How Russia’s FTS Fights International Tax Avoidance

Russia’s Federal Tax Service (FTS) imposes extremely strict conditions for granting tax treaty benefits, making it one of the most challenging jurisdictions for foreign enterprises to enjoy such advantages. Behind this strictness lies political considerations. On March 25, 2020, in his Address to the Nation, Russian President Vladimir Putin discussed tax treaties, stating:

"Today, two-thirds of funds (referring to interest and dividends)... are taxed at only 2%, thanks to various so-called tax optimization strategies. Meanwhile, ordinary income earners pay 13%. At the very least, this is unfair. For this reason, I propose a 15% tax on dividends sent abroad. Naturally, we need to amend Russia’s bilateral tax treaties with certain countries. I have instructed the government to implement this. If our foreign partners do not accept our proposal, Russia will unilaterally withdraw from these treaties."

Following Putin’s speech, the Russian Ministry of Finance swiftly renegotiated tax treaties with several countries, including Cyprus, Malta, and Luxembourg, raising withholding taxes on dividends and interest from 5% to 15%. The Netherlands, however, did not respond positively to Putin’s demands, prompting Russia to unilaterally withdraw from its treaty with the country. Upcoming negotiations are expected to include Switzerland, Hong Kong, and Singapore, though no further updates have been announced.

Russia’s strict tax policies have not emerged overnight. In recent years, Russia has implemented rigorous rules on payments of interest and dividends to foreign individuals or entities, rendering many cases ineligible for treaty benefits that would otherwise apply in other countries. Why sign tax treaties but then make it difficult to grant benefits? Under Western sanctions, Russia sees few genuine foreign investors; most are Russian oligarchs and corporations disguised as foreign entities. Offering tax benefits would only encourage capital flight.

While Russia has signed numerous tax treaties, it is unlikely to amend all of them wholesale, likely due to diplomatic considerations. Some treaties, such as those with China, genuinely attract foreign investment and are thus unlikely to be revised in the short term. However, even if Russia begins amending treaties, this does not mean the FTS is prepared to adopt a more lenient tax policy.

In this series of articles, we will explore how the FTS has used treaty provisions in recent years to combat tax avoidance.