The Ministry of Finance has explained the purpose of amendments being introduced into the DTTs with the Republic of Cyprus, the Republic of Malta and the Grand Duchy of Luxembourg

Pepeliaev Group advises that the Russian Ministry of Finance has issued explanations in which the regulatory body referred to the purpose of amendments being introduced into the Double Tax Treaties (“DTTs”) regarding the taxation of dividend and interest income.

In late April, the Ministry of Finance issued a letter[1] in which it stated that the proposed amendments to the articles of the DTTs relating to the taxation of dividend and interest income are aimed at counteracting tax evasion which involves schemes ensuring that most of the income originating in Russia is ultimately paid to Russian beneficiaries via a transit jurisdiction. Thus, the Ministry of Finance has pointed out that the proposed amendments are not meant to deteriorate the position of Cyprus, Luxembourg and Maltese national investors in the Russian economy; rather, they are aimed at combating tax evaders of Russian origin.

According to the authority, the proposed amendments in terms of increasing the rate of withholding tax on income in the form of dividends and interest are driven by the complicated economic situation both in Russia and all in the world as a whole - particularly, by the measures being taken to support the population and economy of Russia against the backdrop of the threatened spread of the coronavirus epidemic. In the opinion of the authority, these measures designed to support the national economy and state social programmes require that financial resources be accumulated and that investors of Russian origin stop misusing the provisions of DTTs.

In its letter[2], the Ministry of Finance states that the above approach to amending DTTs applies only to jurisdictions through which significant resources of Russian origin pass, to which the Russian economy is sensitive to the greatest extent. In other words, the amendments apply only to so-called ‘transit jurisdictions’ where companies are located which do not dispose of the above income independently and through which such income passes by way of transit and is subsequently disposed of by investors of Russian origin.

Amending the DTTs with a number of countries in relation to the taxation of dividend and interest income represents the Ministry of Finance’s committed position in line with the assignment of the Russian President, since the country’s budget may lose significant amounts of income owing to the tax benefits which have been introduced for small and medium-sized enterprises. We expect that the changes will not affect DTTs with countries which have a high tax burden, e.g. France, China, or the USA. However, the Ministry of Finance has not yet informed the business community about its plans regarding such popular jurisdictions as the Netherlands and Switzerland. We will monitor the statements of representatives of the Ministry of Finance in this regard. These measures continue the deoffshorisation policy in relation to the Russian economy which, among other things, provides for assets located in the territory of transit states to be redomiciled to Russian special administrative regions (SARs), which are not yet particularly popular with investors of Russian origin. As mentioned above, the regulation of SARs is being improved, so that more benefits are granted to potential investors. We recommend taking a very close look at this. In practice, the issue of the so-called ‘pass-through approach’ is still open in the context of the proposed amendments to the DTTs with Cyprus, Malta and Luxembourg. During public discussions with the business community, representatives of the Ministry of Finance suggest that the public authority is ready to improve the ‘pass-through approach’ - however, by way of further negotiations with Russia’s partner countries under the DTTs in order to amend these DTTs, rather than by introducing the relevant amendments into the Russian Tax Code.

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