Double Taxes. What is the threat of the abolition of tax agreements with the West?

In response to the inclusion of Russia in the European Union's tax blacklist, the Ministry of Finance and the Ministry of Foreign Affairs yesterday proposed suspending double taxation agreements with "unfriendly" countries. A total of 40 agreements could be concerned. The measure would affect foreign businesses and foreign subsidiaries of Russian companies, employees who have left and landlords of real estate. The Finance Ministry and the Foreign Ministry on Wednesday proposed that the president suspend double taxation treaties (DTTs) with all "unfriendly" countries. This is in response to the EU's decision to blacklist Russia as a taxing jurisdiction, according to a message on the Finance Ministry's website. "If the proposal of the Ministry of Finance and the Foreign Ministry is supported, the application of reduced withholding tax rates (tax exemptions) on income subject to double taxation treaties will be suspended," the ministry said. Now Russia has concluded double taxation treaties with 81 countries. About 40 of them, including SIDN with Malta, Cyprus, Luxembourg, USA, Great Britain, Switzerland, Japan and Singapore may be suspended. It is proposed that the agreements be suspended from the date of the presidential decree and "until the restoration of the violated rights of Russia. What is the threat of this? SIDN allow legal entities and individuals who are tax residents of one country but receive income in another country to pay tax on it only in one country or in both countries, but at a reduced rate. There is no way to avoid double taxation if the treaty is abolished. As a rule, agreements on avoidance of double taxation regulate personal income tax and tax on profits, says RBC. In particular, SIDN provides for a reduced tax on dividends (5-10% vs. 15% in Russia) and a zero rate on interest payments and royalties (instead of 20%), writes "Kommersant. For example, how much taxes Russian investors will pay because of double taxation can be seen here. Experts note that from the wording of the Ministry of Finance and the Ministry of Foreign Affairs is still impossible to understand with which particular countries LEDN will be suspended. At a minimum, these will be EU countries that already have a black list against Russia (which is a smaller part of the EU). At the most, all "unfriendly" countries (i.e., about 40 states). Who will be affected In answering this question, experts stipulate that in 2022 the application of LEDS benefits has already been significantly hampered by sanctions, so it is difficult to accurately assess the consequences of the suspension of these agreements. But some things are already clear: After the suspension of the SITA, individuals who received income in "unfriendly" countries, such as from renting apartments or commercial use of other property, will not be able to apply foreign tax credit when paying tax in Russia, the lawyer explained to Kommersant. In this case the tax burden may increase up to 35-40%, says RBC. The risk of double taxation also arises for employees of Russian companies who have gone to "unfriendly" countries and became their tax residents, if such remote work is not stipulated in the employment contract, the lawyers explain. Under current legislation individuals lose their tax resident status in Russia, if they are abroad for more than 183 days a year: after this period of time their income from Russian sources is withheld personal income tax at a rate of 30%, and they begin to pay foreign tax on income in foreign jurisdictions, where they have tax residency. Russian companies that still have a presence in the EU or are in the process of restructuring their "foreign circuit" may be affected, experts add. For them, the tax burden could increase by 15-40%. Also, additional difficulties may arise for the Russian owners of controlled foreign companies from "unfriendly" countries. For example, TCS Group, which includes Tinkoff Bank, as well as Cian, Ozon, HeadHunter and others are registered in Cyprus. Changes will also affect international companies operating in Russia, but registered in "unfriendly" countries, RBC notes. However, such companies are few in number now, so Russian business will suffer more than foreign, experts admit. Even private investors with blocked assets may suffer if the Federal Tax Service can prove that they were credited coupons and dividends on foreign securities, says Frank Media. However, lack of access to these securities and income is not a basis for nonassessment of tax. The appeal of the Ministry of Finance and the Foreign Ministry directly to the president indicates that the initiative is likely to be approved. The only question is how many countries will be suspended from the SIDN. The second danger lies in the terms of suspension: the experts polled by RBC hope that the authorities will leave time for restructuring at least until the end of the year, but they admit that there is a risk of immediate suspension right after the presidential decree. Russian companies will need the most time to restructure and adapt to the new tax regime. Analysts believe that the suspension of the SITN will be a significant incentive for Russian entrepreneurs to leave the "unfriendly" country. But it may not be easy to do so, "as Russian business is not well tolerated there," the experts add.