Russia's Draft Law on New Profit Withholding Tax

The Russian Duma is considering draft bill No. 448566-8 in the third reading. There is a high probability that the bill will be enacted. Please find below a brief summary of the bill and of its effects on foreign investors:

Main Contents

• Starting on 1 January 2024, Russian legal entities and non-Russian legal entities with Russian permanent establishments (“Russian Service Recipients”) must withhold and pay to the budget 15% of profit tax (“New Withholding Tax”) from payments for services (“Intercompany Services”) rendered by non-Russian legal entities (“Non-Russian Service Providers”) being related to the Russian Service Recipients as shown below in the tables.
• In our view, the New Withholding Tax may only be applied if there is no Double Taxation Treaty (“DTT”) which would overrule the New Withholding Tax. On the other hand, the New Withholding Tax will be applied to Intercompany Services rendered by Non-Russian Service Providers with their head office in a jurisdiction with which the Russian Federation has no DTT.
• The New Withholding Tax will also be applied to Intercompany Services rendered prior to 1 January 2024 if payment for such Intercompany Services is made on or after 1 January 2024.

Our Recommendations

• Non-Russian Service Providers and Russian Service Recipients should identify Intercompany Services rendered among their intra-group transactions.
• Agreements on Intercompany Services should be reviewed regarding the application of the New Withholding Tax. Applicable DTTs should be reviewed to determine whether they overrule the New Withholding Tax.
• Russian Service Recipients should pay for Intercompany Services rendered prior to January 1, 2024 not later than 31 December 2023.
• Non-Russian Service Providers should consider inserting a gross-up clause into their agreements on the rendering of Intercompany Services. Gross-up clauses increase the amount of the remuneration payable to the Non-Russian Service Providers by the amount of the New Withholding Tax.

Tables:

Relations Between Non-Russian Service Provider and Russian Service Recipients Qualifying for New Withholding Tax (Excluding Agreement Between Individuals)

   –  non-Russian legal entity

  –  Russian legal entity or Russian permanent establishment of non-Russian legal entity

Non-Russian Shareholder – non-Russian legal entity or individual not being a Russian tax resident (including such individual’s family members)

Russian Shareholder – Russian legal entity or individual being a Russian tax resident (including such individual’s family members)

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