Double Taxation Treaties in Russia


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Double Taxation Treaties in Russia

  1. 1. Authors: Jon Hellevig, Anton Kabakov, and Artem Usov.Jon Hellevig, Managing partner of Awara Group Anton Kabakov, Partner of Awara Group Artem Usov, Partner of Awara Group LinkedIn: LinkedIn: LinkedIn: : Facebook: kabakov/31/b21/200 usov E-mail: E-mail: E-mail: Website: Website: Website: This blog post represents an updated excerpt from the soon to be published Awara Russian Tax Guide. Authors: Jon Hellevig, Anton Kabakov, and Artem Usov. Publishing date: 06.03.2013, considering the Russian tax laws in force at the date and case law up to date. DOUBLE TAXATION TREATIES IN RUSSIA Double Taxation Treaties, abbreviated DTTs, are agreements concluded by and between two states aimed at eliminating taxation-related obstacles to the movement of capital, goods or income, at preventing tax evasion and discrimination, and also at establishing procedures for interaction between the states when collecting taxes. DTTs concluded between Russia and other states are based on the Model Agreements on Avoidance of Double Taxation of Income and Property, approved by resolutions of the Russian Government in 1992 (now inoperative) and in 2010 (currently in effect). In turn, these model agreements reproduce to a significant degree the Model Tax Convention on Income and on Capital by the OECD (hereinafter the “Model Convention”). Despite the fact that Russia does not participate in the OECD, the Convention and the Commentary on it are used by Russian courts when making decisions in disputes involving the application of DTTs. In particular, the Commentary on the Model Convention was applied in some of the most recent court decisions (see the Severny Kuzbass case, Resolution of the Supreme Commercial Court dated 15 November 2011). MOSCOW, ST.PETERSBURG, TVER, YEKATERINBURG, KYIV, HELSINKI WWW.AWARAGROUP.COM WWW.HKUPARTNERS.COM
  2. 2. By January 2012 Russia had signed 79 DTTs (see list of treaties in Appendix 1), and 78 of them arecurrently in effect. The majority of the DTTs are applied in relation to such Russian taxes as corporateprofit tax (including income from business activities, income from real estate, interest, dividends, androyalties), as well as personal income tax (including income from independent activities, from work forhire, fees of directors, artists, and athletes, and from real estate). The DTTs include taxes on the propertyof enterprises and of individuals among the taxes excluded from double taxation. The DTTs do not extendto indirect taxes like value-added tax.In most cases, the essence of the mechanism for preventing double taxation consists in the fact that taxeson income or capital to be paid in one country may be partially or completely deducted from the amountsof tax (or counted towards payment thereof) which are subject to payment in another country in regard tothat income or capital. Income received under certain conditions may also be exempt from taxation ortaxed at rates lower than the rates applied to taxpayers not falling under the operation of the DTTs.Below, we look at some matters related to application of DTTs concluded by Russia in regard to types ofincome most characteristic for business, for instance, profit from business activity, dividends, interest,royalties, and income from real estate (capital gains).ResidentsDTTs extend to parties that are residents of Russia or of a state that is a party to a relevant agreement.Normally, DTTs do not apply when a party is not a resident of any of the participating states. For DTTpurposes, resident is any individual or legal entity that, under the legislation of that state, is subject totaxation there based on dwelling place, permanent residence, place of registration, place of management,or place of foundation of a company or any other similar criterion. If the taxpayer is a resident of bothstates, additional criteria for determining residency status for DTT purposes are applied.Permanent establishmentUnder the majority of DTTs concluded by Russia, profit tax is not levied on the profit of foreigncompanies obtained from business activity in Russia, except in cases when a company is engaged inbusiness activity via a permanent