Russia can suspend Double Taxation Agreements (DTAs) with all “unfriendly” countries. As a result, emigrants in Europe who continue to receive payments from Russia run the risk of paying taxes twice – both in Russia and in the host country. Large companies with overseas holdings, as well as foreign investors, will also have to pay more taxes. The consequences of the planned changes lie in the RTVI hardware. The measure will affect 38 of the 84 tax treaties Russia with other countries. “The suspension of such a volume of tax relations, developed over years of practice, is unprecedented,” B1 partner Marina Belyakova told RTVI. If the president supports the initiative of the Ministry of Finance and the Ministry of Foreign Affairs, the decision should come into force before the end of the year, but perhaps earlier, believes the expert. the Ministry of Economic Development.
A blow for emigrants from Russia
Alexander Chizhenok / Kommersant
The suspension of the agreements is aimed more at large companies with holdings abroad. But a much wider range of people will suffer, including Russians who have emigrated and still receive income from Russia. Among the “unfriendly” are such countries of mass emigration of Russians as Montenegro, Cyprus, Latvia, Lithuania, Poland, Portugal, Finland, Germany. Now the tax will have to be paid twice – both in Russia and in the host country,” Daria Nevskaya, managing partner of Nevskaya Consulting, told RTVI. For example, a Russian left for Montenegro after the outbreak of hostilities in Ukraine, but continues to work and receive a salary from a Russian company or rents for renting an apartment in Russia Personal income tax in Russia – 13% (15% with income 5 million rubles per year).In Montenegro income tax is 15%.Having lived in Montenegro for more than 183 days, the Russian will lose the tax residence of the Russian Federation and become a resident of Montenegro. In this case, he will have to pay 30% personal income tax on income from Russia.In Montenegro, you do not have to pay anything more thanks to the double taxation agreement. is “frozen”, the possibility of tax compensation it will disappear.
“Those who left must finally make up their minds and, possibly, sever economic ties with Russia,” Daria Nevskaya said.
The changes may encourage the resettlement of Russians to countries where there is no personal income tax – for example, the United Arab Emirates (UAE). Portugal does not levy taxes on the foreign income of residents. In Italy and Switzerland there is the possibility of fixed tax payments.
Signal for the return of business to Russia
Many holdings of large Russian companies are still abroad. For example, Tinkoff Bank (100% owned by TCS Group Holding PLC in Cyprus), VK Company Limited in the British Virgin Islands, RUSAL (25.72% owned by Sual Partners of the Bahamas), NLMK (79.3 % by Fletcher Group Holdings Limited, Cyprus) and many others. This is another signal to companies that they need to return to Russia, and doing business with the participation of holding companies in “hostile” countries does not meet current conditions, agree experts interviewed by RTVI. expect flexibility and exceptions for certain types of companies – for example, state-owned companies,” said Marina Belyakova. The aim of the initiative is to inject more money into the budget and “draw a turning point” between Russia and “hostile” countries, which could lead to an acceleration of isolation, says Daria Nevskaya , managing partner of Nevskaya Consulting.
“Hole” in the budget increases the Russian budget deficit has reached 2.58 trillion rubles in January-February. It’s 88% the projected deficit for 2023 of 2.9 trillion rubles. (2% of GDP).
The flow of passive income (eg dividends and interest on loans) from Russia to hostile countries is already limited. “As a rule, permission from the government commission is required,” said Marina Belyakova.
Following Russia’s suspension of the deals, a similar “freeze” by “unfriendly” countries will follow, Alexander Tokarev, partner at Kept tax and legal advisory department, said in an interview with RTVI. “After all, the ‘hostile’ country, Russia’s partner in DTT, can hardly be expected to continue to apply it,” Tokarev said. Benefits from Double Taxation Treaties (DTAs) have allowed companies to pay less tax on dividends, interest on loans and royalties. If agreements are suspended, taxes will increase.
