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Despite current challenges, the Russian market is growing and Asian players are entering and increasing their presence. The authors overview how to navigate some of the taxation, regulatory, customs and counter-sanctions issues for the successful operation of international businesses in Russia.

Tax aspects

Double taxation treaties. Double taxation avoidance treaties (DTTs) can significantly limit tax exposure when working with Russia. The country has about 90 treaties, including those with China, India, Indonesia, the Philippines, Thailand and Vietnam. Some are supplemented by protocols and certain conditions must be considered when applying DTTs.

First, Russia is party to the multilateral BEPS convention and as such applies the convention’s provisions on top of many of its DTTs. Second, Russia has suspended application of some DTT provisions, including those with South Korea, Singapore and Japan. Only some basic provisions of these treaties are still active from the Russian side, while treatment of suspension can differ from the other side. Finally, the right to apply a DTT must be confirmed pursuant to beneficial ownership criteria.

Taxation of international transport. International transportation is generally supported by special tax provisions and incentives. However, tax authorities have recently paid more attention to it. When applying incentives it must be considered whether transportation is performed by foreign or Russian persons, and what is the scope of the contract.

VAT treatment largely depends on the itinerary; transportation by a foreign company with one point in Russia and another abroad is not subject to Russian VAT. But lately, tax authorities have been trying to separate the part of an itinerary on Russian territory and tax it at the standard VAT rate of 20%. To avoid this, proper documentation of services is required.

If transportation is provided by a foreign company only outside Russia, such services are not subject to Russian corporate profit tax. Otherwise, international transportation performed by a foreign company for a Russian company is generally subject to 10% withholding tax. A DTT usually allows an exemption. Taxation of transportation expedition services depends on the provision by the expeditor or by other contractors.

Withholding tax on intragroup works & services. Russian authorities pay special attention to the reality and proper documentation of intragroup services. A 15% withholding tax applies to services and works provided by foreign companies to Russian interdependent companies and permanent establishments. This tax can be eliminated by a DTT in some cases.

Cross-border transactions

On one hand, due to sanctions, the conditions for payment to and from Russia are becoming less favourable. On the other, Russian authorities are alleviating the situation. From a regulatory standpoint, currency control requirements have been eased to allow cashless termination of obligations, for example by way of set-off or cession, and alternative payments such as digital assets and cash in some cases.

The Central Bank of Russia is developing a mechanism to allow major payments in cryptocurrency, with payment arrangements in national currencies without using USD, EUR and global financial infrastructure.

Customs

Russian customs authorities are targeting adjustments to the price actually paid for imported goods by related parties for customs purposes on part of the income/proceeds of subsequent use that accrues directly or indirectly to the seller (including the payment of dividends), licence fees and other similar payments for the use of IP, intermediary fees, related costs and more. To avoid extended audits and disputes with customs authorities, it is best to prepare in advance reference values, such as prices on comparable supplies to independent buyers in Eurasian Economic Union countries, or calculations with deductive or computed methods.

Counter-sanctions

Russia has limited the ability of foreign investors to perform certain deals and transactions. The restrictions are not applied uniformly, however, and even when applicable allow special permissions.

The Russian government has listed jurisdictions conducting “unfriendly” activities against Russia. The list includes such Asian jurisdictions as Korea, Singapore, Taiwan and Japan. Other jurisdictions are “friendly”. Most counter-sanctions apply to entities and persons registered or controlled by other entities in “unfriendly” jurisdictions. Multinationals with headquarters in “friendly” jurisdictions must not conduct operations with Russia via “unfriendly” subsidiaries.

Counter-sanctions mostly target “passive” operations allowing the quick outflow of funds from Russia to foreign “unfriendly” entities, and the sale of assets. Even for such transactions, procedures for obtaining permissions for such deals and transactions are established, so even “unfriendly” companies can conduct business.

Yulia Smourova is a counsel and Valeriy Chelnokov is an associate at SL Legal