The Russian Ministry of Finance has come up with a proposal to suspend double tax treaties as a response to countries that have introduced unilateral economic measures against Russia, as well as to include Russia on the EU tax black list.
Double taxation is a situation where income is taxed twice: where the income originated and where it was received by the tax resident. Thanks to double tax treaties (DTAs), taxes can be levied in only one of the two countries, or in both, but at preferential rates. The actions of the DTT usually relate to income from the sale or rental of real estate, commercial activities, dividends, pensions, etc. At the moment, such agreements are in force between Russia and 92 countries, it is planned to suspend agreements with 39 countries included in the list of “unfriendly countries” . Among them are countries such as the USA, Great Britain, all member countries – the EU, Japan, South Korea and a number of other countries.
The abolition of the DTT by issuing a Decree of the President of the Russian Federation, as proposed by the Ministry of Finance, can happen quickly enough, because of which taxpayers will not have time to prepare for innovations, since they will enter into force shortly after the publication of the decree, and not from the next tax period .
Taxes regulated by Double Tax Treaties
As a rule, double tax treaties regulate personal income tax and income taxes. Transport, property taxes, VAT are not subject to such international treaties. Separate provisions of the DTT, which take precedence over national tax laws, also establish important rules. For example, which objects are classified as real estate for tax purposes.
In the case of legal entities, the DTT most often covers the taxation of passive income of foreign companies or taxes on the profits of Russian companies abroad.
For individuals, the changes will affect taxes on income from foreign sources – this may be income from renting an apartment abroad or from labor activity in an unfriendly country and becoming its tax resident, if he continues to work for Russia, but his employment contract does not provide for work for outside of Russia.
Possible consequences for individuals
One of the main advantages of the DTT was the ability not to pay income tax (PIT) twice. In case of suspension of tax treaties, foreign tax residents who receive income in Russia will have to pay both 30% personal income tax and tax abroad. A similar situation can be expected for Russians working abroad or living abroad and working remotely for Russian companies. Previously, tax residents of the Russian Federation had the opportunity to reduce the amount of tax in Russia by the amount paid in the host country. However, there is a small chance of reducing the tax burden if foreign countries do not suspend the DTT with Russia and then it will be possible to deduct the amount of tax paid in Russia for foreign tax authorities.
The possible cancellation of the DTT will also affect the activities of foreign companies in Russia that have passive income – dividends, interest, royalty (license payments), income from the sale of securities from Russia and the activities of Russian companies that receive income from unfriendly countries.
Under the DTT, such companies, when receiving passive income from Russia, pay taxes at preferential rates: 5% for dividends, 0% for royalties and interest. With the suspension of the DTT, these rates will increase many times (15% for dividends and 20% for interest and royalties) and this will negatively affect the Russian economy in the first place, since companies had the opportunity to reinvest these incomes in their activities.