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Tax Treaty Considerations for Expats in Russia

Submitted: January 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside Russia, and intend bring money earned from them into Russia during your stay. They also apply if you build up some investments in Russia during your stay, and intend to leave them there after you have left Russia. Russia has a network of tax treaties in force with approx 80 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed in Russia, only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. The types of income covered by a treaty may include:

  • property income
  • business profits
  • dividends
  • interest
  • royalties
  • capital gains
  • employment income
  • directors fees
  • income from sports and entertainment
  • state and private pensions, alimony and child support
  • money for the full-time education of students, and
  • income from teaching.

It is important to recognise that a tax treaty operates on money flows both into and out of the treaty countries.

The withholding tax rate in Russia on dividends sent to a country without a tax treaty is 15%, if sent to certain countries with a tax treaty the rate can be reduced to 10%.

The withholding tax rate in Russia on interest sent to a country without a tax treaty is 20%, if sent to a country with a tax treaty the rate is generally reduced to 10% -15%.

The withholding tax rate in Russia on royalties sent to a country without a tax treaty is 20%, if sent to a country with a tax treaty they are generally reduced to 10%, and in many cases 0%.

Russia’s tax treaties with other countries generally restrict the amount of withholding tax those countries can charge Russian residents to 15% on dividends, 10%-15% on interest and 0% to10% on Royalties.

For the complete rules and rates it is necessary to read the treaty itself. A list of each Russia treaty in force, with the differing rates can be found here. To read the treaty itself, you may have to search on the internet in the country with the treaty with Russia, as the treaty details are not available for all countries on the Russian site. Sections dealing with dividends, interest and royalties can usually be found half way through the treaty document.

Prior to arriving in Russia you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-Russian country to one with a more favourable tax treaty, or even to Russia itself, to reduce the tax rate paid.

If your home country has a generally higher rate of tax than Russia, you may benefit by becoming tax-resident in Russia as early as possible. At the end of your stay in Russia you can also rearrange your affairs to ensure that any ongoing income from Russian employment or investments is also taxed at the lowest rate possible in the future.

 

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