Provisions of DTTs with "Unfriendly" States Partially Suspended
The Decree of the Russian President No. 585 of August 8, 2023 suspending certain provisions of DTTs has been signed and published.
Therefore, the suspension is valid starting from August 8, 2023. As long as Russia remains on the blacklist of tax havens, the suspension shall apply except for cases when the relevant DTT is terminated. We have previously reported on the possibility of such a suspension and its consequences.
According to the Decree, several DTT provisions will be suspended, except for the articles on avoidance of double taxation, exchange of information, as well as the general provisions (definitions, residency, entry into force and termination, etc.).
Thus, as of August 8, 2023, the exemptions from withholding tax and other incentives under DTTs with "unfriendly" states will no longer apply. Instead, the local tax rates will be applied, namely 15% withholding tax on dividends and 20% regarding following payments:
- Interest;
- Royalties;
- Income from the sale of shares in companies, which assets are more than 50% directly or indirectly comprised of immovable property in Russia;
- Income from lease movable property in Russia;
- Fines and penalties due to breach of contractual obligations by Russian contractors;
- Other similar income (i.e., "passive" income from sources in the Russian Federation not connected with the foreign company's activities through a permanent establishment).
Income from international transportation is now subject to 10% withholding tax in Russia. In addition, the other benefits provided by DTTs no longer apply, e.g.:
- Recharge of executive and general administrative expenses of the head office - deduction of such expenses for profits tax purposes of Russian permanent establishments regardless of where such expenses have been actually incurred;
- Unlimited deduction of advertising expenses, please refer to DTT with Germany or DTT with France (advertising expenses in Russia are limited to 1% of the sales revenue during the respective period excluding VAT and excise taxes).
- Extended period during which construction sites and assembly objects do not create permanent establishments (30 days from the beginning of the activity according to the Russian Tax Code instead of, e.g., 12 months according to DTT with Germany).
The Russian government is also directed by the Decree to elaborate measures to mitigate negative impact on the Russian economy. Therefore, we also expect amendments to the Russian Tax Code in the near future.
