1. Expansion of the range of income which is taxable at source in Russia
Under the Bill, payments made to a related entity for the performance of work (rendering of services) in the territory of the Russian Federation would be treated as Russian source income which is subject to withholding tax (clause 9.4 of Article 309 of the Tax Code). For these purposes, the place of supply of the services/work would be considered to be the buyer’s location, i.e., the location of the Russian organisation which pays the income.
Income of this kind would be subject to the tax rate applicable to dividends, i.e., 15%.
The current version of the Bill does not lay down any transitional provisions or any exceptions for agreements concluded in the past. Nor does it make any exceptions for particular kinds of work/services. This means that it is not only typical intra-group services (such as consulting, legal, accounting services, etc.) that would be hit, but also various business-related services, such as brokerage, banking and depositary services. Moreover, the changes would also affect situations where, in the current environment, services are purchased from independent entities by foreign related entities and then wholly or partially “recharged” to a Russian organisation.
Historically, fees for services (other than certain types of services specifically mentioned in clause 1 of Article 309 of the Tax Code) were not considered as income from sources in the Russian Federation and were not, therefore, subject to withholding tax. At the same time, over the last few years the tax authorities have been paying close attention to payments for intra-group services, examining whether the prices charged for them are at arm’s length for tax purposes, whether the Russian organisations have a genuine need for them, whether they constitute shareholder activities, etc., as a result of which, in a number of cases, they have recharacterized remuneration for services (in whole or in part) as a disguised dividend distribution and required the amounts concerned to be assessed to withholding tax at the 15% rate prescribed for dividend income. To a certain extent, therefore, these provisions of the Bill serve to formalise the approach that has been taken by the tax authorities over the last few years.
In those cases where payments of this kind are made to related entities from friendly jurisdictions, the 15% tax rate may potentially be lowered based on applicable double taxation treaties, provided that the recipient of the income provides proof of its eligibility for the relevant benefits.
The question arises of how the changes to the provisions of Article 309 of the Tax Code will correlate with the planned amendments to Article 105.3 of the Tax Code, which provide for tax to be charged at 15% on the difference between the market price and the price actually used in the transaction with the foreign related entity. In the long run this would lead to the double charging of withholding tax on the amount by which the cost of work/services deviates from the market price.