Conributed by Vladislav Donchenko, tax partner in “Lex Alliance” law firm, Moscow
Summer 2020 brought many significant changes in the Russian tax system, including international taxation. The most important for non-Russian companies are the following changes:
· Increase of withholding tax rates established by double tax treaties (DTT), concluded between Russia and such jurisdictions as Cyprus, Malta, Luxembourg, Netherlands, Switzerland and Hong Kong;
· Start of MLI convention application to 27 DTTs in Russia since 2021;
· New tax incentives for Russian software and abolishing of VAT tax incentive for foreign software.
Change of DTT rates
In March 2020, Russian President ordered the government to change the DTTs with the countries which the largest volume of Russian origin resources passes through, so that the income that is withdrawn from Russia is taxed fairly. In case of refusal to change the agreements, Russia is ready to terminate DTTs unilaterally.
DTT Russia - Cyprus
On August 10, final negotiations took place between the authorized bodies of Russia and Cyprus on the revision of the DTT.
There is no official text of the protocol yet, but some details of it have already leaked to the media.
The preferential dividend rate (5%) will remain for dividends received by Cyprus public companies if the following conditions are met simultaneously:
· 15% of the recipient company's shares must be traded on the open market;
· The share of a Cypriot public company in the capital of the Russian company-source of dividends is at least 15%.
Pension funds and insurance companies will also be able to use the 5% dividend rate.
Thus, the distribution of dividends from Russia at preferential rates will be available only for large companies, at least 15% of whose shares are traded on the open market.
According to VTimes, in relation to interest income, the 0% rate will apply exclusively to interest on outstanding Eurobonds. Earlier, the RBC website reported that the 0% rate will also remain for corporate and state bonds.
DTT Russia - Malta, Russia - Luxembourg
Malta and Luxembourg agreed to change the DTT with Russia. This information about this was published on the RBK website on August 7, 2020 with reference to the words of Deputy Finance Minister Alexei Sazanov.
If there are no delays in the diplomatic process, from 2021 dividends and interest paid to residents of these states will be taxed at the source in Russia at a rate of 15%.
We remind you that earlier the Ministry of Finance of Russia began to prepare a draft law to denounce the DTT with Malta. Since the departments of Russia and Malta have agreed to raise rates, the DTT between the two countries is not expected to be denounced.
DTT Russia - Netherlands
The Netherlands Ministry of Finance received a "letter of happiness" from Russian colleagues on August4. It is worth noting that according to the current version of the DTT, the Russian Ministry of Finance had to send a notice of termination of the DTT by June 30 of this year in order to terminate the Treaty by the end of 2020. Since this has not been done, the DTT with the Netherlands will be in force until 2022 at least.
DTT Russia – Switzerland, Russia – Hong Kong
Deputy Prime Minister Alexei Overchuk during a meeting between the Russian President Vladimir Putin and government members said that Russia could turn to Switzerland and Hong Kong with a proposal to amend DTT.
· Carry out diagnostics of structures for negative consequences due to the increase in rates / termination of DTTs, assess the possibilities of reducing the negative impact.
· Determine the possibility of making payments before the amendment / termination of the DTT, taking into account the rules on the actual beneficial owner of the income, and the possibility of applying a “pass-through approach”.
· Consider the possibility, assess the effectiveness and tax consequences of changing tax residency / re-domiciliation of a foreign company to another foreign jurisdiction including Russian offshore zones / liquidation of foreign companies.
Russia starts to apply MLI convention to 27 DTTs since 2021
The Russian Federation sent an official notification to the OECD that it has completed the necessary procedures for the entry into force of the Multilateral Convention MLI (Multilateral Instrument) for 27 states. The notification was sent on April 30, 2020.
It means that since 2021 Russia will apply MLI convention to DTTs with the following countries:
17. New Zealand
27. United Kingdom
The first period of MLI application to other countries depends on when Russia sends the necessary notification to OECD.
Please note that the beginning of the MLI application may differ in relation to withholding tax and other taxes:
· If the Russian Federation (and the DTT partner state in case of a similar clause on the beginning of the MLI application) sends a notification of the completion of domestic procedures to the OECD and the DTT partner state by the end of November 2020, then, in relation to the withholding tax, application is possible from January 1, 2021. If the notification is sent later than November, application is possible only from January 1, 2022;
· With respect to other taxes, the MLI is most likely to be applied from January 1, 2022.
· Сheck structures for compliance with MLI provisions;
· Develop a plan to minimize the identified risks before January 2021;
· Start adapting structures to changes, for example: to restructure the group; to develop economic substance for payments of passive income to foreign jurisdictions; if some MLI conditions are not met (for example, PPT and LOB), analyze the possibility of using DTT benefits, taking into account the positions of the competent authorities.
New tax incentives for Russian software and abolishing of VAT tax incentive for foreign software
On June 23, the Russian President Vladimir Putin announced a change in taxation for IT companies. He proposed to reduce the interest on insurance premiums in the IT sector from 14% to 7.6%, income tax - from 20% to 3%. Corresponding Federal Law №265 was published on July 31, 2020
Russian IT-companies could apply mentioned tax incentives since January 2021 if they meet following criteria simultaneously:
· State accreditation;
· The share of income from IT activities is at least 90%;
· Average number of employees is at least 7 people.
At the same time, Russian government decided to abolish VAT exemption in respect of sales of software which is not registered in the Unified Register of Russian software.
Under the current version of the Russian tax law, provision of any software under license agreement is exempted from VAT. Since January 2021, only provision of software registered in the Unified Register of Russian programs will be exempted from Russian VAT. Other sales of software will be subject to the Russian VAT at 20% rate.
Please note that if the software is transferred via the Internet, then the foreign entity, provider of such software, must be registered by Russian tax authorities as a supplier of electronic services (Article 174.2 of the Tax Code of the Russian Federation).
Accordingly, from 2021, such foreign entities will be obliged to pay VAT from sales of licensed software to the Russian budget by themselves.
If the software is transferred without the Internet, the Russian buyer (legal entity) will act as a VAT tax agent for a supplier of foreign software and withhold VAT from 2021.
· Identify whether you company provides software under the license agreements to the Russian customers;
· In case of software distribution via the Internet, make registration as a provider of electronic services by the Russian tax authorities and prepare your infrastructure to VAT payments;
· Consider the possibility of transferring developers and distributors of software to Russia to enjoy new Russian tax benefits for IT-companies since 2021
Lex Alliance team will be glad to help you with structures adapting to changes in Russian and international tax field.