United States-Russia Tax Treaty
Russia International Tax Compliance Rules
Quick Summary. Geographically the largest country in the world and spanning across Eastern Europe and Northern Asia, Russia is a semi-presidential republic with a civil law system. Russia’s Tax Code imposes three levels of taxation: federal, regional, and local.
Russia’s constitution was adopted in 1993 and provide for eighty five federal subjects, including oblasts, krays, republics, autonomous okrugs and oblasts, and federal cities of Moscow and Saint Petersburg.
Russia has a bicameral Federal Assembly or Federalnoye Sobraniye comprises of the Federation Council or Sovet Federatsii. Its judicial system is comprised of the Supreme Court of the Russian Federation; Constitutional Court, and subordinate courts including the Higher Arbitration Court; regional (kray) and provincial (oblast) courts; Moscow and St. Petersburg city courts; autonomous province and district courts.
Russian law places restrictions on property ownership by foreigners with respect to certain property.
U.S.-Russia Tax Treaty
Russia imposes tax on residents on worldwide income. Non-residents are subject to tax on income from Russian sources.
Currency. Russian rouble (RUB)
Common Legal Entities. Public and nonpublic joint stock company, limited liability company, partnership, and branches.
Tax Authorities. Federal Tax Authority
Tax Treaties. Russia is party to more than 80 income tax treaties and is a signatory to the OECD MLI.
The United States and Russia signed a bilateral investment treaty (BIT) in 1992. However, it was never ratified by Russia and is not in force. A U.S.-Russian dialogue to explore prospects for negotiating a new BIT ceased upon Russia’s purported annexation of Crimea in 2014.
The U.S.-Russia Income Tax Convention, in effect since 1994, was designed to address the issue of double taxation and fiscal evasion with respect to taxes on income and capital.
Corporate Income Tax Rate. 20%
Individual Tax Rate. 13 – 30%
Corporate Capital Gains Tax Rate. 0% / 20%
Individual Capital Gains Tax Rate. 0% – 30%
Residence. Residence for tax purposes is based upon physical presence of 183 days or more in Russia during a calendar year.
Withholding Tax.
Dividends. 15% (resident company) / 13% (resident individual) / 5%, 15% (nonresident company) / 15% (nonresident individual)
Interest. 0% (resident company) / 13% (resident individual) / 20% (nonresident company) / 30% (nonresident individual)
Royalties. 0% (resident company) / 13% (resident individual) / 20% (nonresident company) / 30% (nonresident individual)
Transfer Pricing. Transfer pricing rules, which are substantially compliant with OECD principles, apply.
CFC Rules. Yes, apply a rate of 20% or 13% of undistributed profits, depending on status of recipient.
Hybrid Treatment. No anti-hybrid legislation.
Inheritance/estate tax. N/a
The U.S.-Russia treaty replaced the prior treaty in place between the United States and USSR. At times, interpretation of the current treaty may be helped by a comparison to the prior tax treaty with the USSR, as well as a comparison to other U.S. income tax treaties and U.S. model treaties in place at the time of the execution of the U.S.-Russia treaty.
The Russian treaty differs in certain respects from other U.S. income tax treaties and from the U.S. model treaty. It also differs in significant respects from the treaty with the Soviet Union, which predates the 1981 U.S. model treaty. Some of these differences are as follows:
(1) Like all treaties, the treaty is limited by a “saving clause,” under which the treaty is not to affect (subject to specific exceptions) the taxation by either treaty country of its residents or its nationals. Exceptions to the saving clause are similar to those in the U.S. model and other U.S. treaties; the USSR treaty, in contrast, flatly states that it shall not restrict the right of a treaty country to tax its own citizens.
