Global Tax Alert | 6 June 2013
New Russia-Malta Tax Treaty signed
A convention between Russia and Malta for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (the Convention) was signed in Moscow on 24 April 2013. A previous draft tax treaty between the two countries, signed in 2000, was ratified in Malta but has never come into force. The new Convention was signed by the Maltese ambassador to Russia and the Russian Deputy Minister of Finance. Both states still have to ratify the treaty. It is conceivable that the final text may differ in some respects from that signed on 24 April but major changes are unlikely.
This Alert covers the key provisions of the Convention which applies to Russian profits tax and personal income tax, and Maltese income tax. It does not apply to assets tax.
Dividends, Interest and Royalties
If a Russian company pays dividends to a resident of Malta who is their beneficial owner, the Russian tax rate should not exceed 5% if the beneficial owner is a company (not a partnership) holding directly not less than 25% of the Russian company and this holding amounts to not less than €100,000. The dividend withholding tax is 10% in all other cases.
If a Maltese company pays dividends to a Russian company that is their beneficial owner, Maltese tax on the gross amount of dividends should not exceed the Maltese profits tax chargeable on the profits out of which the dividends are paid.
However, dividends should not be taxed at source if the beneficial owner of the dividends is a pension fund resident in the other contracting state and such dividends are derived from investments made out of the assets of the pension fund.
The definition of dividends includes income from shares or other rights (not being debt-claims) participating in profits, as well as payments on units of investment funds or other similar collective investment vehicles or schemes. Income subject to the same tax treatment as income from shares under the domestic tax law of the state of which the paying company is resident, which specifically includes income paid in the form of interest, is notably treated as dividends for the purposes of the dividend article. This provides a clear basis for Russia’s thin capitalization rules to apply to interest on a controlled debt paid to a resident of Malta, which may result in taxation at 10% in some cases rather than 5%.
The Convention allows taxation of interest and royalties at source at a tax rate of up to 5%. Interest is defined as income from debt-claims of every kind (government securities, bonds, debentures) including premiums and prizes relating to them with the exception of penalty charges for late payment and interest treated as dividends. Royalties are defined as income from copyright and licences.
The Convention contains several new paragraphs limiting the application of reduced tax rates. They are not applicable if dividends, interest or royalties are paid to a company’s permanent establishment (PE) which is situated in a third state or if dividends, interest or royalty payments were initiated for the sole purpose of obtaining a tax benefit provided in accordance with the Convention.
If a company paying interest or a royalty has a PE which incurs expenses relating to that interest or royalty payment, the interest or the royalty is to be considered to arise in the state where that PE is situated for treaty purposes.
Capital Gains on Real Estate Companies
The Convention provides that capital gains of a resident of a contracting state arising from the disposal of shares or a comparable interest in acompany deriving more than 50% of its value directly or indirectly from immovable property situated in the other state, may be taxed in that other state. The state of residence of the real estate company is not specified, raising the possibility that Russia might seek to tax a gain on the sale of an interest in a company resident in Malta or a third state deriving more than 50% of its value directly or indirectly from immovable property situated in Russia. Russian domestic law does not currently include such gains in the tax base of foreign organizations with no presence in Russia.
Income may be taxed at source unless exempt under Articles 1 to 20 of the Convention.
A positive development for construction companies in the 2013 version of the Convention is that a building site which exists for no more than 12 months is not a PE, whereas in the 2000 text a PE could arise after six months.
If a company resident in one state provides services in the other state through an individual who remains there for more than 183 days in total within any 12-month period, and during this period more than 50% of the gross revenue of the company relates to its business in that other state, the company is treated as having a PE there. A PE also arises when services are provided by one or more individuals who are present in the other state for more than 183 days in total within any 12-month period on the same project or connected projects. Similar provisions were introduced in the Cyprus-Russia treaty with effect from 1 January 2013.
Thin Capitalization and Controlled Foreign Companies
The Non-Discrimination Article of the Convention contains a paragraph which specifies that for income tax purposes interest or royalty payments made by a resident of one state to a resident of the other state should be deductible on the same terms as if they had been made to a resident of the first state.
This Article includes no provisions dealing with “thin capitalization” or “controlled foreign companies”. However, such provisions are included in the Protocol to the Convention. This stipulates that notwithstanding any provision of the Non-Discrimination Article, contracting states are not prohibited from applying their national tax laws concerning “thin capitalization” and “controlled foreign companies”. Russia has yet to enact legislation concerning controlled foreign companies but this is definitely on the government’s agenda.
The Convention also has articles dealing with methods of elimination of double taxation, a mutual agreement procedure and exchange of information.
Entry into Force
The Convention will enter into force on the 30th day after the two states have exchanged instruments of ratification. The provisions of the Convention will apply to income derived after 1 January of the year following the year in which the Convention enters into force. This means that the Convention may be applicable to income arising from 2014 at the earliest.
For additional information with respect to this Alert, please contact the following:
EY (CIS) B.V., Moscow
- • Vladimir Zheltonogov
+7 495 705 9737
Ernst & Young LLP, Russia Tax Desk, New York
- • Julia Samoletova
+1 212 773 8088
EYG no. CM3508