Expected new rules pertaining to taxation at source under Russian bilateral tax treaties could apply as early as January 2021. There is no information yet as to whether either Russia or the US extended any proposals to each other to amend the existing tax treaty. Neither country is known as a tax haven for foreign dividend income. However, if either side exits the existing tax treaty, the taxpayers will carry the burden.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) implemented a series of tax treaty measures to lessen the opportunity for tax avoidance by multinational enterprises. The MLI sets forth agreed upon minimum standards to counter treaty abuse and offers concrete solutions for governments to close the gaps in existing international tax rules and to modify the application of bilateral tax treaties.[1]
The MLI came into force on July 1, 2018 and already covers 94 jurisdictions.
On April 30, 2020, Russia sent the Organization of Economic Co-operation and Development (OECD) a notice of completion of internal procedures necessary for the entry into force of the MLI in respect to bilateral tax treaties with 27 jurisdictions.[2] The list includes jurisdictions which previously received a proposal from Russia to amend the current tax treaties and to increase withholding tax rate at source. Specifically, on April 13, 2020, the Russian Ministry of Finance announced that it had already approached the relevant authorities of Cyprus, Luxembourg and Malta with a proposal to set a 15% standard tax rate at source for dividends and interest income.[3] The proposals were extended in furtherance of President Putin’s request to the government to implement measures ensuring the adequate taxation of Russian-sourced dividend and interest payments that are channeled to “offshore” jurisdictions by taking advantage of loopholes in Russia’s tax treaties as part of the government’s response to the situation caused by the global pandemic.[4]
Amendments to a tax treaty require an amending protocol to be signed and ratified by both parties. Unilateral termination of a tax treaty requires a termination notice and termination is always an option under treaty provisions. There is possibility that the tax treaties with Cyprus, Luxembourg and Malta will be either amended or terminated by January 1, 2021.
Maria Grechishkina is a senior attorney in the Philadelphia office of Marks & Sokolov LLC. With over 20 years of professional experience, Ms. Grechishkina has represented Western, Russian and Ukrainian clients in complex commercial disputes, corporate and transactional matters and has provided legal opinions on Russian law to US Courts.
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[1]https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf.
[2]http://www.consultant.ru/document/cons_doc_LAW_351967/
[3]https://www.minfin.ru/ru/press-center/?id_4=37027-minfin_rossii_napravil_pisma_ob_izmenenii_soglashenii_ob_izbezhanii_dvoinogo_nalogooblozheniya_s_lyuksemburgom_i_maltoi