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: http://www.linkedin.com/in/jonhellevig LinkedIn: http://ru.linkedin.com/pub/anton- LinkedIn: : http://www.linkedin.com/in/artem-
Facebook: http://www.facebook.com/jonhellevig kabakov/31/b21/200 usov
E-mail: jon.hellevig@awaragroup.com E-mail: anton.kabakov@awaragroup.com E-mail: artem.usov@awaragroup.com
Website: www.awaragroup.com Website: www.awaragroup.com Website: www.awaragroup.com
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).
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2. By January 2012 Russia had signed 79 DTTs (see list of treaties in Appendix 1), and 78 of them are
currently in effect. The majority of the DTTs are applied in relation to such Russian taxes as corporate
profit tax (including income from business activities, income from real estate, interest, dividends, and
royalties), as well as personal income tax (including income from independent activities, from work for
hire, fees of directors, artists, and athletes, and from real estate). The DTTs include taxes on the property
of enterprises and of individuals among the taxes excluded from double taxation. The DTTs do not extend
to indirect taxes like value-added tax.
In most cases, the essence of the mechanism for preventing double taxation consists in the fact that taxes
on income or capital to be paid in one country may be partially or completely deducted from the amounts
of tax (or counted towards payment thereof) which are subject to payment in another country in regard to
that income or capital. Income received under certain conditions may also be exempt from taxation or
taxed 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 of
income most characteristic for business, for instance, profit from business activity, dividends, interest,
royalties, and income from real estate (capital gains).
Residents
DTTs 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 DTT
purposes, resident is any individual or legal entity that, under the legislation of that state, is subject to
taxation 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 both
states, additional criteria for determining residency status for DTT purposes are applied.
Permanent establishment
Under the majority of DTTs concluded by Russia, profit tax is not levied on the profit of foreign
companies obtained from business activity in Russia, except in cases when a company is engaged in
business activity via a permanent establishment set up in Russia. The DTTs set certain thresholds above
which foreign organizations are recognized as having a permanent establishment.
Generally, the term “permanent establishment” means a fixed place of business through which an
enterprise from a Contracting State regularly (partially or completely) engages in business activity in
another 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 permanent
establishment (that is, ones less favorable for the taxpayer), the provisions of the appropriate DTT are
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3. applied (more favorable ones). For instance, in Russia, a construction site is regarded as a permanent
establishment, irrespective of how long it has actually existed; whereas according to DTTs, a construction
site leads to a permanent establishment if the length of its existence as a rule exceeds a certain period of
time (generally speaking, 6, 12 or 18 months).
The profit received through a permanent establishment is taxed only for that portion which the permanent
establishment could have received if it had existed as an independent entity under similar conditions.
Dividends
Dividends paid out by a Russian company to a foreign company may be taxed both in Russia and in the
country of which the foreign company is a resident. Dividends to which DTTs might apply may be taxed
at rates lower than those set by national legislation. That said, DTTs may set certain requirements for the
amount of interest from shares and the size of the investments of the recipient of the dividends.
Loan interest
Interest payable to a foreign resident is taxed at the source of the payment in Russia. Moreover, DTTs
might stipulate an exemption from tax in Russia or a reduced tax rate at the source. Exemption and a
reduced tax rate do not apply to interest related to the permanent establishment of a foreign resident in
Russia.
In a situation where companies are interdependent, interest is exempt from taxation only to the extent
which would be agreed to between independent entities; for the remaining excess portion, the accrued
interest is taxed as profit tax in accordance with Russian law.
Royalties
Income from royalties paid by a resident of Russia to a foreign resident is subject to Russian taxation at
the source of payment. That said, DTTs may envisage tax exemption in Russia or a reduced tax rate at the
source. Exemption and a reduced tax rate do not apply to royalties related to the permanent establishment
of a foreign resident in Russia.
In the event that the payer of royalties and the recipient have special (dependent) relations, then the
amount of income paid in the form of royalties is not taxed only on the portion that would have
corresponded to the amount of royalties paid under similar conditions between independent entities.