(2) The U.S. excise tax on insurance premiums paid to a foreign insurer is not a covered tax; that is, the treaty does not preclude the imposition of the tax on insurance premiums paid to Russian insurers. This is a departure from the U.S. model tax treaty, but one that is shared by many U.S. treaties. In addition, the treaty, like the model treaty, does not contain a general prohibition on source country taxation of reinsurance premiums derived by a resident of the other country. Nor does the treaty provide that if the income of a resident of one country is tax-exempt in the other country, the transaction giving rise to that income is exempt from any tax that is or may otherwise be imposed on the transaction. (It is understood that this provision applies to the insurance premium excise tax, and does not apply to customs duties.)
(3) Like the U.S. model, the treaty generally does not cover U.S. taxes other than income taxes, although it does cover capital taxes and excise taxes with respect to private foundations. Nor does the treaty cover the accumulated earnings tax, the personal holding company tax, and social security taxes.
(4) The treaty makes it clear that each country includes its territorial sea, and also the economic zone and continental shelf in which certain sovereign rights and jurisdiction may be exercised in accordance with international law.
(5) By contrast with the prior USSR treaty, but like the U.S. model, U.S. citizens are entitled to treaty benefits regardless of actual residence in a third country. In addition, the treaty provides rules for determining when a person is a resident of either the United States or Russia, and hence entitled to benefits under the treaty. The treaty, like the model, provides tie-breaker rules for determining the residence for treaty purposes of “dual residents,” or persons having residence status under the internal laws of each of the treaty countries.
(6) Under the treaty, any corporate dual resident is treated as a resident of one or the other country only if the competent authorities can agree; if not, the treaty (unlike the U.S. model) expressly provides that the company shall be treated as a resident of neither country for purposes of enjoying treaty benefits, and hence is entitled to no treaty benefits.
(7) The treaty introduces the permanent establishment threshold for one country’s imposition of tax on the business profits of a resident of the other country, in conformity with the U.S. and OECD model treaties. This replaces the concept of a “representation” used in the prior USSR treaty.
https://freemanlaw.com/business-profits/(8) Under the U.S. model treaty, a building site or construction or installation project, or an installation or drilling rig or ship used for the exploration or exploitation of natural resources, constitutes a permanent establishment only if it lasts more than 12 months. The corresponding rule in the proposed treaty extends that time period to 18 months. Under the prior USSR treaty, the source country was prohibited from taxing the income of a resident of the other country from furnishing engineering, architectural, designing, and other technical services in connection with an installation contract with a resident of the source country and which are carried out in a period not longer than 36 months at one location.
(9) The treaty provides that the maintenance of a fixed place of business by a person solely for the purpose of facilitating the conclusion (or for the mere signing) of contracts in the name of the person, concerning loans or the delivery of goods or merchandise or technical services, is an activity that will not be treated as carried on through a permanent establishment. The model treaties do not address this type of activity specifically.
(10) The business profits article of the treaty overrides the force of attraction rules contained in the Code, providing instead that the business profits to be attributed to the permanent establishment shall include only the profits derived from the assets or activities of the permanent establishment. This is consistent with the U.S. model treaty.
(11) The treaty clarifies that a country may tax profits or income if the other-country resident carries on “or has carried on” business, or has “or had” a fixed base, in that country. Addition of the words “or has carried on” and “or had” clarifies that, for purposes of the treaty rules stated above, any income attributable to a permanent establishment (or fixed base) during its existence is taxable in the country where the permanent establishment (or fixed base) is situated even if the payments are deferred until after the permanent establishment (or fixed base) has ceased to exist.
(12) The protocol provides that, in allowing interest deductions from the taxable income of a permanent establishment, Russia will permit a Russian permanent establishment of a U.S. resident to deduct interest, whether paid to a bank or another person, and without regard to the period of the loan. However, unlike the model treaty or the prior USSR treaty, the treaty provides that the deduction may not exceed the limitation under Russian tax law, as long as the limitation is not less than the London Interbank Offered Rate (“LIBOR”) plus a reasonable risk premium to be provided for in the loan agreement.
