In June, Putin will freeze tax treaties with “unfriendly” countries

Russian President Vladimir Putin will suspend double tax treaties (DTTs) with “unfriendly” countries in a separate decree to be published in June.

According to Forbes Citing two sources familiar with the process of preparing the document, the issue of protecting individuals against double taxation is currently being discussed, but there is no concrete decision yet.

The Federal Tax Service “in principle” opposed the “freezing” of contracts for this reason, but “the volume of transactions with individuals is considered not very significant,” a source in the Federal Tax Service emphasized.

Breaking tax treaties is a political step, explains the interlocutor who took part in the discussion on the draft presidential decree. “First of all, the measure does not serve fiscal purposes,” he said, adding that the tax office did not even recalculate the amount of additional fees for the budget for raising taxes on payments abroad.

The Ministry of Foreign Affairs and the Ministry of Finance proposed to “hold” tax treaties with “unfriendly” countries. Such action is considered by the Russian authorities as a response to Russia being included in the “black list” of jurisdictions that do not cooperate with the EU on tax matters.

Previously, the government had classified 38 countries out of 84 with which Russia has existing tax treaties as “unfriendly.” Stopping so many international treaties would be unprecedented.

DTT allows foreign companies operating in Russia to significantly reduce their tax burden. For example, tax on dividends is paid at a rate of 5-10% instead of 15%, and on interest on loans and royalties – at a rate of zero instead of 20%.

As a result of the “freezing” of agreements, the tax burden will increase sharply both for foreign companies that remained in Russia after the start of the war, and for Russian companies that operate through foreign jurisdictions.

Emigrants who derive income from Russia will also suffer, e.g. from real estate rental. Tax treaties allow them to pay taxes in only one country or in both, but at a reduced rate due to “offsetting” taxes in the other country.

The “unfriendly” countries include the countries of mass emigration of Russians, including Latvia, Lithuania, Montenegro, Cyprus, Poland, Portugal, Finland and Germany.

Suspension of contracts is “unlikely to significantly increase tax collection to the budget,” says B1 partner Marina Belyakova. According to her, the size of taxable payments from Russia to “unfriendly” countries decreased significantly after the start of the war.

Moreover, such a step would be a blow to genuine foreign investors who, despite the sanctions and counter-sanctions, have retained their stake in the Russian economy, Belyakova warns.