Learn the general rules of withholding tax in Russia
Under the general provisions of the RTC, income earned by an FLE and not attributed to a PE in Russia is subject to WHT in Russia (to be withheld at source). WHT rates are as follows:
Taxation of margins (rather than gross income received from the types of sales listed above) may be applied only if expenses are properly documented.
Income of foreign organisations (not performing activities in Russia through a PE) from the sale of certain listed securities of Russian entities (and their derivatives) is not regarded as income derived from sources in Russia subject to WHT.
The list of exempt income (not subject to WHT) also includes: (i) interest payments on Russian government securities; (ii) interest payments on tradable bonds, issued in accordance with the laws of foreign countries; and (iii) payments made by Russian companies to finance coupons on Eurobonds issued by special purpose vehicles (SPVs) incorporated outside of Russia.
Tax should be withheld by the tax agent and paid to the Russian budget. WHT rates may be reduced under a relevant DTT, provisions of which may be applied based on confirmation of tax residency, which is to be provided by a foreign company to the Russian tax agent prior to the payment date (no advance permission from the Russian tax authorities is required) and also as long as general conditions are fulfilled (proof of beneficial ownership, etc.).
The Russian tax authorities recognise the terms of treaties concluded by the Union of Soviet Socialist Republics (USSR) until they are renegotiated by the Russian government. Furthermore, the list of effective tax treaties is continuously updated.
Russia has ratified amendments to DTTs with Cyprus and Luxembourg, amendments to DTT with Malta are expected to be ratified. The main points are increasing tax rates for dividends and interest. Maximum rate will be 15 % both for dividends and interest, but there are some exemptions (5 % and 0 % rates will be applied in some cases). Tax rate for royalties will remain at 0 % (5% with Malta). The amendments to the DTT with Cyprus apply from 1 January 2021. The Amendments to DTT with Malta and Luxembourg will likely apply from 2022 (ratification process has not been completed). Ratification process of protocol with Malta is also not completed; Application of new rates under the DTT with Malta in 2021 has to be clarified by the Ministry of Finance. In addition, Russia has announced about denunciation of DTT with the Netherlands (but in 2021 the DTT would still remain in force). Other DTTs with transit jurisdictions historically used for investments into Russia may also be revised.
Russia has ratified MLI. Russia has chosen 71 DTTs, including DTT with Austria, China, Cyprus, France, Hong Kong, Ireland, Latvia, Luxembourg, the Netherlands, Singapore and the UK. When assessing the MLI’s applicability, it is necessary to consider whether the other party to the DTT has signed the Convention.
On 30 April 2020, Russia notified OECD that it had completed its national procedures for implementing the Multilateral Convention (MLI) for 27 double tax treaties, on 26 November 2020 Russia notified about completing national procedures with 7 more jurisdictions. So MLI may become effective as early as 1 January 2021 for 27 DTTs applying to all taxes and for 7 DDTs applying only to WHT. MLI will be applied to these 7 DDT to all taxes since 1 January 2022.
Russia expressed the intention to adhere to the strictest possible approach and impose the maximum limitations on providing tax benefits. However, the final approach depends on what choice the other party to a particular DTT makes.
Simplified Limitation of Benefits was the option selected by Russia, but most other countries selected Principle Purpose Test (PPT), thus, in most cases, Simplified Limitations of Benefits will not apply. Instead PPT will be applied in most cases; a treaty's benefits shall not be granted if obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.
Dividends: WHT reduced tax rate is applicable only if the period of holding the shares or interests of the company paying the dividends is equal to or exceeds 365 days (the existing participation criteria will remain in place).
Capital gains from transfer of shares or interests of entities deriving their value principally from real estate: These gains may be taxed at the jurisdiction of the real estate location if at any time during the 365 days preceding the transfer these shares or comparable interests derived more than 50% of their value from such real estate.
Eliminating double taxation: Russia selected tax deduction method, as it is now (the same as set out in most of the DTTs with Russia).
The concept of the actual owner of income (i.e. the 'beneficial owner') was introduced into Russian tax legislation by the so-called 'Deoffshorisation' Law. It determines the ability to apply lower tax rates under a DTT.
There is no clear test on beneficial ownership in the Russian tax legislation to be applied by tax agents, which means that Russian tax agents can not be entirely comfortable applying reduced tax rates on income paid abroad. In making any payments, they need to consider the risk of additional tax and penalties to be paid at their own expense.
According to the law, a tax agent has to request confirmation that a foreign entity is a beneficial owner of income. If the actual beneficial owner is known, the tax agent may apply the 'look through' approach (to use a treaty with the country where this beneficial owner resides). If the beneficial owner is located in Russia or a non-treaty country, the income paid is taxed under the RTC rules (note that a zero tax rate on dividends applies under special criteria).
The list below indicates the effective tax treaties (in alphabetical order):
Since 1 January 2021, the MLI will be entered into force for 34 Russian DTTs as follows:
|Application to all taxes||Application only for WHT|
|1. Australia||1. Cyprus|
|2. Austria||2. Czech Republic|
|3. Belgium||3. Indonesia|
|4. Canada||4. Kazakhstan|
|5. Denmark||5. Korea|
|6. Finland||6. Portugal|
|7. France||7. Saudi Arabia|
|17. New Zealand|
|23. Slovak Republic|