(13) The treaty includes an article corresponding to the associated enterprises article in the U.S. model treaty. In particular, the proposed treaty contains a “correlative adjustment” clause, providing that either treaty country must correlatively adjust any tax liability it previously imposed on a person for income reallocated to a related person by the other treaty country. The prior USSR treaty contained no associated enterprises article.
(14) The treaty, similar to the model treaty and similar in some respects to the prior USSR treaty, provides that income of a resident of one treaty country from the operation of ships or aircraft in international traffic is taxable only in that country. (The corresponding model treaty provision applies to “profits” from such operation, while the English version of the proposed treaty applies to “income.”) Similar to the model treaty, the proposed treaty includes bareboat leasing income in the category of income to which this rule applies.
(15) The prior USSR treaty in general imposed no restriction on the taxation of income from real property by the country in which the property is located. The treaty contains a provision similar to the model treaty provision permitting taxation of such income by the country in which the real property is located, including the U.S. model treaty provision under which investors in real property in the country not of their residence must be permitted to elect to be taxed on those investments on a net basis.
(16) The prior USSR treaty generally imposed no restriction on the source-country taxation of dividends. The treaty, similar to the U.S. model treaty, provides that direct investment dividends (i.e., dividends paid to companies resident in the other country that own directly at least 10 percent of the voting shares of the payor) will generally be taxable by the source country at a rate no greater than 5 percent. Like recent U.S. treaties, the protocol provides that the 5 percent limit does not apply to dividends paid by a U.S. regulated investment company (a “RIC”).
(17) Under the treaty, portfolio investment dividends (i.e., those paid to companies owning less than a 10 percent voting share interest in the payor, or to noncorporate residents of the other country) are generally taxable by the source country at a rate no greater than 10 percent. This is a significantly tighter restriction than that in the model treaties and many other U.S. treaties, which generally permit source country taxation of at least 15 percent on portfolio dividends. (It could be argued that, in effect, France, Germany, and the United Kingdom are required under their treaties with the United States to retain somewhat less shareholder-level tax in the corresponding case; the United States is not so required under those treaties.) On the other hand, the treaty imposes no general restriction on the source country taxation of dividends paid by a U.S. real estate investment trust (a “REIT”).
(18) The prior USSR treaty generally imposes no restriction on the U.S. branch profits tax. The treaty, similar to U.S. treaties negotiated since 1986, expressly permits the United States to impose the branch profits tax, but at a rate not exceeding 5 percent.
(19) The treaty, like the U.S. model and numerous U.S. treaties, generally prohibits source country taxation on interest. However, the treaty provides that income from any arrangement, including a debt obligation, carrying the right to participate in profits and treated as a dividend by the source country according to its internal laws, may be taxed by the source country as a dividend. Thus, for example, the country of source could withhold tax on deductible interest paid under an “equity kicker” loan, at rates applicable to dividends. There is no similar provision in the U.S. or OECD models .
(20) The protocol provides that the interest article in the proposed treaty does not interfere with the jurisdiction of the United States to tax under its internal law an excess inclusion with respect to a residual interest in a real estate mortgage investment conduit (a “REMIC”). Currently, internal U.S. law applies regardless of treaties that were in force when the REMIC provisions were enacted.
(21) Like the model treaty, the treaty provides that royalties derived and beneficially owned by a resident of a country generally may be taxed only by that country. Royalties are defined as payments for the use of certain rights, property, or information. Unlike the model treaty, the treaty does not treat as royalties gains from the alienation of rights or property which are contingent on the productivity, use, or further alienation of such right or property. The taxation of such gains is governed by the treaty’s “Other Income” article, which, in a manner similar to the royalties article, generally reserves taxing jurisdiction to the residence country.
