On 25 March the President of the Russian Federation announced measures intended to increase the revenue received by the Ministry of Finance from payments of dividends and interest to foreign entities.

Under domestic legislation the current rate of withholding tax (WHT) on dividends is 15% while the rate of WHT on interest is 20%.  However, because international tax treaties take precedence over domestic legislation, the actual rate of tax paid is, in many cases, reduced to 5% or 10% and in some cases even to 0%.  The exact rate and the conditions for its application will be determined by the relevant tax treaty. The only way for the Russian Federation to increase the taxation rates applied where a tax treaty is already in place is by changing the terms of the treaty.  The Ministry of Finance was therefore instructed to amend Russia’s tax treaties accordingly.

The Ministry started this process at the beginning of April by sending notification to the Republic of Cyprus that it wanted to renegotiate its double tax treaty with that country to increase the rate of WHT to 15% (currently 5%).  The Ministry has threatened to withdraw from the treaty if Cyprus does not agree to the change. Similar notification was sent to Malta and Luxembourg on 13 April. It is to be anticipated that notification will also be sent to a handful of other countries that are popular among Russian businesses as so called “conduit” countries used to minimise tax on interest and dividends flows to beneficial owners.

So, how should Russian businesses with international structures react?  There is no need to panic. Changes will come into effect no sooner than 1 January 2021 and in the case of certain countries the implementation date may be even later.  This offers an opportunity to take action to reduce or eliminate the potential impact of these measures. But, nobody should waste time, as conducting analysis and implementing a strategy based on it may be a lengthy process.

The content of this article is intended as a general guide to the subject. Consult a qualified professional about your specific circumstances.

Elena Tikhnenko

Head of the supervisory board