The main impact of the changes will be felt on actual cross-border trade
More taxes will be paid by Russian companies, which are currently restructuring or liquidating European companies and planning to distribute assets to Russian entities.
How much more will the company pay?
For example, after the suspension of the agreements, the payment of interest on a stake in Cyprus in favor of a Russian company will be taxed at 30% instead of 15%, as is currently the case.
More taxes will also have to be paid in the countries of registration of the European sub-holdings of the Russian groups when they are liquidated and allocated assets. For example, in Switzerland – 35% instead of 5%.
“At the same time, Russian groups will pay increased taxes to the foreign budget,” emphasizes Alexander Tokarev.
The fact is that the suspension of the agreements will “nullify” the right of companies to offset taxes paid in Russia on obligations abroad. “In fact, they will pay twice – first withholding tax in Russia, then corporate tax in the country of registration of the holding company, if the dividends from it are not exempt under local legislation,” explained Daria Nevskaya.
Kirill Kukhmar / TASS
The measure will not help much in the fight against shell companies which were used to withdraw capital to traditional offshores. Intermediary companies have long lost the ability to apply tax exemptions due to the tightening of tax controls, explained Alexander Tokarev.
Tax increase will also affect foreign investors
“The measure will affect, for example, companies from France, Japan and Germany which, despite the current context, have maintained strategic investments in Russia. Marina Belyakova explained. “For example, the dividends of many of these investors could be taxed at source in Russia at 5%, but now the rate will increase to 15% in general.” Alexander Tokarev emphasizes that the effect on Western affairs will not be strong. “Passive income payments from Russia have decreased significantly due to counter-sanctions and the withdrawal of foreign companies from Russia,” he said.
Will the exodus from offshore accelerate?
In part, the measure will encourage businesses to move to “Russian offshores,” as the special administrative regions (SARs) of Vladivostok and Kaliningrad are called.
“SARs will be more interesting for international companies with Russian roots,” explained IEF LEGAL partner Alexander Erasov. Some may modify their business structures to include companies from friendly countries.
“But a massive increase in migration to the SAR is hardly possible,” says Daria Nevskaya. “Companies under sanctions and those who have seriously considered such an opportunity have already moved to SAR or are” on the way “. In particular, VK discuss the possibility The measure will become an additional incentive for Russian companies to transfer businesses to other jurisdictions – in particular to the United Arab Emirates, believes Daria Nevskaya. Russian companies are also ready to accept Hong Kong, Kazakhstan, Uzbekistan, Qatar, Bahrain, Mauritius, tax advisers told RTVI earlier. massively their assets to Russia. This is also evidenced by the lack of enthusiasm during the last capital amnesty, which ended on March 1.
How Russia Changed Tax Treaties in the Past The system of withdrawing capital from Russia at reduced tax rates through transit jurisdictions was once popular. Russia does not have tax agreements with popular offshore companies, for example with the British Virgin Islands, Caymans, Seychelles, Bermuda, Guernsey and Jersey. When paying dividends to these jurisdictions, the maximum tax rates apply. Therefore, unscrupulous companies registered shell companies in countries with which there is TNT, withdrew profits from Russia with a minimum payment of taxes, and only then – to classic offshore companies.
Until 2020, for example, dividends from Russia to Cyprus were transferred with a 5% tax, then to the British Virgin Islands (BVI) with a 0% tax. If the dividends were transferred directly to the BVI, with which there is no tax treaty, the rate would be 15%.
In March 2020, President Vladimir Putin declared an end to the withdrawal of capital through transit jurisdictions. Accordingly, the Ministry of Finance revised the DTC with Cyprus, Luxembourg and Malta. It was not possible to reach an agreement with the Netherlands and the agreement was denounced. A similar process of renegotiating the treaty with Switzerland came to nothing.
Since then, profit distribution in Cyprus, Luxembourg and Malta for private companies is taxed at 15% instead of the previous 5%. The preferential rate of 5% remained only for a limited circle of enterprises with state participation and public enterprises.