establishment set up in Russia. The DTTs set certain thresholds abovewhich foreign organizations are recognized as having a permanent establishment.Generally, the term “permanent establishment” means a fixed place of business through which anenterprise from a Contracting State regularly (partially or completely) engages in business activity inanother Contracting State.The term “permanent establishment” includes specifically: a) place of management; b) branch; c) office; d) factory; e) workshop; f) mine, oil or gas well, quarry, or any other place for extracting natural resources.In case the national legislation sets higher thresholds for recognizing the existence of a permanentestablishment (that is, ones less favorable for the taxpayer), the provisions of the appropriate DTT are MOSCOW, ST.PETERSBURG, TVER, YEKATERINBURG, KYIV, HELSINKI WWW.AWARAGROUP.COM WWW.HKUPARTNERS.COM
  3. 3. applied (more favorable ones). For instance, in Russia, a construction site is regarded as a permanentestablishment, irrespective of how long it has actually existed; whereas according to DTTs, a constructionsite leads to a permanent establishment if the length of its existence as a rule exceeds a certain period oftime (generally speaking, 6, 12 or 18 months).The profit received through a permanent establishment is taxed only for that portion which the permanentestablishment could have received if it had existed as an independent entity under similar conditions.DividendsDividends paid out by a Russian company to a foreign company may be taxed both in Russia and in thecountry of which the foreign company is a resident. Dividends to which DTTs might apply may be taxedat rates lower than those set by national legislation. That said, DTTs may set certain requirements for theamount of interest from shares and the size of the investments of the recipient of the dividends.Loan interestInterest payable to a foreign resident is taxed at the source of the payment in Russia. Moreover, DTTsmight stipulate an exemption from tax in Russia or a reduced tax rate at the source. Exemption and areduced tax rate do not apply to interest related to the permanent establishment of a foreign resident inRussia.In a situation where companies are interdependent, interest is exempt from taxation only to the extentwhich would be agreed to between independent entities; for the remaining excess portion, the accruedinterest is taxed as profit tax in accordance with Russian law.RoyaltiesIncome from royalties paid by a resident of Russia to a foreign resident is subject to Russian taxation atthe source of payment. That said, DTTs may envisage tax exemption in Russia or a reduced tax rate at thesource. Exemption and a reduced tax rate do not apply to royalties related to the permanent establishmentof a foreign resident in Russia.In the event that the payer of royalties and the recipient have special (dependent) relations, then theamount of income paid in the form of royalties is not taxed only on the portion that would havecorresponded to the amount of royalties paid under similar conditions between independent entities.Beneficial OwnerAs a rule, DTTs grant exemption or a reduced tax rate for dividends, interest and royalties provided thatthe recipient of the income acts as a beneficial owner. A beneficial owner is recognized to be anyindividual or legal entity enjoying benefits of receipt of income. The concept of beneficial owner isintended to limit the application of DTTs in cases when an agent or nominee acts as the recipient of theincome, as well as to prevent tax evasion with the help of conduit companies.The protocol to the DTT signed by Russia and Switzerland on 24 September 2011 specifically contains anamendment prohibiting the use of conduit arrangements, whereby income paid to a resident of a state thatis a party to the DTT and which is taxed on preferential terms subsequently is transferred entirely (oralmost entirely) to another party which would not be able to take advantage of similar tax benefits if that MOSCOW, ST.PETERSBURG, TVER, YEKATERINBURG, KYIV, HELSINKI WWW.AWARAGROUP.COM WWW.HKUPARTNERS.COM
