Following Presidential Decree No. 585 of 8 August 2023, Russia suspended the key income-taxation provisions of its double tax treaties with 38 states classified as "unfriendly," including most EU member states, the United Kingdom, Switzerland, Norway, Japan and Singapore. The suspension does not amount to denunciation: the treaties remain formally in force but their core protective provisions – reduced withholding rates, permanent establishment thresholds, tie-breaker rules – are operationally unavailable to taxpayers for as long as the suspension persists. For foreign groups retaining Russian subsidiaries, branches or intercompany flows, this creates immediate withholding exposure and a structurally elevated risk of juridical double taxation.
The Legal Framework: Decree 585 and What It Actually Suspends
Presidential Decree No. 585, signed on 8 August 2023, is the primary legal instrument. It does not terminate Russia's treaty network; it suspends specific articles – principally those governing the taxation of passive income streams such as dividends, interest and royalties, as well as business profits attributable to permanent establishments. The distinction between suspension and termination matters legally: suspended treaties may in principle be reactivated by executive action, whereas terminated treaties require fresh negotiation and ratification.
Two treaties in the affected group have moved beyond suspension. Denmark and Latvia formally terminated their double tax agreements with Russia, with effect from 1 January 2024. For counterparties with exposure rooted in Danish or Latvian structures, no treaty protection is available at all, and that position is unlikely to reverse in any near-term planning horizon.
Russian tax agents are now required to withhold at the domestic statutory rates applicable under Russian internal legislation rather than at the reduced rates previously available under the relevant treaties. Where those domestic rates exceed treaty rates – which they typically do for dividends, interest and royalties – the result is an immediate and quantifiable cost increase for any cross-border payment from a Russian entity to a parent, lender or licensor resident in a suspended-treaty jurisdiction.
Open Interpretive Questions and Unresolved Tensions
The suspension creates a series of interpretive gaps that, as of the date of this analysis, have not been resolved by binding guidance from the Federal Tax Service or by Arbitrazh court or Supreme Court of Russia rulings on the specific post-Decree position.
- Non-discrimination and procedural articles: Many treaties contain chapters on non-discrimination, mutual agreement procedures (MAP) and exchange of information that are formally distinct from the income-taxation provisions targeted by Decree 585. Whether those chapters remain operative – and whether a taxpayer can invoke MAP to relieve double taxation caused by the suspension itself – is not settled. Russia's general position on MAP accessibility in the current geopolitical environment is uncertain.
- Beneficial ownership analysis: Even before the suspension, Russia's Federal Tax Service had intensified scrutiny of beneficial ownership claims. Russian anti-avoidance rules require that a recipient claiming treaty benefits demonstrate that it is the beneficial owner of the income in an economically substantive sense. With treaty rates suspended, the immediate relevance of beneficial ownership for rate purposes is reduced domestically – but the analysis remains directly relevant for the residence-state relief that a foreign parent may seek. Groups that previously relied on conduit structures should expect that position to be challenged both in Russia (if the suspension is ever lifted) and in the residence state.
- Transfer pricing interaction: Intercompany transactions between Russian entities and related parties in suspended-treaty jurisdictions continue to be subject to Russian transfer pricing rules. Tax audit activity in the transfer pricing space has remained active, and an arm's-length adjustment creating additional taxable income in Russia compounds the withholding cost already imposed by the suspension.
- The "frozen" treaty as a domestic law anchor: Some commentary has suggested that a suspended treaty could nonetheless be referenced as interpretive context under domestic Russian tax law. This argument is theoretically available but untested before the Arbitrazh court system, and reliance on it in a tax audit context carries significant litigation risk.
Foreign groups monitoring their Russia exposure should treat each of these questions as live risk items rather than resolved positions. For a broader analytical perspective on how courts in other jurisdictions have approached beneficial ownership and treaty entitlement, our analysis of beneficial ownership in the Danish cases and EU context provides a useful comparative frame.
Practical Impact: Cross-Border Payment Flows
The most immediate and measurable consequence of the suspension for a typical foreign group is the increase in Russian withholding tax on outbound payments. Where treaty rates for dividends, interest or royalties were materially below domestic rates, the difference represents a recurring cash cost. For groups that modelled their Russia investment on post-treaty cash repatriation, the financial projections from before August 2023 require revision.
At the same time, the residence state of the foreign parent may not grant a full foreign tax credit for the additional Russian withholding, particularly if its domestic credit mechanism is capped at the treaty rate that would have applied had the treaty not been suspended. In that scenario, the incremental withholding tax above the (now unavailable) treaty rate is neither creditable nor deductible in the straightforward sense, producing genuine double taxation rather than merely a timing or cash-flow issue.
Tax risk management for groups in this position therefore requires analysis at two levels simultaneously: the Russian domestic and treaty position, and the credit or exemption position in the home jurisdiction. The interaction is complex and jurisdiction-specific.
If your group is assessing the real financial exposure from suspended treaty flows or considering structural adjustments, our team is available to discuss the cross-border mechanics. Please write to info@ferrazwhitmore.com or visit our contacts page to arrange a consultation.
Structuring Considerations: Third-Country Intermediaries and Jurisdictional Alternatives
Following the suspension, a number of groups with regional holding or financing structures have looked at whether interposing an entity in a jurisdiction whose treaty with Russia remains in full effect might restore some level of withholding protection. Several Commonwealth of Independent States (CIS) states, as well as certain Asian and Middle Eastern jurisdictions, are not on the "unfriendly" list and retain operative treaties with Russia.
