On 08.08.2023 Russian President Vladimir Putin signed a Decree on the suspension of certain provisions of Double Tax Treaties (DTTs') with 38 unfriendly countries1. The Decree enters into force from the date of its official publication (the document was published on the portal of legal acts on 08.08.2023).
The Decree suspends certain provisions of treaties with Poland, the United States of America, South Korea, Bulgaria, Sweden, Luxembourg, Romania, Great Britain, Hungary, Ireland, Slovakia, Albania, Belgium, Slovenia, Croatia, Canada, Montenegro, Switzerland, Czech Republic, Denmark, Norway, Italy, Finland, Germany, France, Macedonia, Cyprus, Spain, Lithuania, Iceland, Austria, Portugal, Greece, New Zealand, Australia, Singapore, Malta and Japan.
The adoption of the Decree is explained by the need to take "urgent measures" in connection with the commission by a number of foreign states of "unfriendly" actions against Russia, its citizens and legal entities. Suspension of DTTs will be effective until foreign states eliminate violations by them of the legitimate economic and other interests of Russia, the rights of its citizens and legal entities, or until the termination of these DTTs with respect to Russia. The Russian Government is authorised to draft a relevant law and submit it to the State Duma for consideration.
It should be noted that the Decree contains a reference to point 4 of Article 37 of the Federal Law dated 15.07.1995 No. 101-FZ "On International Treaties of the Russian Federation". According to this point, the effect of an international treaty of Russia, the decision on the consent of which to be bound for the Russia was adopted in the form of a Federal Law, could be suspended by the Russian President in cases requiring urgent measures to be taken, with the obligatory immediate informing of the Federation Council and the State Duma and submission of a draft of the relevant Federal Law to the State Duma.
Thus, the suspension of DTT (certain provisions of DTT) and termination of the obligations of Russia to fulfil it could take place by the decree of the President, and the adoption of the relevant Federal Law is a necessary formal procedure.
In addition, in case the State Duma rejects a draft Federal Law on the suspension of the action (individual provisions) of an international treaty, the action of the treaty (individual provisions) is subject to immediate resumption. Thus, it is possible to conclude that in the period from the date of adoption of the Decree of the President to the date of consideration of the draft law by the State Duma, certain provisions of DTT are already suspended.
In respect of the most significant tax consequences of the suspension of certain provisions of the DTT, we note the following.
A Russian company, as a tax agent, when paying income (dividends, interest, royalties, etc.) in favour of foreign persons who are residents of unfriendly countries, from 08.08.2023 should withhold corporate profits tax / personal income tax at the rates and in accordance with the procedure established by the Russian Tax Code.
It should be reminded that previously, upon receiving supporting documents from a foreign recipient, certain types of income of foreign recipients could have been exempted from corporate profits tax / personal income tax in Russia or taxed at reduced rates (clause 1 of Article 7 of the Russian Tax Code).
For example, in respect of corporate profits tax (withholding tax), the change in the taxation of the main types of income from sources in Russia will be as follows:
|
Type of income |
"Ordinary" tax rate under DTT |
Tax rate under the Russian Tax Code |
|
Dividends |
5% |
15% |
|
Interest |
Not taxable in Russia |
20% |
|
Licence fees (royalties) |
Not taxable in Russia |
20% |
It should be noted that some of the provisions of DTT are suspended, however, DTT itself is considered to be in force, which means that the rules on crediting in Russia of tax paid on income from the territory of unfriendly countries, for Russian persons in accordance with clause 2 of Article 275 of the Russian Tax Code and Article 232 of the Russian Tax Code remain in force (the provisions on elimination of double taxation are not suspended)2. Similarly, the provisions on potential communication between tax authorities in form of exchange of information and Mutual Agreement Procedure (MAP) remain in force.
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1 Decree of the President of the Russian Federation dated 08.08.2023 No. 585 "On Suspension by the Russian Federation of Certain Provisions of International Tax Treaties of the Russian Federation"
2 When a Russian company receives dividends from a foreign company which is a resident of an unfriendly country, the Russian company, when taxing this income in Russia, will be able to offset the tax paid on dividends in the unfriendly country, if this is provided for by an international treaty between Russia and the state in which the dividends were received and the tax was paid (Clause 2 of Article 275 of the Russian Tax Code).
Individuals who are Russian tax residents may offset tax paid abroad against Russian personal income tax if this is provided for by an international agreement between Russia and the state where the tax was paid (points 1-4 of Article 232 of the Russian Tax Code).