  4. 4. income were paid to it directly. However, Russian law does not require mandatory disclosure of the endrecipients of the income.Non-discriminationDTTs contain provisions aimed at ruling out discrimination. Taxation on foreign citizens or companiesfrom a foreign country in Russia should not be more onerous (discriminatory) in comparison withtaxation of Russian citizens or companies in the same circumstances. This rule also extends to the activityof foreign entities which creates a permanent establishment in Russia. The prohibition on discriminationalso means that Russian companies whose capital directly or indirectly belongs to (or is controlled by)residents of a foreign country should not be subjected in Russia to more onerous taxation in comparisonwith the taxation of other similar Russian companies.It should be noted that the Russian tax authorities, applying rules on non-discrimination, believe thattaxation of Russian companies owned by residents of one foreign country are subject to comparison (non-discrimination) with taxation of companies owned by residents of other foreign countries. Russian courtpractice follows the path of not applying the provisions on non-discrimination in cases of tax abusepractice (for example, when applying thin-capitalization rules).Capital gainsRussian profit tax is levied on income received by a foreign resident from alienation of real property(capital gain) located in Russia. This rule extends likewise to income arising from the sale of shares orother corporate rights in Russian companies whose assets principally consist of real estate located inRussia. Moreover, some DTTs allow one to avoid paying profit tax in Russia in connection with a foreignresident’s sale of shares or other corporate rights in Russian companies whose assets principally consist ofreal estate located in Russia.Exchange of informationMost DTTs stipulate that the competent authorities of the contracting states exchange informationnecessary to implement the provisions of the DTTs or of national legislation of the contracting statesconcerning taxes to which the DTTs extend, to the degree to which the specified taxation does notcontradict the DTTs. Exchange of information is not limited to information on the parties mentioned inthe DTTs. Such information may be disclosed in the course of open court hearings or in court decisions.In practice, in some cases, the Russian tax authorities may use the information obtained from the taxauthorities of other states against the taxpayers.Furthermore, Russia is a party to Convention on Cooperation and Mutual Assistance in Tax Matters(Minsk, 1999). In 2011, Russia signed Convention on Mutual Administrative Assistance in Tax Matters(Strasbourg, 1988), which has not yet been enacted by the Russian Parliament. MOSCOW, ST.PETERSBURG, TVER, YEKATERINBURG, KYIV, HELSINKI WWW.AWARAGROUP.COM WWW.HKUPARTNERS.COM
  5. 5. Appendix 1List of the Double Taxation TreatiesActual to the date 06.03.13 The list of the countries which signed the Double Taxation Treaties with the Russian Federation1 Albania 28 India 55 Philippines2 Algeria 29 Indonesia 56 Poland3 Argentina 30 Iran 57 Portugal4 Armenia 31 Ireland 58 Qatar5 Australia 32 Israel 59 Romania6 Austria 33 Italy 60 Saudi Arabia7 Azerbaijan 34 Japan 61 Serbia and Montenegro (former Yugoslavia)8 Belarus 35 Kazakhstan 62 Singapore9 Belgium 36 North Korea 63 Slovakia10 Botswana 37 South Korea 64 Slovenia11 Brazil 38 Kuwait 65 South Africa12 Bulgaria 39 Kyrgyzstan 66 Spain13 Canada 40 Latvia 67 Sri Lanka14 Chile 41 Lebanon 68 Sweden15 China 42 Lithuania 69 Switzerland16 Croatia 43 Luxembourg 70 Syria17 Cuba 44 Macedonia 71 Tajikistan18 Cyprus 45 Malaysia 72 Thailand19 Czech Republic 46 Mali 73 Turkey20 Denmark 47 Mexico 74 Turkmenistan21 Egypt 48 Moldova 75 Ukraine22 Finland 49 Mongolia 76 United Kingdom of Great Britain and Northern Ireland (UK)23 France 50 Morocco 77 United States of America (USA)24 Germany 51 Namibia 78 Uzbekistan25 Greece 52 Netherlands 79 Venezuela26 Hungary 53 New Zealand 80 Vietnam27 Iceland 54 NorwayIf you want to discuss this article, please contact the authors:Jon Hellevig, Managing partner of Awara GroupFacebook: jon.hellevig@awaragroup.comAnton Kabakov, Partner of Awara GroupLinkedIn: anton.kabakov@awaragroup.comArtem Usov, Partner of Awara GroupLinkedIn: MOSCOW, ST.PETERSBURG, TVER, YEKATERINBURG, KYIV, HELSINKI WWW.AWARAGROUP.COM WWW.HKUPARTNERS.COM