Barabashev & partners

Agreement between the Swiss Confederation and the Russian Federation to come into effect in 2013

Date: 06-11-2012
The Protocol of ratification of the Agreement between the Swiss Confederation and the Russian Federation for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, signed in Moscow, will come into effect in January 2013.

Let us note, however, that there are both positive and negative aspects of it.
Taxation will change.

A 15% tax will be paid to a foreign lender in Russia as part of interest payment. The rate may change based on the terms of an agreement, if available.

In the old edition of the international agreement the tax rate was at 10%.
However, from 2013 interest will be paid from Russia to Switzerland subject to no tax. It looks like Switzerland will be possible to use as a financial company.
Moreover, under the national law such financial company may apply preferential tax treatment.

From 2013, a sale of shares of a Swiss company with over half of the assets being real estate in Russia will be subject to 20% tax in Switzerland.
Currently, no sale of shares is subject to any tax, however, sale of real estate is subject to profit tax in Russia.
It appears that from 2013, if a Swiss company owns real estate in Russia, sale of such real estate carried out exclusively through sale by the Swiss company will not result in a tax benefit. The company will have to pay a 20% tax in Switzerland.

There are exceptions, however.
In case of sale of shares of a Russian company, including listed shares, which uses such real estate as a place for conducting its business activity (plant, own office etc.) no Russian tax will be charged.
The above benefit related to the purpose of real estate is undoubtedly good news. No agreement with Cyprus or Luxembourg provide for such tax benefit.
Thus, it would be more expedient to sell a company that owns a plant in Russia at the level of its ownership in Switzerland than at the one in Cyprus.

VAT. It remains to be beneficial to sell shares and not real estate. If a Swiss company sells real estate directly in Russia a VAT will be charged at an international payment. In its turn, sale of shares is not subject to VAT, respectively.

Profit tax in Switzerland may be well below the Russian rate at 20%.
That is why Switzerland remains a trade instrument which allows use of transfer pricing.
Russian tax authorities will be able to control this by exchange of information with Switzerland.
Switzerland has already been exchanging information with the United Kingdom, Germany, USA, Denmark, Austria, Singapore, the Netherlands and France.
Such information exchange will cover bank data.
One must take into account the fact that Russian tax authorities pay serious consideration to development and reasoning of requests. Swiss tax authorities may refuse to provide information if a request conflicts with the public policy, or if the grounds for the request appear dubious.
It is also important that no information may be requested which existed before 2013.
A considerable amount of the Protocol is devoted to control of shell companies used solely to gain benefits.
Use of such benefits may be recognized as unlawful.
It certainly would be rather difficult to trace any company paying a tax in Switzerland instead of in Russia and having the money go to another jurisdiction.
However, Russian tax authorities become more active players in recovery of money which, to their mind, must be paid to the budget.
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