Prime Minister Mikhail Mishustin said Russia may withdraw from its tax treaties with specific countries that refuse to impose a 15 percent tax on individuals transferring their dividend income abroad.
The potential ultimatum was one of several measures mentioned during a March 26 meeting in which the government discussed ways to support Russia's citizens and economy during and after the coronavirus pandemic. According to a transcript of the meeting, Mishustin made it clear that time was of the essence, explaining that all the decisions needed to fulfill President Vladimir Putin’s instructions were to be made that day.
Putin first suggested the tax March 25 during his Address to the Nation. He said two-thirds of dividend and interest income — "and basically we are talking here about incomes of specific individuals — are taxed at the rate of only 2 percent, thanks to so-called optimization strategies of all kinds. At the same time, people with modest salaries pay an income tax of 13 percent. This is unfair, to say the least."
Putin said the change will require amendments to Russia's tax treaties with some partners, and he instructed the government to begin discussions with countries that attract a significant amount of resources from Russia.
David R. Hardy, a partner with Osler, Hoskin & Harcourt LLP, told Tax Notes in a March 26 email that the decision appears to be more about controlling Russia's currency than it is about tax policy. “Most modern treaties reduce withholding rates to 5 percent or even zero for dividends from controlled subsidiaries to their foreign 80 percent parents," Hardy said. "Higher withholding rates make it more difficult for a country to attract foreign investment, but [easier] to control or reduce the flow of money out of the country.”
Hardy said Russia may be indifferent about attracting foreign investment because of its prominence as an oil and gas exporting country and its lucrative contracts with major domestically controlled corporations. It could instead be focused on protecting the value of its currency and its hard currency reserves, he said.
In his Address to the Nation, Putin also discussed tax deferrals for small and medium-size businesses and placing a moratorium on bankruptcy proceedings, during which time enforcement actions, fines, and penalties would be suspended. The country will also be limiting incoming flights, except those bringing in Russian nationals.
On March 16 Mishustin confirmed plans to provide tax deferrals for companies in the tourism and airline industries as part of a $4 billion package of crisis relief measures. Russia is among several countries to roll out tax measures to help mitigate the economic effects of the coronavirus pandemic.