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Changes in the double taxation agreement with Russia

Russia is suspending some DTA regulations with 38 countries with immediate effect

On August 8th, 2023, Russia issued a presidential decree that parts of the double taxation agreements (DTA) with 38 “unfriendly” states were temporarily suspended. In addition to Germany, the other EU member states, the USA, UK, Australia, Switzerland, Singapore and Japan are affected by the measure. The regulation came into effect immediately upon its publication.

In the specific case of the double taxation agreement between the Federal Republic of Germany and the Russian Federation of June 29, 1996, this affects Articles 5 to 22 and Article 24 of the agreement. Paragraphs 2-7 of the Protocol to the DTA are also affected.

In particular, the suspension will result in the elimination of preferential withholding tax rates for dividends, interest and license fees from August 8, 2023. As a result, Russia generally levies a withholding tax of 15 percent (previously 15 percent, reduced 5 percent) on dividend payments to Germany, and of 20 percent (previously 0 percent) on interest and license fees. The suspension of paragraph 3 of the Protocol to the DTA also eliminates a contractual basis that previously allowed the deduction of certain costs for advertising beyond the domestic requirements in Russia and which was particularly relevant for the consumer goods industry.

Double taxation of salaries and wages for employees

For employees who are subject to unlimited income tax liability in Germany but carry out part of their dependent work in Russia, Art. 15 of the DTA Russia applies with regard to the taxation of salaries, wages and similar remuneration.

According to this, the mentioned remuneration for dependent work may only be taxed in Russia if the work is actually carried out there. However, Russia’s right to taxation does not apply if all of the requirements of Article 15 (2) of the DTA Russia are met. These are the following:

  • The employee stays in Russia for a total of no more than 183 days in any 12-month period,
  • the remuneration is paid by an employer based in Germany and
  • the remuneration is not borne by a permanent establishment or a fixed facility (economic) that the German-based employer has in Russia.

“Our recommendation is to check the reduction/avoidance of any double taxation by offsetting the wage taxes withheld in Russia in Germany or to temporarily leave the place of work exclusively in Germany, if this is possible in practice,” says Kai Mütze, Managing Director of IAC Management Consultancy GmbH.

Adverse Effects of Applying Transfer Pricing

How transfer prices between affiliated Russian and German companies are to be evaluated by the respective tax authorities is not specifically described in the DTA Russia. Accordingly, the unilateral suspension would not automatically lead to a change in the way transfer pricing is handled in Russia. Nevertheless, there is always the danger that the German and Russian tax authorities will assess the agreed transfer prices differently, resulting in double taxation.

Almost all double taxation agreements – including the Russian double taxation agreement – ​​allow the competent authorities of the contracting states to jointly discuss how double taxation can be avoided in such cases.

The unilateral suspension of the Russia DTA does not rule out the possibility that there will be significant changes, especially with regard to bilateral advance agreement procedures on transfer pricing agreements, and that there will also be a risk of double taxation in the area of ​​transfer pricing.

The federal government should react to this

Even if there is not as much business with Russia at the moment as it was with Ukraine before the war, the federal government should react to this. As described, it would initially only be a unilateral and temporary suspension of the DTA and not a termination of the agreement. As a result, Germany would initially continue to be obliged to comply with the international treaty regulations that have been made. If, on the other hand, Germany sees this as a breach of the agreement, there would be the possibility of the agreement being terminated. “This would possibly represent an additional sign in this power struggle,” said Kai Mütze.

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