(22) Unlike the U.S. model treaty, the treaty has no “Gains” article. The prior USSR treaty generally imposed restrictions on the source-country taxation of gains only in the case of certain ships or aircraft operated in international traffic, property received by inheritance or gift, and gains from the disposition of either industrial, commercial, or scientific equipment, or certain intangible property. The “Other Income” article on the treaty would appear to permit a treaty country to tax gains of a resident of the other country to the same extent allowed under the U.S. model treaty, taking into account both the Gains and Other Income articles of the U.S. model:Similar to the U.S. model treaty, the treaty does not restrict the jurisdiction of a treaty country to tax gains from the alienation of real property situated in that country, and from stock in a company at least 50 percent of the assets of which consist of real property situated there. As provided in the protocol, this safeguards U.S. tax under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), which applies to dispositions of U.S. real property interests by nonresident aliens and foreign corporations.
The treaty generally permits taxation by a treaty country of income of a resident of the other treaty country—other than business profits, dividends, interest, royalties, shipping income, and income from real property, personal services, directors’ fees, and pensions—attributable to a permanent establishment or fixed base in the first country. The Treasury Department has indicated that this permits the taxation of gains from the alienation of a permanent establishment or fixed base, or gains from the alienation of personal property which are attributable to a permanent establishment or fixed base, as provided for in the U.S. model.
(23) The treaty generally restricts, to a greater extent than the U.S. and OECD model treaties, and numerous U.S. treaties, source country taxation of income of an individual resident of the other treaty country from performing independent personal services. In addition to the restrictions provided by the model treaty, the proposed treaty, like the prior USSR treaty, conditions taxation in this case upon presence of the individual in the source country for more than 183 days. Otherwise the treaty is similar to the U.S. model treaty.
(24) The treaty generally also restricts source country taxation of employment income to a greater extent than the U.S. and OECD model treaties, and numerous U.S. treaties. Under the treaty, as under the models, income from employment in one country (the source country) by a resident of the other country is not taxable by the source country if the individual is in the source country fewer than 184 days during the year, the employer is not a resident of the source country, and the compensation is not borne by a permanent establishment or fixed base of the employer in the source country. Consistent with the prior USSR treaty and the models, the source country may not tax compensation derived from employment as a member of the regular complement of a ship or aircraft operated in international traffic. Unlike the models, the treaty prohibits source country taxation if the employment is directly connected with a place of business which is not a permanent establishment, and the employee is present in the source country 12 consecutive months or less. In addition, the treaty prohibits source country taxation of employment income from providing technical services directly connected with the application of a right or property generating a royalty, if the services are provided under a contract for the use of the right or property.
(25) Notwithstanding the above restrictions on source country taxation of income from personal services, the treaty, like the OECD model treaty, allows directors’ fees and similar payments made by a company resident in one country to a resident of the other country to be taxed in the first country. The U.S. model treaty, on the other hand, treats directors’ fees as personal service income. Under the U.S. model treaty the country where the recipient resides generally has primary taxing jurisdiction over personal service income and the source country tax on directors’ fees is limited.
(26) The treaty omits the U.S. model treaty reservation to the source country of jurisdiction to tax an entertainer or athlete, residing in the other country, who earns more than $20,000 in the source country during a taxable year, without regard to the existence of a fixed base or other contacts with the source country.
(27) Unlike the U.S. model treaty, the treaty makes no special provision for the treatment of annuities, alimony, or child support payments. Taking into account the “Other Income” article, the result in the case of annuities and alimony is generally similar to that under the model; the result in the case of child support may not be.
(28) The treaty, like the U.S. model treaty and unlike the USSR treaty, expressly provides for the taxation of pensions in general only by the residence country, and for the taxation of social security benefits and other public pensions not arising from government service only in the source country.
(29) The treaty modifies the USSR treaty’s rule, similar to the U.S. model rule, that compensation paid by a treaty country government to one of its citizens for services rendered to that government in the discharge of governmental functions may only be taxed by that government’s country. Under the treaty, as under the OECD model treaty and other U.S. treaties, such compensation generally may only be taxed by the recipient’s country of residence, if the recipient is a citizen of that country, or (in the case of remuneration other than a pension) did not become a resident of that country solely for the purpose of rendering the services.