Beneficial Owner
As a rule, DTTs grant exemption or a reduced tax rate for dividends, interest and royalties provided that
the recipient of the income acts as a beneficial owner. A beneficial owner is recognized to be any
individual or legal entity enjoying benefits of receipt of income. The concept of beneficial owner is
intended to limit the application of DTTs in cases when an agent or nominee acts as the recipient of the
income, 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 an
amendment prohibiting the use of conduit arrangements, whereby income paid to a resident of a state that
is a party to the DTT and which is taxed on preferential terms subsequently is transferred entirely (or
almost entirely) to another party which would not be able to take advantage of similar tax benefits if that
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4. income were paid to it directly. However, Russian law does not require mandatory disclosure of the end
recipients of the income.
Non-discrimination
DTTs contain provisions aimed at ruling out discrimination. Taxation on foreign citizens or companies
from a foreign country in Russia should not be more onerous (discriminatory) in comparison with
taxation of Russian citizens or companies in the same circumstances. This rule also extends to the activity
of foreign entities which creates a permanent establishment in Russia. The prohibition on discrimination
also 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 comparison
with the taxation of other similar Russian companies.
It should be noted that the Russian tax authorities, applying rules on non-discrimination, believe that
taxation 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 court
practice follows the path of not applying the provisions on non-discrimination in cases of tax abuse
practice (for example, when applying thin-capitalization rules).
Capital gains
Russian 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 or
other corporate rights in Russian companies whose assets principally consist of real estate located in
Russia. Moreover, some DTTs allow one to avoid paying profit tax in Russia in connection with a foreign
resident’s sale of shares or other corporate rights in Russian companies whose assets principally consist of
real estate located in Russia.
Exchange of information
Most DTTs stipulate that the competent authorities of the contracting states exchange information
necessary to implement the provisions of the DTTs or of national legislation of the contracting states
concerning taxes to which the DTTs extend, to the degree to which the specified taxation does not
contradict the DTTs. Exchange of information is not limited to information on the parties mentioned in
the 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 tax
authorities 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.
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5. Appendix 1
List of the Double Taxation Treaties
Actual to the date 06.03.13
The list of the countries which signed the Double Taxation Treaties with the
Russian Federation
1 Albania 28 India 55 Philippines
2 Algeria 29 Indonesia 56 Poland
3 Argentina 30 Iran 57 Portugal
4 Armenia 31 Ireland 58 Qatar
5 Australia 32 Israel 59 Romania
6 Austria 33 Italy 60 Saudi Arabia
7 Azerbaijan 34 Japan 61 Serbia and Montenegro (former
Yugoslavia)
8 Belarus 35 Kazakhstan 62 Singapore
9 Belgium 36 North Korea 63 Slovakia
10 Botswana 37 South Korea 64 Slovenia
11 Brazil 38 Kuwait 65 South Africa
12 Bulgaria 39 Kyrgyzstan 66 Spain
13 Canada 40 Latvia 67 Sri Lanka
14 Chile 41 Lebanon 68 Sweden
15 China 42 Lithuania 69 Switzerland
16 Croatia 43 Luxembourg 70 Syria
17 Cuba 44 Macedonia 71 Tajikistan
18 Cyprus 45 Malaysia 72 Thailand
19 Czech Republic 46 Mali 73 Turkey
20 Denmark 47 Mexico 74 Turkmenistan
21 Egypt 48 Moldova 75 Ukraine
22 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 Uzbekistan
25 Greece 52 Netherlands 79 Venezuela
26 Hungary 53 New Zealand 80 Vietnam
27 Iceland 54 Norway
If you want to discuss this article, please contact the authors:
Jon Hellevig, Managing partner of Awara Group
Facebook: http://www.facebook.com/jonhellevig
LinkedIn: http://www.linkedin.com/in/jonhellevig
E-mail: jon.hellevig@awaragroup.com
Anton Kabakov, Partner of Awara Group
LinkedIn: http://ru.linkedin.com/pub/anton-kabakov/31/b21/200
E-mail: anton.kabakov@awaragroup.com
Artem Usov, Partner of Awara Group
LinkedIn: http://www.linkedin.com/in/artem-usov
E-mail: artem.usov@awaragroup.com
MOSCOW, ST.PETERSBURG, TVER, YEKATERINBURG, KYIV, HELSINKI
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