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Application of major double taxation treaties (DTTs) could be suspended

Application of major double taxation treaties (DTTs) could be suspended

The Russian Ministry of Finance and Ministry of Foreign Affairs have publicly proposed to Russian President Vladimir Putin to temporarily suspend the application of double taxation treaties (DTTs) with all “unfriendly” states. The suspension would have a significant impact on the taxation of foreign businesses in Russia. The termination of DTTs is, however, not being discussed.

The announcement on this matter was published on the website of the Russian Ministry of Finance (MinFin) on March 15th, 2023. The list of “unfriendly” states includes circa.

The MinFin announcement links this initiative to the sanctions imposed on Russia, as well as Russia's recent inclusion in the EU's list of “non-cooperative tax jurisdictions” (“EU-blacklist”). The intention is to suspend the application of DTTs “until Russia's violated rights are restored”. If Russia is removed from the “EU-blacklist”, the suspension could be lifted. The list is due to be revised in October 2023.

The suspension of DTTs may result in double taxation. In particular, reduced tax rates and exemptions will cease to apply. This primarily affects so-called “passive” income: interest, dividends, royalties. These will then be taxed in accordance with the Russian rules: 15% for dividends, 20% for interest, royalties and other passive income from Russian sources. The latter will then also be subject to taxation in Russia, while other income was previously exempt under the DTTs.

Likewise, the income of foreign employees from work in Russia may be affected - it is possible that such income may be taxed in both Russia and the relevant foreign state with no tax credits or exemptions being applicable.

In addition, some DTTs (e.g., with Germany) provide for exemption from Russian withholding tax in regard to income from the sale of shares in the capital of Russian companies when more than 50% of their assets consist of real estate located in Russia. The application of these exemptions will then likewise no longer be possible.

Overall, it remains to be seen whether this proposal will be accepted and implemented by the President.

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16.03.2023

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