(30) The treaty contains a less restrictive set of limitations on host-country taxation of temporary visitors. They do not apply to visits purely for teaching. The treaty prohibits the host country from taxing certain payments from abroad for the purpose of the individual’s maintenance, education, study, research, or training. Temporary presence in the host country must be for the purpose of studying at an educational institution; training as required to practice a profession; or studying or doing research as a recipient of a grant from a governmental, religious, charitable, scientific, literary, or educational organization. In the last case, the proposed treaty prohibits the host country from taxing the grant. As under the USSR treaty, the exemptions apply no longer than the period of time ordinarily necessary to complete the study, training or research. Moreover, no exemption for training or research will extend for a period exceeding five years. The exemption from host country tax does not apply to income from research if the research is undertaken for private benefit.
(31) The treaty contains a version of the standard “other income” article, found in the model treaties and some existing treaties, such as the U.S. treaty with the United Kingdom, under which income not dealt with in another treaty article generally may be taxed only by the residence country.
(32) The treaty contains a limitation on benefits, or “anti-treaty shopping,” article similar to the limitation on benefits articles contained in someU.S. treaties and protocols and in the branch tax provisions of the Code.
(33) The treaty provides that each country shall allow its residents (and the United States its citizens) a credit for income taxes imposed by the other country. However, such credits need only be in accordance with the provisions and subject to the limitations of internal law (as it may be amended from time to time without changing the general principle that credits must be allowed).
(34) The protocol provides an additional credit rule for a U.S. citizen who is a Russian resident. To such a person Russia must allow credits even for U.S. taxes imposed solely by reason of the person’s citizenship, but to no greater extent than the Russian tax on income from sources outside Russia.
(35) U.S. law allows taxpayers credit for foreign taxes only if the foreign taxes are directed at the taxpayer’s net gain. Thus the sufficiency of deductions allowed under foreign law is relevant to the creditability of foreign tax against U.S. tax liability. At times, Russian law has in effect placed significant restrictions on labor and interest cost deductions. In order to assist U.S. taxpayers’ ability to take U.S. credits for Russian taxes, Russia agreed under the protocol to permit certain Russian entities certain interest and labor cost deductions, regardless of its internal law, if U.S. residents beneficially own at least 30 percent of the entity, and the entity has total corporate capital of at least $100,000.
(36) The treaty greatly expanded the non-discrimination rule in the prior USSR treaty, in some respects conforming it to the U.S. model, and in other respects providing additional benefits. The USSR treaty required “national treatment” to the extent of prohibiting discrimination under the laws of one country against citizens of the other country resident in the first country. It required “most-favored-nation treatment” to the extent of prohibiting less favorable treatment, under the laws of one country, of citizens of the other country resident in the first country, or of local representations of residents of the other country, than the treatment afforded to third-country citizens and representations of third-country residents. The Russian treaty requires both “national treatment” to the extent required in the U.S. model and a form of “most-favored-nation treatment” (not taking into account special agreements, such as bilateral income tax treaties, with third countries) to be applied to citizens and residents of the treaty countries. The treaty affords these benefits to citizens of the other country in the same circumstances as citizens of the first country, regardless of residence; to the local permanent establishments of residents of the other country, and to enterprises owned by residents of the other country. In addition, the treaty prohibits discrimination against the deductibility of amounts paid to residents of the other country.
(37) Like the U.S. model treaty, the treaty makes express provision for the competent authorities to mutually agree on topics that would arise under the proposed treaty, but are not mentioned in the present treaty’s mutual agreement article, such as the characterization of particular items of income, the common meaning of a term, the application of procedural aspects of internal law, and the elimination of double taxation in cases not provided for in the treaty.
(38) The treaty omits the U.S. model provision pledging assistance in collecting such amounts as may be necessary to ensure that treaty relief does not enure to the benefit of persons not entitled thereto.
(39) The protocol expressly provides that where the treaty limits the right to collect taxes, which taxes are nevertheless withheld at source at the rates provided for under internal law, refunds will be made in a timely manner on application by the taxpayer.
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