Russia added to EU’s “blacklist”

Special attention necessary where Russian participating interests are involved

The most recent meeting of the EU finance ministers (ECOFIN) resulted in changes to the list of non-cooperative jurisdictions for tax purposes. On 14 February 2023, the finance ministers of the EU member states resolved to add four jurisdictions to the blacklist. Besides the Russian Federation, the British Virgin Islands, Costa Rica and the Marshall Islands were added to the list. Russia was listed because of its violations of the “good tax governance” criteria set out in the EU Code of Conduct as well as the halted dialogue on tax matters following the conflict in Ukraine.

Tax implications for Austrian companies

This development will have considerable implications in practice. The blacklist is relevant for:

• • the classification of international Group companies as “low-taxed” within the meaning of Section 10a para. 11 KStG (Austrian Corporate Income Tax Act) (general assumption of low taxation) and
  • the triggering of reporting obligations in case of cross-border payments within the meaning of Section 5 subsection 1 item (b) EU-MPfG (EU Reporting Obligations Act) (“DAC 6”) and
  • evaluating whether an Austrian company can benefit from COVID-19 subsidies or the energy costs subsidy within the meaning of Section 3 subsection 3 WohlverhG (Austrian Act linking subsidies to appropriate conduct in relation to tax) or corresponding provisions set out in the respective subsidy guidelines.

Consequently: If Austrian entities have direct or indirect participating interests in Russian companies, these Russian companies are now generally classified as “low-taxed” for the purpose of Section 10a KStG (irrespective their actual tax payments in Russia). At the level of the Austrian parent company, this could trigger the application of the controlled foreign corporation (CFC) rules. Furthermore, dividend income and capital gains may be subject to a switch-over from the exemption to the credit method.

For arrangements which allow for intra-Group payments to Russia that are tax-deductible in Austria (e.g., loans, licence agreements, service level agreements, contract production), a reporting obligation under DAC 6 could be triggered in addition, since the Russian recipient is now domiciled in a state on the “blacklist”. Please consult our DAC 6 microsite for more information.

Moreover, Austrian companies having their legal seat in Russia or a Russian branch office may not be eligible to apply for COVID-19 subsidies (e.g investment premium, compensation for losses, revenue shortfall bonus) or the energy costs subsidy in the future if the entity situated in Russia primarily receives passive income.

Need for action

Since Russia has been added to the EU blacklist, all Austrian companies holding participating interests in Russia are advised to promptly determine whether the CFC-rules apply in their case. Companies receiving dividends or capital gains from Russian participating interests are advised to do the same with respect to the application of the switch-over rule.

Please note: Now that numerous corporations are cutting back on their investments on the Russian market and are, e.g., liquidating local entities (taxwise resulting in a capital gain at Austrian shareholder level), a switch-over to the credit method may cause a significant additional tax burden on the Austrian parent company.

Arrangements with cross-border intra-Group payments to Russia need to be reviewed on a case-by-case basis as to whether this change will trigger future DAC 6 reporting obligations.

Furthermore, Austrian companies with Russian activities (seat, branch office) primarily generating passive income should also analyse the relevance of the blacklisting for their qualification as recipient of Austrian subsidies.

Written by: Richard Jerabek / Aleksandar Vesić