The work by the task force on a relevant presidential decree has been actively proceeding and is close to completion. It is expected that the foregoing decree will be published by the end of June, if not earlier.
Although Russian authorities assure that this measure is not of a fiscal nature and is not aimed at increasing tax revenues of the budget, it is clear that this legislative initiative will inadvertently generate more tax collections to the Russian budget.
All (so far remaining) international businesses realise that as a result of the suspension of DTTs they will have to suffer from higher withholding tax rates on passive income paid by their Russian subsidiaries to foreign income recipients.
A more detailed overview of the tax rates domestically stipulated by the Russian Tax Code for different types of passive income was provided in another legal update.
Additional update includes certain suggestions to consider various options as to how this measure is supposed to be implemented – from the complete suspension of passive income treaty relief to a fine-tuning of certain provisions and the introduction of exceptions for the number of cases so that the initiation of this measure would not harm the Russian economy, whatever it is supposed to mean. Such a selective approach, in particular, was considered with regard to interest payments on loans and a number of financial instruments (for example, Eurobonds) to avoid higher costs of external financing. It was also suggested that licence or royalty payments could be excluded due to the dependence of some industries on foreign technologies to circumvent the worst-case scenario for certain businesses where a tax increase would lead to rightsholders refusing to provide access to intangible assets.
In addition to the abovementioned options for the implementation of this measure, the following issues are also discussed in the elaboration of the decree:
- to postpone the suspension of DDTs in certain parts by introducing a so-called transition period to adapt business and business processes to the new realities;
- to retain the provisions of DDTs concerning the exchange of tax information and assistance in the administration of tax matters; and
- to adopt certain measures to protect individuals from double taxation of income they receive from Russia, etc.
Therefore, international businesses should consider expediting remittances of any due passive income out of Russia, which, in the most radical development of events and if no exceptions and exemptions are adopted, will be withdrawn from preferential taxation. Some restructuring of beneficial ownership chains including channelling income to collection vehicles with the proper substance in friendly jurisdictions or opportunities for claiming a “look through” approach for recurring income flows could be analysed and planned in advance. Finally, contractual grossing up any additional withholding tax costs remains a doable option and, subject to accurate transfer pricing considerations, may be considered as an effective solution to tackle the arising withholding tax leakage for multinationals on their still functioning arrangements with Russian businesses.
