Russia suspends parts of the double taxation agreement with Austria
By decree of 8 August 2023, Russia unilaterally suspended the application of major parts of the provisions of the double taxation agreement between Austria and Russia. This has implications for Austrian taxpayers.
Background
In response to Western sanctions (such as the EU adding Russia to its “blacklist”), the Russian Foreign Ministry and the Russian Ministry of Finance recommended to the Russian President already in March 2023 to issue a decree on the suspension or termination of existing double taxation agreements (DTAs) with “unfriendly states”. The recommendation has now been implemented: By decree dated 8 August 2023 (available in Russian), Russia unilaterally suspended the application of provisions from more than 30 DTAs, one of which the DTA Austria-Russia. Following the suspension, the Russian Foreign Ministry will issue an official notice to Austria (not yet available to our knowledge)
Provisions to be suspended
According to the decree, Russia will not suspend the entire DTA Austria-Russia. However, the suspension affects major parts of the DTA:
- Definition of permanent establishments (Article 5)
- Allocation rules (Articles 6-22)
- Administrative assistance regarding enforcement of taxes (Article 26.1)
- Limitation of tax benefits (Article 26.2)
Furthermore, some additional passages of the DTA will not be applied further.
Which effects does the suspension have?
The suspension has significant effects on Austrian companies continuing to maintain business activities in Russia, such as:
- Russia will no longer apply the reduced withholding tax for dividends as defined by the agreement
- No prevention of double taxation of interest and royalties
- Possible double taxation of wages and salaries of employees who perform their work at least partly in Russia
Due to the suspension of administrative assistance with the enforcement of tax claims it is unclear whether comprehensive administrative assistance with Russia is still possible, in particular given the current suspension of exchange of information with Russia (cf. information provided by the Austrian Ministry of Finance (BMF) on 18 July 2022). The discontinuation of comprehensive administrative assistance would result in consequences on domestic legislation, such as:
- Ex lege exit of Russian group members and subsequent taxation of all losses that are still subject to subsequent taxation (section 9 para. 2 Austrian Corporate Income Tax Act (KStG))
- Subsequent taxation of Russian losses (e.g., losses of permanent establishments) at the latest in the third year after their recognition, unless the loss has already been utilised in Russia (section 2 para. 8 Austrian Income Tax Act (EStG))
- Discontinuation of international participation exemption for portfolio dividends (section 10 para. 1 subsec. 6 KStG)
- Discontinuation of tax benefits for donations (section 4a para. 4 EStG)
- Discontinuation of the option of voluntary capital gains tax deduction for non-securitised derivatives by disbursing Russian agents (section 95 para. 2 subsec. 4 EStG)
Outlook
In future, Russia will no longer apply major parts of the DTA Austria-Russia. As the DTA Austria-Russia generally only allows for the option of an overall suspension of the agreement, a number of substantive questions remain unanswered, which are expected to be clarified only in the weeks ahead (e.g. point of time when Russia will discontinue applying the DTA benefits, effects of the suspension on the existence of comprehensive administrative assistance, applicability of the ordonnance relating to section 48 Austrian Federal Tax Code (BAO)). Companies maintaining business operations in Russia should in any case assess the impact which these changes will have on their structures and transactions. We are happy to support you with this matter.
Author: Sophie Schönhart