This approach requires careful and realistic appraisal. The following considerations are critical:
- Substance requirements: Russian anti-avoidance rules, including the beneficial ownership doctrine and the general anti-avoidance framework under the Tax Code, require genuine economic presence in the intermediary jurisdiction. A letterbox entity will not withstand scrutiny from the Federal Tax Service in a tax audit.
- Government Commission authorisation: Since 2022, payments from Russian entities to recipients in a broader range of foreign jurisdictions have been subject to review by Russia's Government Commission for Monitoring Foreign Investment. Structural changes involving foreign entities may require Government Commission approval or notification, and the timeline and outcome of that process are not predictable.
- Home-jurisdiction and sanctions constraints: For groups headquartered or listed in the EU, the United Kingdom or other jurisdictions that have imposed sanctions, any restructuring touching Russia must be assessed against applicable sanctions frameworks. EU Regulation 833/2014 (as amended, including the provisions introduced by Article 5n) restricts the provision of certain advisory services connected to Russian entities. The analysis below is directed exclusively at EU and third-country groups managing their own Russian exposure as investors or creditors; it does not constitute advice to Russian-established entities.
- Treaty shopping exposure: Both the OECD's base erosion and profit shifting (BEPS) project outputs and Russia's own domestic rules contain anti-treaty shopping provisions. A structure perceived as designed primarily to access treaty benefits that the direct investor cannot itself claim is vulnerable to challenge.
Armenia is one jurisdiction that has attracted attention in regional restructuring discussions given its treaty position and relative accessibility for CIS-connected groups. Our analysis of tax structuring considerations in Armenia sets out the relevant framework in more detail.
Tax Audit Risk and Dispute Outlook
The Federal Tax Service has shown sustained capacity and willingness to pursue complex international tax disputes through the Arbitrazh court system and, where necessary, to the Supreme Court of Russia. The suspension of treaties does not reduce audit risk; in certain respects it increases it, because the absence of treaty protection removes one layer of argument available to taxpayers and focuses audit attention on domestic-law positions that may be less robustly documented.
Transfer pricing documentation for transactions with related parties in suspended-treaty jurisdictions should be reviewed in light of the changed environment. Intercompany pricing policies that were designed and benchmarked before August 2023 may not reflect current market conditions or the current regulatory expectations of the Federal Tax Service.
Groups that receive a request for information or a formal audit notice from the Federal Tax Service in connection with cross-border transactions should treat the matter as requiring prompt specialist attention. The evidentiary and procedural standards in Russian tax disputes are distinct from those in common law jurisdictions, and early legal input on documentation and response strategy can materially affect the outcome of the process.
Ferraz & Whitmore advises international clients on tax risk management in complex, multi-jurisdictional situations. If you are dealing with a Russian tax audit or anticipating one, please contact us at info@ferrazwhitmore.com.
Strategic Recommendations for Foreign Groups
Given the current uncertainty – the suspension may persist, be extended, be selectively lifted, or in some cases give way to formal termination as occurred with Denmark and Latvia – a wait-and-see posture carries its own risks. The following steps are appropriate for most groups with material Russian exposure:
- Map the financial exposure: Quantify, for each cross-border payment type, the difference between the currently applied domestic withholding rate and the treaty rate that would have applied before August 2023. Model the credit or exemption position in the residence jurisdiction.
- Review intercompany agreements: Loan agreements, licence agreements and service agreements involving Russian counterparties typically contain tax gross-up clauses. Those clauses should be reviewed to determine whether the additional withholding cost falls on the Russian payer or the foreign recipient, and whether the agreement contains provisions allowing renegotiation in the event of a change in treaty status.
- Assess substance in intermediate jurisdictions: If the group currently uses an intermediary holding or financing entity in an EU or other suspended-treaty jurisdiction, assess whether that entity has sufficient substance to sustain its position if and when Russia's treaty network is re-examined – whether by reactivation of suspended articles or by negotiation of new agreements.
- Engage proactively with transfer pricing: Ensure that transfer pricing policies and supporting documentation are current, consistent and defensible under Russian rules. A transfer pricing adjustment that increases Russian taxable income in the context of already-elevated withholding rates amplifies overall tax cost significantly.
- Monitor legislative and diplomatic developments: The suspension was effected by presidential decree and could, in principle, be reversed by the same mechanism. Monitor official communications from the Russian Ministry of Finance and Federal Tax Service, as well as bilateral diplomatic signals, for indications of movement on the treaty front.
For a more detailed discussion of tax structuring options in light of these developments, our Russia tax structuring practice page sets out the range of services and approaches available to international clients.
Outlook
As of the date of this analysis, there is no public indication that Russia intends to lift the suspension in the short term, nor that the states listed in Decree 585 are actively pursuing re-engagement on the treaty front. The geopolitical context that prompted the suspension has not materially changed. Denmark and Latvia's treaty terminations represent the harder end of the spectrum, and it is possible that other suspended-treaty jurisdictions will follow that path if the suspension remains in place over an extended period.
For planning purposes, foreign groups should not rely on treaty protection being restored within any fixed horizon. Structures and cash-flow models should be stress-tested on the assumption that the current domestic-rate withholding environment persists for a multi-year period, and contingency planning should address both the continued suspension scenario and the scenario in which further terminations occur.
The legal and tax environment in Russia is evolving, and the intersection of domestic anti-avoidance rules, Government Commission requirements and international sanctions frameworks means that external specialist input is valuable at each stage of the planning and compliance cycle. We welcome the opportunity to discuss specific situations. Please reach out to our team at info@ferrazwhitmore.com or through our contacts page.
Sources
- Schneider Group – Suspension of Double Taxation Treaties: schneider-group.com
- Presidential Decree No. 585 of 8 August 2023 (Russian Federation)
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.