Russia to impose extra withholding tax on outbound payments
The new tax is equal to the withholding tax rate applied to dividends under Russian domestic law. It is one of the emergency measures drafted as part of the country's response to the coronavirus epidemic, which has forced Russia, like other countries, to provide financial support to businesses and individuals.
The proposals are likely to be implemented from 2021, so the first tax payments under the new rules will not be made until 2022.
According to the Ministry of Finance of Russia, the withholding tax will primarily apply to outbound payments made to so-called 'transit jurisdictions'. The Russian government will now attempt to negotiate amendments to all applicable double tax treaties (DTTs) within one month. Jurisdictions that do not accept the changes will have their treaties terminated unilaterally.
Russian government estimates suggest that 34 per cent of cumulative direct foreign investment in its economy comes from Cyprus. An official request has already been sent to the Cypriot finance ministry to modify their existing bilateral DTT. Tax rates on dividends under the current DTT vary from 5 per cent to 10 per cent, depending on the type and size of the investment, while cross-border interest payments are exempt from any withholding taxation.
Cyprus is expected to reply to this ultimatum by 15 June. If it accepts the requested amendments, the increased withholding tax rates will probably apply not just to direct payments made to Cypriot entities, but also indirect ones made through other jurisdictions where the ultimate beneficial owner of such income is located in Cyprus, says law firm CMS.
However, if Cyprus rejects the proposal, Russia will impose the dividend withholding tax unilaterally, and also apply a 20 per cent withholding tax on other outbound payments such as interest and royalties. It may also terminate tax information exchanges.
The announcement still leaves much to be clarified, most importantly which countries will ultimately qualify as transit jurisdictions, and under which conditions the new rules will apply to them, says the firm. 'It is highly probable that other jurisdictions will be approached for DTT modifications in the short run', it adds.
The new withholding tax will not apply to interest payments made on Eurobonds, bonds, or loans provided by banks.
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