Earlier we have already touched upon the issue of suspension of certain articles of double taxation treaties of the Russian Federation: Consequences of suspension of provisions of international tax treaties on the example of the agreement with Finland. In this article we will highlight this issue in more detail.

With which countries the terms of agreements have been suspended

On August 8, 2023 the Decree of the President of the Russian Federation dated 08.08.2023 N 585 (hereinafter – the Decree) “On suspension by the Russian Federation of certain provisions of international treaties of the Russian Federation on taxation” came into force. The Decree suspended most of the articles of 38 international treaties of the Russian Federation regulating the procedure for taxation of income and property with the following states:

Australia Hungary Spain Macedonia Republic of Korea Finland Sweden
Austria Germany Italy Malta Romania France Japan
Albania Greece Canada New Zealand Singapore Croatia
Belgium Denmark Cyprus Norway Slovakia Montenegro
Bulgaria Ireland Lithuania Poland Slovenia Czech Republic
United Kingdom Iceland Luxembourg Portugal USA Switzerland

What parts of the agreements are suspended

International double taxation treaties of the Russian Federation have a typical structure and the list of articles suspended from 08.08.2023 does not differ much from one treaty to another. Basically, the following articles of the agreements with the above states have been suspended:

Permanent Establishment Income from Immovable Property Directors’ Fees Other Income
Profit from Commercial Activities Income from Sale of Immovable and Movable Property Income from Public Service Property (Capital)
International Transport Income from Copyrights and Licenses Pensions Non-Discrimination
Dividends Income from Employment Income of Artists and Athletes Adjustment of Income when Certain Persons Participate in Management, Control, or Capital of Other Persons
Interest Income from Independent Personal Services Teachers, Researchers, Students, and Trainees

With regard to the taxation of “active” income of organizations, in our opinion, the Decree had the greatest impact on the taxation of income from construction and installation activities and international transportation.

Taxation of income from construction and installation activities and income from international transportation

The suspended provisions of international agreements established specific time limits within which construction and installation activities did not result in the establishment of a permanent establishment and also provided for the taxation of income from international transportation (including the lease of transportation, equipment and containers) only in the state of residence of the recipient of the income.

Current Russian tax legislation provides for the formation of a permanent establishment from the beginning of regular activity at a construction site at a rate of 20% and for the taxation in Russia of income of foreign organizations from international transportation and from the use, maintenance or lease of ships, aircraft or other mobile vehicles or containers in international transportation at a rate of 10%.

Taxation of “passive” income of foreign organizations from sources in the Russian Federation

However, the Decree has had the most significant impact on the taxation of “passive” income of foreign organizations from sources in the Russian Federation. The provisions providing for privileges in respect of income of foreign organizations in the form of dividends, interest, license and similar payments have been suspended.

Instead of the reduced rates provided for by international agreements, Russian legislation provides for a 15% profit tax rate for foreign organizations with respect to dividends.

Please note! Payment of dividends to owners and shareholders from states recognized as unfriendly shall be made only with the approval of the Government Commission. More details on the requirements and procedure: Payment of dividends, sale of company shares and property by owners and shareholders from states recognized as unfriendly. Restrictions on purchasing foreign currency and conducting international banking operations are also possible. Current situation regarding major currencies and banks: Overview of sanction-related and other restrictions, as well as legislative relaxations.

The suspended provisions of international agreements provided for no withholding taxation of license and similar payments (royalties) at source in the Russian Federation or taxation of such income at a rate of 5-10%. Under Russian law, royalties paid by Russian companies to foreign companies are subject to income tax at the rate of 20%.

Similarly, the suspended provisions of international agreements established a full exemption from taxation of interest in the country of payment source or a preferential income tax rate not exceeding 15%. Now, under Russian law, interest income of foreign companies is subject to Russian withholding tax at a rate of 20%.

Taxation of sales of aircraft, marine vessels and inland waterway vessels in the Russian Federation

The changes also affected taxation of the sale of aircraft, sea vessels and inland waterway vessels in the territory of the Russian Federation. According to the provisions of international agreements suspended by the Decree, such property is not considered immovable property. Russian legislation classifies aircraft, sea vessels and inland waterway vessels subject to state registration as immovable property, the sale of which is subject to taxation in the Russian Federation at the rate of 20% on the basis of subparagraph 6 of paragraph 1 of Article 309 of the Tax Code of the Russian Federation. In a similar manner, other income of foreign companies, not separately named in other articles of international agreements, which previously were not subject to withholding tax under these international agreements, is now subject to taxation in the Russian Federation at the rate of 20%, if Russian legislation so provides.

Russian companies planning to pay income to foreign companies should analyze the impact of the suspension of the provisions of international tax treaties of the Russian Federation from 08.08.2023 on the taxation in the Russian Federation of the income paid.

Clarifications, comments and updates

Taxation of certain types of interest income

11.07.2023 An explanation was published by the Ministry of Finance of the Russian Federation regarding “The Procedure for Taxation of Certain Types of Interest Income Paid to Residents from Unfriendly Countries”:

“When paying income in the form of interest to export credit agencies located in unfriendly countries, as well as organizations engaged in banking activities in accordance with their domestic law, which were previously exempt from or subject to a reduced rate of withholding tax under Russia’s international tax treaties, the effect of which has been suspended by the Decree, tax agents are entitled not to calculate and withhold corporate profit tax (or to calculate and withhold such tax at the corresponding reduced rate) on such interest income, provided that such foreign organizations (agencies) have a real right to the income received.

The relevant amendments to the Tax Code of the Russian Federation will be prepared during the fall session of the State Duma in 2023 and will apply to the specified interest income paid starting from the date of suspension of the provisions of Russia’s international tax treaties.”

Reasons and expected duration of the suspension

19.08.2023 Ministry of Finance of the Russian Federation commented on the reasons and duration of the suspension of certain provisions of international agreements:

“Since 2022, Western countries have unilaterally imposed economic restrictive measures against Russia. Including in February of the current year, the European Union included Russia in the list of non-cooperative jurisdictions in the tax sphere, the so-called ‘EU blacklist.’ Simultaneously, there has been non-compliance with certain provisions of tax agreements by unfriendly countries. For instance, refusals to issue certificates of residence in a foreign state to their residents for the application of agreements, as well as the suspension of the exchange of tax information with Russia. In the current circumstances, Russia could not continue to apply agreements unilaterally. […] The partial suspension of tax agreements with unfriendly countries will remain in effect until the rights of the Russian side are restored or the agreements are denounced”

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