Russia is one of the fastest growing markets for the
international wealth management industry. This is partially due to
the fact that political uncertainty drives Russian money to
"safer lands" offshore. The poor legal system and lack of
enforcement mechanisms in Russia allow the non-Russian ownership
structures for Russian resident individuals to be legitimate and
low-risk. One of the main tools of wealth planning for Russian
HNWIs is the use of double tax treaties to mitigate tax exposure on
repatriation of money offshore.
To date, Russia has concluded over 70 double tax treaties with
most of its trade partners. Most of the treaties are based on the
OECD Model Convention.
Last year, the Russian government approved a new Model Treaty on
Double Taxation and Income and Property Tax Evasion (the
'Model Treaty'). The Model Treaty does not
correspond exactly to the OECD Model Convention. It does not have
statutory effect, but is intended to be used as a basis for
negotiations in relation to new double tax treaties between the
Russian Federation and foreign states . However, it may also be
used as a basis for amending current treaties by means of a
The main impact of the Model Treaty is that the newly concluded
double taxation treaties will considerably widen powers to taxation
of the income source state. This clearly demonstrates the desire of
Russian tax authorities to increase tax revenue at the point of
repatriation of income received from investments in Russia. Most
amendments to articles contained in the previous model treaty,
including those on dividends, interest and capital gains taxation,
are designed to restrict the conditions for the application of
reduced withholding taxation at source.
Some examples of new restrictions concern: taxation of profit
distribution within associated companies; re-qualification of
interest payments as dividends in accordance with domestic law
provisions (in effect, the income source state's power to apply
domestic 'thin capitalisation' rules now extends to
cross-border controlled debt interest payments); fundamental
changes in provisions regulating 'other income' (these
extend the source state's power to tax 'other
Another important provision closes a loophole previously used by
vigorous tax planners: the absence of a mechanism for taxing
foreign companies in Russia, eg on a sale/acquisition outside
Russia between foreign companies of Russian-located assets. These
provisions include powers whereby one state may raise inquiries
with another state demanding tax collection and apply injunction
The Model Treaty also contains a number of provisions aimed at
the prevention of tax avoidance and abuse of treaty provisions (eg
the concept of beneficial owner, limitation of exemptions), as well
as provisions which have a more fiscal character compared to the
previous Model Treaty and to most existing tax treaties with
Russia. As mentioned, in practice the most common holding structure
projects designed for Russian corporate groups use the most
favourable jurisdictions to minimise overall tax exposure within
the group. The provisions of the new Model Treaty limit the
exemptions provided for under a treaty if such exemptions will lead
to the abuse of advantages resulting from treaty provisions
(so-called 'treaty shopping').
A key question is how far the changes to the Model Treaty may
influence the application of existing treaties. Following the
revision of its treaty with Cyprus, which showed Russia pursuing a
more fiscal international tax policy, countries including
Luxembourg, Switzerland, Austria and the Netherlands have also been
'short-listed' for review of existing treaties. In fact, in
March 2011 the Swiss and Russian governments announced the
completion of negotiations and confirmed agreement on changes to
their existing double tax treaty. The protocol has not yet been
published; it is intended to be put to the local Swiss authorities
for consultation first. It is likely that exchange of information
provisions and overall tax avoidance issues will be the major
changes. These changes will inevitably impact on the
profession's approach to international corporate and personal
asset structuring solutions involving Swiss elements.
The Model Treaty therefore serves as an indicator of government
policy in the area of international taxation and should be taken
into account when assessing tax risks in the application of various
concepts in relation to existing treaties, which successfully meet
current international tax planning objectives. These provisions
shall be closely considered for the existing and future
international investments structuring into Russia and the clients
shall be informed of the increased risks and additional
requirements for careful planning of cross-border transactions at
an early stage.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Cyprus Tax Department recently issued Forms T.D 38, T.D 38Qa and T.D 38Qb applicable to individuals being Cyprus tax residents but non-Cyprus domiciled.
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