New Developments in the Tax Environment - the Russian practice

Briefing on latest developments in the Russian tax environment . 

1. Introduction by Svetlana Chiriaeva, President, Swiss Russian Chamber of Commerce.

2. The floor was given to Dr. Roderik J.P. Strobl, Relationship Manager Key Clients, Leo Trust Switzerland AG who listed the speakers at the event:

- Alexandra Kadet. On latest developments in the Russian tax Environment
- Inna Volkova, Relationship Manager, Leo Trust Switzerland AG
- Dr. Roderik J.P. Strobl, Relationship Manager Key Clients, Leo Trust Switzerland AG to introduce case studies on the subject.

3. The floor then went to Maria Anna Laemmli, Partner, Leo Trust Switzerland AG. She states that the event is probably one of the most important of the year – a meeting of a top Russian official in the tax field with representatives of Swiss companies and international business community interested in cooperation with Russia.

4. Keynote speech by Alexandra Kadet, Head Transfer Pricing Department, Federal Tax Service, Russia.
The briefing takes place 4 days before the 21st session of the Joint Commission on Trade and Collaboration between Switzerland and Russia in Bern. I will participate in the event.
Key points:
- Changes in the Controlled Foreign Companies (CFC) taxation. A new regime has been introduced – a lump sum taxation equal to 5 million rubles for all controlled foreign companies. It is an option available only for physical persons, but not legal entities. However, it is balanced by a new obligation on CFCs - mandatory annual submission of financial statements. Some penalties for non-submission have been increased.
- Taxation of individuals. The most important change in physical person taxation – first tax period covered is 2021 – progressive income tax rate comes into force, i.e. 13%. Income over 5 million rubles will be taxed at 15%. The regime also applies to the so called “highly qualified specialists”. It is popular with expats.
- Significant changes in taxation of corporations.
a) Russia is elaborating special investment contracts which can be concluded separately with regional and federal authorities and both at the same time. It is a very attractive option for foreign investors.
b) Changes to the double tax treaties. Malta, Cyprus and Luxemburg agreed to change the treaties and boost the withholding rates. The treaty with the Netherlands has been renounced because no agreement was reached.
c) Transfer pricing rules. Very important changes have been made since TP rules were introduced in Russia in 2012. There is now more focus on advance pricing agreements (including bilateral and multilateral) and not audits. This is a very good sign. A new development since this year is an opportunity to submit an application for APA electronically.
d) There are discussions of the International Compliance Assurance Program introduced by the OECD on taxpayer initiative. It will provide risk assessment in the countries where taxpayers operate. Russia is part of this program but Switzerland is not, which is a pity.
e) A very important point are BEPS 2.0 to be brought to life in 2023 or 2024. At the moment the combination of Pillar I and Pillar 2 target the biggest multinationals but will later apply to smaller businesses operating internationally. This means that we are moving towards unified rules for almost all companies. It is unprecedented and the outcomes are not quite clear. Every country have to establish rules how to operate this 15% minimal tax. The core to success will be exchange of information between countries and there is a need to enhance cooperation between tax authorities.

Q & A

Q. What are the withholding tax rates for dividends (15%) and interest payments (20%) and what is the ordinary residual tax rate?
A. With Switzerland the withholding tax on dividends is 5% when the respective conditions of the provisions of the treaty with Switzerland are fulfilled. The withholding tax on interest payments is zero percent under the treaty with Switzerland. The ordinary domestic withholding tax rate on dividends is 15% and the ordinary rate on interest payments is 20%.
Q. Are there any limitations or restrictions on capital contributions to the companies owned by a Swiss company?
A. There are no restrictions to a foreigner making investment in Russia. You can also establish a company in Russia. There are also conditions allowing to apply 5% withholding tax in Russia under the treaty with Switzerland: the share of capital in the subsidiary company (20%) and size of investment (200 000 CHF) It is important whether the investor is a corporation or an individual. The beneficial owner test is applied.
Q. Are there any restrictions on the ratio between the local and foreign employees?
A. There are no restrictions. And local authorities are very keen about having the local people employed.
Q. Are there changes in taxation between the UK and Russia? When a Russian owns a UK holding company?
A. It relates to double tax treaties, probably. We have only four double tax treaties that were changed recently. Three have been amended and one is renounced. The treaty between the UK and Russia continues to be in force.