Germany recognizes Russia as a tax haven

On 20 December 2023, amendments to the German Tax Haven Defense Act were published entering into force on 1 January 2024, including the Russian Federation in the list of tax haven jurisdictions. The basis for such amendments is the earlier insertion of Russia into the European Union “Black List” (the list of non-cooperative jurisdictions for taxation purposes) on 14 February 2023. Currently we do not have the information regarding the implementation of such amendments by national legislation of other EU countries.  We are collecting such information and may publish further articles on this in the close future.

Important consequences include the following:

1. Payments to Russian legal entities and individuals are considered as tax structuring

Payments to Russian companies or individuals - residents in Russia that are deductible as business expenses at the level of German companies are considered tax structuring.

2. Tightened additional taxation

If the effective profit tax rate in Russia is below 25%, a company is subject to add-back taxation in Germany regardless of its any active economic activity in the market. As the standard tax rate for corporations in Russia is 20%, it can be assumed that the stricter add-back taxation is regularly applied.

3. Profit withholding tax for certain payments to Russian legal entities

Payments from Germany to Russia may be subject to stricter withholding tax regulations.

4. Increased reporting and documentation obligations

Increased obligations apply to cooperate and keep records of business relationships, contractual terms or assets that go beyond the German Fiscal Code.

5. Full taxation of payments of dividends and gains from sale of shares

Starting from 1 January 2026, when profits from Russia are distributed to German corporate shareholders or when German corporate shareholders sell shares in Russian companies, dividends and capital gains are fully taxable in Germany and are, therefore, not subject to the 95% tax exemption that otherwise applies regularly.

If a German shareholder receives dividends or if the shares of a Russian corporation are part of  a German company’s business assets, the partial income method does not apply, which means that both dividends and capital gains are also fully taxable. The same applies to individual shareholders who receive dividends - the flat rate of withholding tax does not apply. In addition, in the case of withholding tax on capital gains, the tax is deemed not to have been partially paid, so that full taxation at the income tax rate should also apply. The relevant statutory provisions, which could normally lead to a tax reduction, are not applicable in this case.

6. Prohibition of payment deductions to Russian legal entities from German profit tax base

Starting from 1 January 2027, if German companies incur operating expenses from business transactions with companies and natural persons based in Russia, they may not be deducted for tax purposes. The only exception is when the corresponding income is subject to add-back taxation in Germany.