The Russian Ministry of Finance has published a list of 34 countries with which agreements have been reached on revising agreements on the avoidance of double taxation.
Russia has ratified the Multilateral Convention on the Implementation of Measures Relating to Tax Agreements in order to counter the erosion of the tax base and the withdrawal of profits from taxation (hereinafter - MLI). The purpose of the MLI is to counteract the abuse of double taxation treaties (DTTs), it clarified and changed some provisions of the existing DTTs. From January 1, 2021, these DTTs have automatically changed for the 27 countries with which Russia has such agreements. For the other seven countries, the agreements have changed in part, since the convention provides for the opportunity to choose from several options for changing the DTT.
Key to the MLI are the limitation provisions of the DTT. The main limitation is the main purpose test, which allows national tax authorities to deny the use of DTT benefits if the use of such benefits was the main or one of the main purposes of structuring transactions.
The MLI Convention aims to change all DTTs without having to change every single agreement. Each participating country can choose to change the DTT from the list provided by the MLI.
In 2020, Russia revised the tax treaties with Cyprus, Malta and Luxembourg due to the fact that these countries chose the basic changes provided for by the MLI convention, which was not in line with the Russian trajectory of tax administration of cross-border transactions. Russia has established increased tax rates for the payment of dividends and interest to persons registered in such jurisdictions.
The ratification of the MLI and the amendment of the DTT undoubtedly contribute to the reduction of international tax planning, the aim of which is to minimize taxes. When using foreign companies, it is recommended to prepare a justification for the non-tax purpose of using such foreign companies and prepare an appropriate evidence base to reduce the risk of prosecution by the tax authorities.
Nadmitov, Ivanov and Partners regularly advises and represents clients on issues of agreements on avoidance of double taxation, tax planning and interaction with tax authorities.