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Important Tax Changes for Payments to Foreign Companies

  1. From this year, when purchasing services/works from foreign interdependent companies, it is necessary to withhold income tax

From 01.01.2024, significant changes were made to Chapter 25 of the Russian Tax Code (particularly, the provisions concerning the withholding of income tax from foreign organizations). Thus, paragraph 1 of Article 309 of the Russian Tax Code, which lists the types of income considered to be from sources in Russia (from which tax must be withheld as a tax agent, unless otherwise provided in the existing provisions of Double Taxation Avoidance Agreements), was supplemented by a new sub-paragraph 9.4. It includes income received by a foreign organization from performing works (providing services) in the Russian Federation to an interdependent person. Works are considered performed (services are considered rendered) in the Russian Federation if the buyer of the works (services) operates in Russia. This means that if a Russian company purchases a work/service from a foreign interdependent entity, it may be required to withhold income tax when paying remuneration to that entity. It all depends on which country the foreign organization is a resident of. If the counterpart is from a country with suspended Double Taxation Avoidance Agreements (e.g., Germany or Austria), then in this case, it is mandatory to withhold income tax as a tax agent when paying for services/works. In this case, the tax rate is 15% (sub-paragraph 4 of paragraph 2 of Article 284 of the Russian Tax Code).

  1. Suspension of Double Taxation Avoidance Agreements: Exemption from tax temporarily extended to certain types of income

After the suspension of Double Taxation Avoidance Agreements with unfriendly countries, companies paying certain incomes to counterparts from these countries became obliged to withhold income tax on incomes specified in paragraph 1 of Article 309 of the Russian Tax Code (dividends, loan interest, international transportations, etc.). At the end of 2023, a law was passed which essentially reinstated the exemption from taxation for part of these incomes. However, only temporarily (until 31.12.2025), but it was introduced retrospectively (from 08.08.2023). This law added sub-paragraph 11 to paragraph 2 of Article 310 of the Russian Tax Code, which contains incomes not subject to taxation. It lists certain types of income that were not taxed by “Russian” tax due to Double Taxation Avoidance Agreements before 08.08.2023. Now, due to the latest tax amendments, they continue to be exempt from tax, but not under Double Taxation Avoidance Agreements, but under the Russian Tax Code. Such a preference is established only for a narrow list of incomes (in particular, incomes from the use in Russia of rights to certain objects of intellectual property, incomes from international transportations, incomes from leasing or subleasing sea vessels) and provided that the foreign company receiving such incomes is not an interdependent person. For individual incomes from this narrow list (e.g., international transportations), there is an additional condition regarding the date of the contract: this date must be before 08.08.2023. Therefore, if a company is currently purchasing, for example, international transportation services from a resident of Germany (not an interdependent person), then despite the suspension of Double Taxation Avoidance Agreements, it can continue not to withhold tax when paying income, as it was before 08.08.2023. However, two conditions must be met:

  • the international transportation contract must have been concluded before 08.08.2023;
  • there is a certificate of residency and a certificate of the actual recipient of the income. This order will be in effect until the end of 2025.