Contributed by Lex Alliance Law, Russia
Lex Alliance law company greet everyone who is reading this article. Our company joined to the AITC as a Russian partner in April and we are glad to present to you our first article for the AITC tax newsletter.
As our first contribution, we would like to summarize the main Russian tax trends that nowadays are being discussed by Russian tax experts.
The changes of DTT tax rates in respect of withholding tax (WHT)
The president of Russia Vladimir Putin announced on March 25 that Russia is going to propose significant changes of DTT rates provided for dividend and interest income. Most DTTs provide reduced WHT rates for dividends (5-10%) and exempt interest income from WHT. Russian president decided to propose to Russian DTT partners to establish 15% WHT rate for dividends and interests. Such changes are not expected to influence Eurobonds, bond-secured loans and loans provided by foreign banks.
Russian ministry of Finance has sent corresponding letters to Cyprus, Luxembourg and Malta. If the state authorities of these jurisdictions refuse the Russian proposal, Russia will quit such DTTs unilaterally.
Thus, the described process for directors, shareholders and controlling persons of companies registered in Malta, Luxembourg and Cyprus will mean the following:
· the dividend income paid by Russian companies will be taxed at source at the rate of 15% in any case;
· the interest income from Russian sources will be taxed with WHT in Russia at the rate of 15% if the foreign recipient confirms its status of actual beneficial owner; otherwise 20% WHT rate, established by the Russian law, should be applied;
· if Russia cancels DTTs with Cyprus, Luxembourg and Malta the interest income paid by Russian companies will be taxed at the rate of 20% in any case;
· the Russian tax authorities will apply practices aimed at the identification of hidden dividend payment
Integration of MLI provisions to the Russian DTTs from 2021
The Russian federal law, which ratifies Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI"), was adopted on 1st of May 2019 (pls. see Federal law #79-FZ at 01.05.2019). Russia extended the actions of MLI on 71 DTTs including the DTTs with Austria, United Kingdom, Hong-Kong, Cyprus, Latvia, Luxemburg, the Netherlands, China, Singapore, France, and so on.
The Russian Federation chose the strictest limitation, which the MLI convention provides; however, these regulations should be applied if the second party of DTT uses a similar approach. Therefore it is necessary to compare the approaches of DTT countries to understand which MLI regulation should be applied. The Russian Ministry of finance is expected to publish updated versions of DTTs this year.
We think that nowadays all international structures should be reviewed to identify potential risks and make corresponding changes.
Taxation of e-commerce
One of the recent trends in the Russian tax law is integration of regulation, which permits to lay tax on transactions performed through the Internet. The first step was the introduction of VAT in respect of sales of e-services through the internet performed by foreign companies in favor of Russian individuals and Russian companies. As the next step, the Russian government is considering to establish liability to pay tax in Russia for foreign companies operating in Russia through their web sources without physical presence (digital permanent establishment). Nowadays we do not have any draft law and cannot predict when it may appear. Nevertheless, we see that Russia adopts all modern best practices in the sphere of taxation. The concept of digital permanent establishment is being developed in many countries, so such a possibility in Russia should not be ruled out.
Lex Alliance tax team will provide you with recent updates regarding the mentioned Russian tax trends. We will be glad to answer your questions regarding any aspects of the Russian law.Dated: [bxcode.pagedata.date]