Double tax avoidance treaties are useful instruments for foreign investors or trade businesses to understand and utilize as they mitigate against the potential for being taxed in two countries, and often provide clauses that permit the reduction in income tax, VAT, and other pertinent taxes between citizens of Russia and another treaty state. This means the application of them can help open up new markets in Russia and vice versa by reducing the overall tax burden. This can have significant impact on trade profitability.
An example is the Russia-Hong Kong Double Tax Treaty, which came into effect in January 2017. This DTA provides greater certainty on taxing rights between Hong Kong and Russia, incentivizes foreign investment with reduced income tax and withholding tax rates, and helps investors on both sides to better assess their potential tax liabilities on business transactions.
Before the DTA came into effect, companies operating in Hong Kong but listed in Russia were subject to income tax in both jurisdictions. In some cases, the taxation of repatriated profits of a Hong Kong company based in Russia would be determined by the tax bureau individually, depending on the source of the income.
For either case, tax credits are now be employed to relieve double taxation under the provisions of the treaty. The residence jurisdiction, either Hong Kong or Russia, is required to grant a tax credit for tax payable accrued in its counterpart. According to Article 2, Paragraph 3, the following tax categories are qualified for double tax avoidance:
(1) in the Hong Kong Special Administrative Region:
- profits tax;
- salaries tax; and
- property tax; whether or not charged under personal assessment.
(2) in Russia:
- the tax on profits of organizations; and
- the tax on income of individuals.
Under the agreement, the dividend withholding in Russia for qualified Hong Kong companies is now taxed at a lower five percent or ten percent than non-treaty companies, according to the shareholding of the dividend beneficiary. The agreement also provides a zero percent Russian withholding tax on interest and a cap of three percent in Russian withholding tax on royalties. Together, these provisions account for a cutback of 17 percent from the non-treaty tax rate. A detailed comparison of Russia’s withholding tax rates on Hong Kong residents before and after the agreement is shown below:
Meanwhile, the treaty specifies that profits arising from the operation of ships or aircraft in international traffic will be taxed only within the jurisdiction where the operating companies are registered.
The impact of this treaty has been a boom in Russia’s bilateral trade with Hong Kong – up 53 percent year on year.
Russia has entered into DTAs with a large number of countries. Businesses from any of these nations wishing to trade or conduct business with or in Russia should be looking at the content of their specific Russia DTA:
Europe and Caucasus
Albania / Armenia / Austria / Azerbaijan / Belarus / Belgium / Bulgaria / Croatia / Cyprus / Czech Republic / Denmark / Finland / France / Germany / Greece / Hungary / Iceland / Ireland / Israel / Italy / Latvia / Lithuania / Luxembourg / Macedonia / Malta / Moldova / Netherlands / Norway / Poland / Portugal / Romania / Serbia / Slovakia / Slovenia / Spain / Sweden / Switzerland / Turkey / Ukraine / United Kingdom
Iran / Kuwait / Lebanon / Qatar / Saudi Arabia / Syria
Algeria / Botswana / Egypt / Mali / Morocco / Namibia / South Africa
Australia / China / Hong Kong / India / Indonesia / Japan / North Korea / South Korea / Malaysia / New Zealand / Philippines / Singapore / Sri Lanka / Thailand / Vietnam
Kazakhstan / Kyrgyzstan / Mongolia / Tajikistan / Turkmenistan / Uzbekistan
Canada / Mexico / United States
South America and Caribbean
Argentina / Chile / Cuba / Venezuela
While some of these agreements have been effectively derailed due to sanctions imposed upon Russia by the United States, EU, and other nations, they may still hold a great deal of validity for businesses in Africa, Asia, the Middle East, Central Asia and South America.
The Eurasian Economic Union members of Armenia, Belarus, Kyrgyzstan, and Kazakhstan all have additional free trade status with Russia via the EAEU partnership. An introduction to the double tax avoidance treaties entered into by the EAEU member states can be found here.
Companies in Egypt, for example, which has just jointly opened a free trade zone with Russia in Port Said, should also be considering their existing DTA with Russia, as should Indian traders now operating in Russia, for example, gem stone investors in the Eurasian Diamond Exchange in Vladivostok. There are many other examples, depending upon Russia’s internal demand for foreign produce – which has increased in the wake of sanctions and is good news for Asian businesses wishing to take advantage of the EU opting out of Russian trade. Opportunities are there.
Firstly, the agreement needs to be thoroughly read and examined to see what parts of it apply to your bilateral trade or business in Russia. If the foreign investor has invested in Russia, any pertinent tax reductions need to be discussed with the relevant Russian tax authority, which is typically either customs or the regional tax bureau. They need to be aware of the status before you can claim benefits. This means it is a good idea to do this as part of any new application procedure to establish a company in Russia.
For Russian investors overseas, the same situation applies, discussions and a application to apply for tax relief under the terms of the relevant DTA need to be made with the pertinent tax bureau.
For assistance with understanding Russia’s Double Tax Treaties, applying for business licenses, and dealing with tax bureau applications, please contact us at firstname.lastname@example.org for further assistance.
Russia Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors in Russia and Russian investors in Asia, and maintains partner offices in Moscow and St,Petersburg, and full professional service offices throughout China, ASEAN and India. Please contact us at email@example.com for assistance or visit our website at www.dezshira.com
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