Update on Information Exchange and Application of Double Taxation Treaties
Valeria Khmelevskaya
by Valeria Khmelevskaya
A number of countries have put international tax cooperation with Russia on hold. This has inadvertently led to negative consequences for both Russian and foreign tax residents.
Suspension of automatic exchange of tax information
As media reported the suspension by a number of countries (such as US, UK, Canada, Germany, Austria, Switzerland etc.) of exchange of tax information with Russia it is of importance to assess the actual consequences. The media usually do not specify which type of exchange is suspended (exchange under DTT, initiative exchange or automatic). At the same time only lack of automatic exchange of tax information leads to tax and legal consequences in vast majority of cases.
When a foreign country carries out automatic exchange of tax information (hereinafter „auto exchange“) with Russia, it is “white-listed” by the Federal Tax Service of Russia. The US, UK and Canada were never listed as countries carrying out auto exchange, Germany and Austria continue to be listed and only Switzerland was excluded from the FTS “white list” as of 05 December 2022, because the latter sent the relevant auto exchange cancellation notification to the Russian authorities.
Russian entities and individuals having bank accounts in the not “white-listed” jurisdictions may suffer certain limitations under Russian currency control rules, Russian residents will only be able to receive specific payments on their foreign bank accounts, inter alia, tax refunds, wages under employment contracts for work outside Russia etc. However, receiving dividend payments, funds from sale/redemption of securities, income from renting property etc. is considered „illicit currency operations” and might lead to a 20-40% fine of the amount debited to the relevant account. This, inter alia, might be relevant, for employees recently relocated from Russia.
Moreover, following the suspension of auto exchange, the tax authorities may require the Russian entity belonging to a foreign company group to provide a Country-by-Country (CbC) report. The CbC report must contain, in particular, information on the total amount of revenue broken down by the amounts of revenue from intragroup transactions and revenue from other transactions. Non-submission is sanctioned with the fine of RUB 100,000 (approx. EUR 1,160).
Cancellation/suspension of double taxation treaties (DTTs)
Russian DTTs with Ukraine and Latvia were denounced. In addition, there is an initiative from Russian Ministry of Finance and Ministry of Foreign Affairs to temporarily suspend, but not terminate the application of DTTs with all “unfriendly” states (those nations which have imposed sanctions, e.g., USA, EU member states, Switzerland, Japan, etc.). The latter proposal, if upheld und implemented, would have a significant impact on the foreign businesses in Russia.
Cancellation/suspension of DTT means that incentives (e.g., reduced rates of withholding tax for dividends) are no longer available, but domestic withholding tax rates (e.g., 20% for interest and license payments, 15% for dividends) will be applicable with respect to the payments to the above countries.
Valeria Khmelevskaya is a Partner, Lawyer and Tax Consultant admitted to practice in Russia. She has over 20 years of experience of consulting in matters of Russian and international tax law. She is also the Deputy Head of the Management Board and the Chair of the Committee for Taxes and Financial Reporting of the German-Russian Chamber of Commerce (AHK) and recommended attorney of the Austrian Foreign Trade Centre Moscow (Advantage Austria). Contact Valeria.
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