Dear Sir or Madam, Dear clients,
There are almost daily developments in the war with Russia. Decisions are also being made that have tax consequences at the international level.
On 8th August 2023, Russia has decided to temporarily suspend the Double Tax Treaties with “unfriendly” countries. This concerns among others the EU member countries including Germany. It leads to the effect that certain articles of the Double Tax Treaties are not applicable anymore from Russian point of view. Thereby, article 5-22 as well as article 24 of the Double Tax Treaty (DTT) between Germany and Russia are concerned.
What are the consequences of the suspension?
There are regularly cross-border situations where two or more countries claim taxation.
By the following example we would like to show the consequences of the suspension of the Double Tax Treaty between Russia and Germany:
Let us assume that a German tax resident provides a loan to a Russian company. Accordingly, the individual receives interest payments. Does Germany have the right of taxation as the individual’s treaty residency or Russia as country of the interest’s origin? Or do the countries even share the right of taxation?
It is clear, that the income should not remain untaxed according to German standards. But there should be also no double taxation.
This is where the Double Tax Treaties, which are agreed between various countries, come in. Within the respective Double Tax Treaties it is agreed, which country has the right of taxation and how to avoid a potential double taxation.
Referring to our above-mentioned example, Germany as country of the individual’s treaty residency has the right of taxation according to Art. 11 par. 1 DTT GER/RUS. Nevertheless, Russia withholds a source tax in the amount of 20% of the interest payment. The source tax withholding would be reimbursed upon request and after submission of a German residence certificate. This results in tax being withheld in Germany only.
And that is the crux of this matter! – Because of the partly suspension of the Double Tax Treaty GER/RUS, Russia does not accept Germany’s right of taxation and therefore, does not reimburse the source tax withholding. Hence, there is a double taxation as Germany claims the right of taxation based on the national tax law and Russia keeps a source tax of 20% as well.
Furthermore, dividend payments and royalties are concerned from the suspension as well. Previously, dividends were subject to a reduced source tax withholding of 5% in certain circumstances according to Art. 10 par. 1 l. a) DTT GER/RUS. Now, Russia keeps a source tax withholding of 15% on a regular basis.
The right of taxation for royalties was allocated to the country of treaty residency before, analogous to interest income, but is now subject to a Russian source tax withholding of 20%.
What does this mean for you?
The partly suspension of the DTT GER/RUS is applicable since issuance of the Russian presidential decree on 8th August 2023 according to prevailing opinion.
It currently remains to be seen whether and in what form there will be a reaction from Germany. However, the consequences of increased tax payments or double taxation may already be affecting you.
If you see a need for action or advice, please contact us – we will be happy to support you!
