Russia prepares to strike back in response to the 10th sanction package and its blacklisting as a tax haven i.e. non-cooperating jurisdictions in tax matters by the EU.
Previous week the Russian Ministry of Finance together with the Foreign Ministry issued a joint press release proposing the Russian President to suspend DTTs with all countries that have introduced unilateral economic restrictions against Russia.
In case the envisaged Presidential Decree will come true the DTTs provisions will presumably cease to apply from the moment of it’s publication, as it happened in the case of Latvia.
Supposedly all countries specified as “unfriendly” (39 states at the moment) will be tangled by the new regulation. Besides EU it would be Australia, Albania, Canada, Iceland, Japan, Montenegro, New Zeeland, Norway, Singapore, South Korea, Switzerland, UK and US.
DTTs suspension will have following major consequences:
1. Upturn of tax burden for passive income payments in favor of residents of unfriendly countries:
- Royalty and interest income 20%
- Dividend income 15%
- International transport service 10%
2. Difficulties with getting a foreign ta credit
- no foreign tax credit would be granted to the natural persons and legal entities in regard to the dividend income,
- getting a foreign tax credit for further passive income would require extended documentation obligations;
3. Implications for of CFCs (controlled foreign companies) located in unfriendly countries:
- Profits cannot be exempted from taxation on the basis of a high effective rate;
- Mandatory provision of auditor report on CFC’s financial results;
4. Increased risks of double taxations (for example in double residency conflicts)
5. Multilateral pricing agreements with the participation of unfriendly countries, as well as to conduct of mutual agreement procedures could be no longer used;
6. Difficulties with the information exchange between the countries.
Taking into account that decision to suspend the DTT will affect the interests of EU players remaining on the Russian market and significantly increase the tax burden on investments in Russia we will closely monitor the implementation of the described proposal and will be glad to jointly assess the possibilities and potential restructuring needs on the side of business.
Please feel free to contact us.