When Russia suspended key provisions of its double tax treaties with 38 states under Presidential Decree No. 585 of 8 August 2023, foreign groups that had relied on reduced withholding rates on dividends found themselves exposed to full domestic withholding with immediate effect. This illustrative scenario – based on patterns typical of matters the firm has encountered – describes how a European holding structure navigated that shift, the complications it faced, and the lessons that transfer to comparable situations. The scenario is presented for educational purposes and does not represent a specific client matter; no actual amounts, outcomes or client details are used.
Background: The Treaty Suspension and Its Immediate Consequences
Presidential Decree No. 585, signed on 8 August 2023, suspended the provisions on taxation of income contained in Russia's double tax treaties with 38 states designated as "unfriendly." The list covers most EU member states, the United Kingdom, Switzerland, Norway, Japan and Singapore, among others. Crucially, the treaties were suspended, not terminated: the legal instruments remain in force as a matter of public international law, but their operative income-tax provisions ceased to apply within Russia's domestic legal order from the decree's entry into force.
The practical result is that Russian tax agents – the Russian operating companies distributing dividends – are required to apply domestic withholding rates rather than the reduced rates that the suspended treaties had previously provided. Two affected states went further: Denmark and Latvia terminated their treaties with Russia outright, with termination taking effect from 1 January 2024, removing even the theoretical prospect of prospective reinstatement for those bilateral relationships.
For foreign groups with Russian subsidiaries or participations, the consequences were felt immediately at the point of each dividend declaration. Groups that had not adjusted their treasury and holding structures were left managing an unplanned increase in their effective tax cost on Russian-sourced income.
Client Profile and Challenge
The illustrative group in this scenario is a Western European industrial holding with a mid-tier Russian operating subsidiary established over a decade earlier. The holding structure had been designed, in part, around the tax treaty then in force between Russia and the jurisdiction of the intermediate holding company. Dividend flows were regular and had, until August 2023, benefited from a reduced withholding rate under that treaty.
On the decree's entry into force, the Russian subsidiary's finance team applied domestic withholding rates to the next scheduled dividend payment, consistent with guidance from the Russian tax authority. The intermediate holding company received a materially reduced net amount. The group's immediate concerns were threefold:
- Whether any mechanism existed to claim relief or credit for the additional withholding in the recipient jurisdiction;
- Whether the structure itself – which had been designed partly for tax efficiency – exposed the group to anti-avoidance challenge, either in Russia or in the holding jurisdiction;
- How to reposition the structure for future dividend flows without triggering a tax audit or adverse transfer pricing scrutiny in Russia.
If your group is facing similar uncertainty about withholding on Russian-sourced income, the team at Ferraz & Whitmore is available to discuss your position. You can reach us at info@ferrazwhitmore.com or via our contacts page.
Strategy and Rationale
The advisory strategy focused on three parallel workstreams: a legal analysis of the decree's scope and limits; an assessment of domestic credit and relief mechanisms in the holding jurisdiction; and a structural review aimed at reducing ongoing exposure without creating new risks.
Analysing the Decree's Scope
The first step was to establish precisely which treaty provisions had been suspended. The decree targeted provisions relating to the taxation of income – in practice, the reduced withholding rates and the allocation of taxing rights under the income articles of the affected treaties. Other treaty provisions, such as those governing exchange of information or mutual agreement procedures, were not within the scope of the suspension. This distinction mattered for planning purposes: the mutual agreement procedure remained available in principle, even though its practical utility in the prevailing environment was limited.
It was also relevant that the treaties remained in force as international instruments. While the suspension meant that Russian domestic law would not give effect to the reduced rates, the continued existence of the treaty framework was a consideration in assessing whether future changes in Russia's position were legally possible.
Credit and Relief in the Holding Jurisdiction
The group's advisers in the holding jurisdiction examined whether domestic rules permitted a foreign tax credit for the additional withholding. The analysis was jurisdiction-specific and turned on whether the increased withholding, although no longer supported by treaty, was nonetheless a legally imposed tax eligible for credit. The outcome of that analysis depended on national implementation rules that varied across affected EU member states – a detail that illustrates why blanket assumptions about credit availability are unreliable.
For groups seeking a broader view of refund and credit mechanisms across EU jurisdictions, the firm's guide on withholding tax refunds in EU jurisdictions addresses the principal procedural routes.
Structural Review and Tax Risk Management
The structural review assessed whether the existing holding layer remained justified on non-tax grounds. This question was urgent because, following the suspension, the structure's original treaty-based rationale had been removed. Retaining a structure that had been designed primarily for a benefit that no longer existed creates an obvious target for anti-avoidance challenge – both under Russian domestic anti-avoidance rules and under the economic substance tests applied in the intermediate holding jurisdiction.
