Important changes in the international tax law

Due to significant changes in Russian and international tax legislation, we would like to highlight their possible impact on existing holding structures. Under certain conditions, changes in legislation without proper adjustments could lead to a significant increase in overall tax burden and / or significant tax risks.

In particular, following international trends, Russian legislation is reinforced with tools aimed at combatting international tax evasion, erosion of the tax base and artificial profit shifting from taxed to offshore jurisdictions. In addition, changes to international tax agreements (Double Taxation Treaty or DTT), which lead to an increase in withholding tax rates (WHT), are being undertaken.

Below is a brief review of the key changes in tax legislation that will fully come into force in 2021. These will affect cross-border transactions. We will be pleased to answer your questions and provide any additional information.

Change of DTTs with low-tax jurisdictions: Malta, Luxembourg, Cyprus, the Netherlands

  • Malta, Luxembourg and Cyprus: changes increase the withholding tax rate on dividends and interest to 15% (with certain exceptions);
  • The Netherlands: the Ministry of Finance has begun procedures for submission to the State Duma to repeal the Federal law on the DTT (https://regulation.gov.ru/projects#npa=111273).

Application of the MLI (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting)

  • Starting 1 January 2021, the MLI may be applied for certain DTTs (http://www.oecd.org/tax/treaties/beps-mli-notification-article-35-7-b-russian-federation.pdf). For other jurisdictions, the MLI will enter into force at a later date. However, we do not exclude the retrospective application of the MLI rules for periods up to 1 January 2021;
  • MLI significantly reinforces and modifies the existing DTTs and tightens rules on reduced withholding tax rates in a number of transactions, introduces additional criteria for permanent establishment, etc.

The Russian Federal Tax Service updated the lists of countries with which the automatic exchange of tax information is carried out

The Federal Tax Service has approved a new List of States and territories with which there is the automatic exchange of financial information. Moreover, the list of states and territories that the automatic exchange of country reports is carried out with has been updated. It now includes 63 countries and 8 territories, including "offshores": Anguilla, the British Virgin Islands, Hong Kong, the Turks and Caicos Islands, as well as Andorra, the Bahamas, Belize, Monaco, the United Arab Emirates, Panama, Peru, San Marino, Saudi Arabia, and the Seychelles.

Strengthened approach to challenging of intra-group services

  • The tax authorities retain the increased interest on expenses on intragroup cross-border services. At the same time, current court practice associates such services not only with significant profits tax and VAT risks, but also with withholding tax risks (reclassification of payments into dividends / other payments) and risks of sanctions currency control legislation violations.
  • When assessing the justification of the expenses of intragroup services, tax authorities analyse the actual existence of services: whether such services were actually provided; duplication of expenses on similar services / functions of the customer's personnel; the existence of economic or commercial value of the services; differentiation of services and costs of joint (shareholders’) activities; pricing methodology, and other elements.

BEPS 2.0 (MLI 2.0) perspective

The OECD and the G20 continue to work on introducing effective measures to limit the erosion of the tax base in the digital economy. It is assumed that the changes will affect both IT companies as well as companies in other industries such as  production or distribution of goods. It is expected that by the summer 2021 the two plans (pillars) will be agreed upon and in the medium-term (5-10 years) could become international laws similar to the MLI:

  • Pillar 1 is a concept that provides for a new taxation procedure for international companies in countries where they have a significant customer base, even if there is no branch / representative office or subsidiary in those countries.
  • Pillar 2 is a concept that provides for the obligation to pay "additional" tax where income is taxed below a certain minimum rate.

If you have any further questions about these changes and the impact they may have on your company, we will be happy to address them and provide any additional information.

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