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Russia amends double tax treaties and reacts to COVID-19 obstacles

Russia has introduced a range of significant international and domestic tax policies since March.

Dmitry Garaev and Olga Wollny of KPMG Russia discuss how the results of Russia’s initial economic response to COVID-19, and discuss how the burden seems to be increasing on foreign investors.

As COVID-19 has spread across the world and the international community has braced itself for economic recession, Russia has been far from idle. Alongside other countries, various measures to support citizens and businesses – including certain tax breaks – have been announced and promptly adopted via respective legislation. In the few months since entering into law, the first results can already be observed. 

COVID-19 relief measures cater to SMEs

The pandemic has been a devastating blow to most businesses, but small and medium-sized enterprises (SMEs) have been hit especially hard. In view of this, the tax breaks implemented by Russia were mostly aimed at offering tax relief to SMEs. The measures include suspending fiscal audits, extending tax reporting and tax payment deadlines, and offering property and land tax incentives for lessors. SMEs operating in the so-called ‘most affected industries’ were also relieved from certain tax payments (except for VAT and personal income tax) for the second quarter of 2020. 

Certain categories of large taxpayers, the so-called entities ‘operating in the most affected industries’ (including air and auto transportation, tourism and non-food retail business), along with strategic, systemic and city-forming entities, have also received the opportunity to apply for extensions to their tax payment deadlines, taking into consideration the effect that the pandemic has had on their financial figures.

Nevertheless, the benefit from these tax breaks is ambiguous. Naturally, given the significant contraction in cash inflows, any extension to tax payment deadlines feels like a breath of fresh air. However, more targeted measures – such as tax relief – depend on various formal criteria (like the officially declared code of the company denoting its main type of economic activity; it being listed on the SMEs register, etc.) which do not always keep up with the rapidly changing business environments in which firms operate. Another drawback is that allocation of the tax breaks depends on the state’s understanding of the ‘most affected industries’ and does not consider any individual company’s decline in revenue or cash flows. 

Double tax treaty trouble

Moreover, at a time when the government is on the one hand trying to support Russian companies, it, on the other hand, seems to be increasing the tax burden on foreign investors. One of the measures announced in relation to this concerns alterations to the double tax treaties with Cyprus, Malta and Luxembourg. If the amendments are made, all dividend and interest payments made from Russia to these jurisdictions would be subject to the withholding of 15% income tax. 

Malta and Russia were not able to agree on amicable amendments, and Russia has begun unliterally terminating the double tax treaty. Negotiations with Cyprus and Luxembourg are still under way. One can predict that the government may also seek to renegotiate its double tax treaties with other jurisdictions as well, such as the Netherlands, Singapore and Hong Kong SAR.

The bottom line is, as prompt as Russia was in reacting to the COVID-19 outbreak and its implications, the state’s domestic tax policy initiatives have been characterised by their moderation, while some have been controversial. Russia’s international tax policy, however, has been more or less straight-forward. The outcome of this policy’s moves remains to be seen.

Dmitry Garaev

E: dgaraev@kpmg.ru

Olga Wollny

E: owollny@kpmg.ru

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