the double taxation avoidance agreements (such as interest, dividends, royalties) will be suspended from the date of the corresponding presidential decree.

Our support

We offer the following services:

  • Analysis of risks associated with the use of restrictive measures and their legal consequences for businesses, and if necessary, assistance in developing an optimal structure for interacting with counterparties from the EU.
  • Analysis of tax consequences of possible suspension of agreements on avoidance of double taxation and development of ways to mitigate them.

Please feel free to contact us for a consultation.