The review also considered whether the Russian subsidiary's dividend policy should be adjusted in timing or amount, and whether any restructuring steps might themselves be subject to Russian transfer pricing scrutiny or require prior approval from the Government Commission for Control of Foreign Investment (the body that oversees certain transactions involving assets linked to "unfriendly" states). Government Commission consent requirements had become a significant procedural constraint for groups seeking to restructure or exit Russian positions, and their applicability to internal reorganisations needed to be assessed carefully.
For groups examining holding structures in parallel jurisdictions that remain treaty-active with Russia, the firm's tax structuring work in Kazakhstan addresses a jurisdiction that has maintained its treaty relationship with Russia and is frequently considered as part of regional holding reviews.
Milestones and Complications
The principal milestones in this type of matter follow a broadly consistent pattern. The immediate phase involves a withholding impact assessment and a review of whether any treaty relief claims are still arguable for the period before the decree's entry into force. The middle phase involves the structural and credit analysis described above. The later phase involves implementing any structural adjustments and establishing ongoing compliance monitoring.
In practice, several complications arise repeatedly in matters of this type:
- Retroactive exposure: Russian tax authorities may review prior years' dividend payments, particularly where the group's structure had features that could be characterised as designed primarily to access treaty benefits. The suspension does not in itself create retroactive liability for past payments made while treaty provisions were operative, but it can prompt scrutiny of the overall arrangement.
- Dual proceedings risk: Where a group is simultaneously under review in Russia (by the Russian tax authority, potentially before the Arbitrazh court system or ultimately the Supreme Court of Russia) and in the holding jurisdiction, coordination between advisers in both jurisdictions is essential. Positions taken in one forum can affect the outcome in the other.
- Government Commission requirements: As noted, certain structural changes require Government Commission consent. The scope and timing of those requirements are subject to ongoing regulatory development, and groups should not assume that internal reorganisations are exempt.
- Sanctions compliance: EU groups must be alert to the prohibition under Article 5n of Regulation (EU) No 833/2014, which restricts the provision of legal advisory and tax consulting services to the Russian government and to legal persons established in Russia. The firm's engagement in this type of matter is directed exclusively to the foreign group managing its own exposure – not to Russian-established entities. Groups should ensure that their advisers have reviewed the applicable sanctions parameters carefully before engagement.
Outcome Category
Illustrative matters of this type tend to resolve into one of a small number of outcome categories. In some cases, a partial credit in the holding jurisdiction reduces the net impact of the additional withholding to a manageable level, and the structure is retained with enhanced substance documentation. In others, the absence of available credit and the anti-avoidance exposure together make simplification of the structure the more defensible path. A third category involves groups that determine, in the context of a broader Russia exposure review, that the dividend question is secondary to a broader asset management or exit decision.
What the scenario illustrates is that the withholding question rarely exists in isolation: it is connected to the structure's legal defensibility, to the group's ability to manage tax audit risk on both sides, and to the practical constraints imposed by Government Commission requirements and EU sanctions compliance.
Three Transferable Lessons
1. Treaty Suspension Is Not a Binary Event
The suspension of income provisions does not mean that the treaty ceases to exist in all respects. Groups should map precisely which articles have been affected before drawing conclusions about available remedies. Mutual agreement, anti-discrimination and information-exchange provisions may remain operative and relevant to ongoing disputes or reviews.
2. Structural Justification Must Be Re-examined Without the Treaty Benefit
A holding structure that was partly justified by treaty access is not automatically illegitimate once the treaty benefit is removed – but it does need to be re-evaluated on the basis of its remaining non-tax rationale. Proactive documentation of that rationale is significantly more effective than retrospective justification produced in response to a tax audit. Groups engaged in tax structuring in Russia should treat the post-suspension environment as requiring a fresh substance analysis.
3. Multi-Jurisdictional Coordination Is Not Optional
The interaction between Russian domestic rules, the suspended treaty framework, EU sanctions compliance, and holding-jurisdiction credit mechanisms means that no single-jurisdiction adviser can manage the full risk picture. Advisers across all relevant jurisdictions need to operate from a shared understanding of the group's position, and their advice needs to be coordinated – not merely delivered in parallel.
Sources
- Schneider Group, "Suspension of Double Taxation Treaties" – schneider-group.com. Facts last verified: 22 September 2026.
- Presidential Decree No. 585 of 8 August 2023 (Russian Federation).
- Regulation (EU) No 833/2014, Article 5n (as amended).
If your group is managing dividend withholding exposure arising from the Russian treaty suspension, or is reviewing its holding structure in light of the decree, Ferraz & Whitmore can assist with the multi-jurisdictional legal and tax risk management analysis. Please contact us at info@ferrazwhitmore.com or visit our contacts page to arrange an initial discussion.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.