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Russia has adopted MLI: new stage in the application of Double Tax Treaties

Russia has adopted MLI

On 1 May, on the basis of the Federal Law on Ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (known in international practice the Multilateral Instrument or MLI), the President of the Russian Federation signed the ratification instruments, in other words, de facto a notice from Russia on its ratification of MLI.

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What happened

On 1 May, on the basis of the Federal Law on Ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (known in international practice the Multilateral Instrument or MLI), the President of the Russian Federation signed the ratification instruments, in other words, de facto a notice from Russia on its ratification of MLI.

However, the MLI will only enter into force once the ratification notice has been transferred to the OECD, and a three month-period has passed. Furthermore,  if MLI enters into force in 2019 the provisions regarding withholding tax payments will apply from 1 January 2020 (subject to adoption of the Multilateral Instrument by the other party to the respective double tax treaty). In the case of other taxes, it is highly likely that MLI will apply from 1 January 2021.

How existing double tax treaties will change

We would like to take this opportunity to point out that MLI is an international multilateral convention between countries aimed at unifying the provisions of existing double tax treaties, and that the application of MLI does not require individual revisions of the actual treaties by the countries bilaterally.

One of the key provisions selected by the Russian Federation concerns the Simplified Limitation on Benefits (S-LOB), which implies in general limitations on the scope of persons that may in principle apply double tax treaties (this approach is selected by countries such as Armenia, Kazakhstan, Bulgaria, Greece and India). However, S-LOB will not apply to a number of double tax treaties, as the respective countries have decided against this approach. However, the Principle Purpose Test (PPT Test) will be introduced to double tax treaties. According to this test, to be eligible for benefits under a double tax treaty, the taxpayer must de facto confirm that the structure or transaction in question contains a principal purpose that differs from the simple attainment of tax savings.

In addition, some countries – signatories of double tax treaties with the Russian Federation (for example, the Netherlands), have selected the provision to the effect that preferential rates of the withholding tax on dividends will apply if the person (company) that has the actual right to the dividends owns/controls the amount of capital/shares/participation interests required for the application of the benefits for at least 365 days.

Russia is also asserting its right to tax income on the sale of the shares (participation interests) of Russian companies if more than 50% of their assets consist of immovable property in the Russian Federation (at any time during the 365 days preceding the transaction). However, proceeding from the current positions of countries, the double tax treaties will only be changed in this respect with certain countries (for example, Italy and Turkey).  For example, this approach will not apply to the double tax treaty with the Netherlands, which stipulates a tax exemption on such income. Accordingly, this benefit will still be available.

What should one expect and what should be done?

MLI can only be applied in respect of two specific countries under a double tax treaty if both parties to the double tax treaty ratify MLI.

At present 87 countries have signed MLI, of which 25 countries have already ratified MLI. Russia plans to apply MLI to 70 countries, accordingly the double tax treaties between these countries (with the exception of the countries which have not indicated Russia) will change (a list of the countries is presented below).

Consequently, in light of the anticipated application of MLI from next year, and accordingly a change to most of the double tax treaties concluded by Russia, we recommend an assessment in the near future of the impact of MLI on the provisions of existing double tax treaties. Taking this into account, we recommend a diagnostics of structures from the perspective of their compliance with the provisions of MLI now. It is advisable to start taking measures today to ensure adaptation to the amendments, inter alia, prepare a substantiation of business purposes regarding payments of passive incomes in foreign jurisdictions.

List of countries* with which Russia will change double tax treaties in accordance with MLI

1. Albania

2. Algeria

3. Argentina

4. Armenia

5. Australia (ratified MLI)

6. Austria (ratified MLI)

7. Azerbaijan

8. Belarus

9. Belgium (the federal law on ratification of MLI indicates two double tax treaties: the existing treaty and new treaty that has yet to enter into force)

10. Botswana

11. Bulgaria

12. Canada

13. Chile

14. China

15. Croatia

16. Cuba

17. Cyprus

18. Czech Republic

19. Denmark

20. Ecuador

21. Egypt

22. Finland (ratified MLI)

23. France (ratified MLI)

24. Greece

25. Hong Kong

26. Hungary

27. Iceland

28. India

29. Indonesia

30. Ireland (ratified MLI)

31. Israel (ratified MLI)

32. Italy

33. Kazakhstan

34. Republic of Korea

35. Kuwait

36. Latvia

37. Lebanon

38. Lithuania (ratified MLI)

39. Luxembourg (ratified MLI)

40. Malaysia

41. Malta (ratified MLI)

42. Mexico

43. Moldova

44. Mongolia

45. Montenegro

46. Morocco

47. The Netherlands (ratified MLI)

48. New Zealand (ratified MLI)

49. Norway

50. The Philippines

51. Poland (ratified MLI)

52. Portugal

53. Qatar

54. Romania

55. Saudi Arabia

56. Serbia (ratified MLI)

57. Singapore (ratified MLI)

58. Slovakia (ratified MLI)

59. Slovenia (ratified MLI)

60. Republic of South Africa

61. Spain

62. Sri Lanka

63. Thailand

64. Turkey

65. Ukraine

66. UAE

67. Great Britain (ratified MLI)

68. USA

69. Venezuela

70. Vietnam

* Information on MLI ratification by country is presented as at 9 April 2019.

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