Russian President Vladimir Putin has signed a decree suspending double taxation treaties with so-called unfriendly countries. The list includes nearly 40 countries – those that have imposed sanctions on Moscow in response to the invasion of Ukraine in February 2022– including Ireland, UK, North Ireland, Germany, Australia, South Korea, Japan and others. The decision was taken “based on the need for urgent measures” in connection with “unfriendly actions” by certain countries against Russian citizens and legal entities. Chern & Co explains how the suspension of double taxation treaty will affect foreign businesses in this post.
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Double Taxation Treaty Between Russia and Ireland
Russian Federation and Ireland signed the treaty for the avoidance of double taxation with respect to taxes on April 29, 1994. The existing taxes to which the treaty shall apply are illustrated in the table below:
| Ireland | Russia |
| the income tax, the corporation tax, the capital gains tax | profits of enterprises and organisations, income of individuals. |
Double tax treaties make life much easier for people living in one country but earning income in another. They allow:
- avoid paying taxes twice, i.e. offsetting levies already paid in another country;
- receive favourable tax rates on foreign income;
- in some cases not to pay taxes on income received in another country.
Prior to the invasion, Russia had signed treaties for the avoidance of double taxation with over 84 countries.
Double Tax Treaty Suspection: Consequences for Businesses
It’s currently unclear what specific consequences individuals and legal entities will face. Many lawyers agree that it all depends on the response of “unfriendly” states and explanations given by the Russian government. Even though the question “Will the legal entities and individuals pay taxes in both countries?” is hanging in the air, there’s a pinch of certainty should be given.
Lawyers agree that, first of all, foreign businesses operating in the Russian Federation will be hit. There will be virtually no benefits for companies. They will have to pay higher taxes than before the suspension of the Treaty:
- Preferential rates for dividend payments will no longer apply – they will have to pay 15 per cent instead of 5-10%;
- Companies will have to pay 15% on interest on loans and 20% on royalties, although they were previously exempt from these taxes.
It seems like the operation of many foreign companies in Russia and Russian companies in foreign countries is a question mark.
Double Tax Treaty Suspection: Consequences for Individuals
So far, the Russian Ministry of Finance has claimed that citizens will not be affected by the suspension of the Treaty, but this does not clearly follow Putin’s decree. Experts’ opinions are divided on this issue. Some lawyers claim that citizens will have to pay taxes in both countries under certain circumstances.
- Russian citizens living in “unfriendly” countries who receive income from Russian securities (bond coupons and dividends from shares) may have to pay tax in Russia and the country where they live.
- There is a risk that Russian citizens who moved to “unfriendly” countries and continue to work in Russian companies will be subject to double taxation. From 2024, they will have to pay 13-15% tax in Russia, while their professional income will also be subject to levies in some countries on the “unfriendly” list.
Exemption Cases: What Provisions Remain in Force
Some lawyers are more optimistic. They claim that the suspension does not apply to all provisions of the Treaty. The provisions on the elimination of double taxation remain in force, making it possible to offset taxes paid in one state (for example, in Russia) against tax in a foreign jurisdiction. Other Provisions that will remain in force are as follows:
- Provisions regarding the procedure for determining residency;
- Mutual agreement procedures and exchange of information;
- Benefits for diplomatic staff.
Mutual agreement procedures are used to resolve possible disputes when different countries claim to tax the same tax base. The exchange of information is important for more effective tax control. However, given that bilateral contacts with the Ministry of Finance and the Russian tax authorities have been suspended by many (if not all) unfriendly states, it is unclear whether this will work in practice.
