23 March 2018
The officials of the Russian and Swiss governments have now confirmed that the Protocol to the existing double tax treaty (‘Protocol’) was signed in Washington DC last week. This is another step for Russia moving towards more transparent international tax policy in accordance with the state tax policy development program. Subject to ratification by both states, the Protocol will come into force on the first January of the year following the year of ratification.
The completion of negotiations has been first officially announced in March earlier this year, however and rather surprisingly, this news raised unexpected panic among the banking and private client sector.
Scope and restrictions
In short, the draft Protocol in many aspects comprehends the desire of the Russian state to enhance tax collection mechanisms and to increase tax revenue at the point of repatriation of income received from investments in Russia. For example, subject to some exceptions, both countries will have a right to tax capital gains at source on disposal of shares in companies where 50% of underlying assets constitute real estate.
The article on interest is fully substituted by new version article which abolishes the withholding rates reduction and provides an absolute right to tax for a state of the resident beneficial owner of interest. This provision was a major negotiation point pursued by the Swiss government to balance the interests pressured by the Russian officials in respect of the exchange of information clause.
Dividend withholding rates are not changed, however, among other changes regarding exception cases for dividend source taxation for state and pension funds, the distributions from investment funds which derive over 50% of profits from investments (including any real estate investment funds) are classified as dividends for purposes of the revised treaty.
The major concern of the business and private sectors is of course the inclusion of the new articles on exchange of information and anti-avoidance provisions in the existing tax treaty. The exchange of information is subject to secrecy rules and official requests on specific matters only (specific tax period, scope of tax and tax purpose of the request, etc). Also, the Protocol specifically restricts application of the exchange of information clause to domestic legislation of the contracting states where certain types of information simply cannot be obtained by the contracting state under the domestic legislation provisions or if such information reveals commercial, professional or trading secrets. Importantly, provisions of the revised treaty on exchange of information will only apply to the matters starting from the date when the treaty comes into force.
The anti-avoidance provisions are aimed at the prevention of tax avoidance and abuse of treaty provisions by way of treaty benefits limitation for tax avoidance schemes.
The new Protocol can be seen as a positive sign for Russia making step forward towards suggested tax policy development.
There is no official information on the timeframe for the Protocol to enter into force and following the revision of the treaty with Cyprus last year which has still not been ratified, the timing for the revised treaty with Switzerland may also suggest a year of two before the changes are implemented. There are of course various unclear issues as to the practicalities and the business response to the Protocol implementation.
However, it is crucial for existing wealth and corporate structures to be revisited in the given time buffer in order to ensure implementation of the safest smooth planning strategy in respect to the business relationships risks assessment, to concentrate on substance issues and to adjust international tax planning objectives, and most importantly to seek for legitimate means of protection for family wealth secrecy in the future.
Moreover, the Protocol also offers beneficial tax treatment for corporate groups using Swiss financing facilities and vehicles for international intra – group financing and still, Switzerland – being the safest state harbour for international investments, provides for fairly rigid domestic legal compliance procedure for information exchange in the context of the international tax planning framework where, more than ever, the wealth planning instruments can serve as a shelter for those who appreciate privacy and confidentiality the most.
Our professional experience over the years suggests that changes towards more transparent tax policy is always a good sign for those pursuing long term planning objectives and we at Withers have extensive international expertise working with the most compliant jurisdictions and sophisticated wealth planning solutions for our clients. This is not the question of future any more but reality that we are able to adjust to the best interests of our clients.
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