New procedure for taxation of income from the source in the Russian Federation

The President of the Russian Federation signed a law amending the Tax Code of the Russian Federation. One of the main changes is the new procedure for taxing income when providing intragroup services by a foreign company.

The essence of the changes made

From January 1st, 2024, for the provision of intragroup services by foreign companies to buyers (Russian organizations), a withholding tax at a rate of 15% will be charged.

We are talking about income that a foreign company received for providing services (performing work) to its related party on the territory of the Russian Federation. Work or services are considered performed (rendered) on the territory of the Russian Federation if the buyer of the services carries out activities on the territory of the Russia.

Previously, income from business activities of foreign companies was not subject to withholding tax in the Russian Federation in accordance with paragraph 2 of Article 309 of the Tax Code, and the belonging of a particular service to the category of intragroup services had to be proven. In extreme cases, part of such income was classified as income from “shareholder activities.”

Now, with a greater degree of probability, any transfers from a foreign organization to a related party for services rendered (work performed) are subject to payment of withholding tax in the Russian Federation at a rate of 15%.

Who does the change apply to?

It is expected that the amendments will mostly affect foreign companies that are residents of “unfriendly” countries and with which Russia has suspended Double Taxation Agreements.

However, if Double Taxation Agreements continue to be in force, then the likelihood of applying a new taxation procedure will be significantly lower.

What should companies do?

Due to the lack of up-to-date clarifications from regulatory authorities and judicial practice, it is recommended to do the following:

  • Conduct an analysis of existing contracts with foreign companies, study the provisions of the tax treaty of the country in which the foreign company is a resident, and determine which payments are subject to the new rules.
  • Consider the possibility of paying invoices for intragroup services provided until December 31st, 2023, until the new provisions of the Tax Code of the Russian Federation come into force.

Acsour specialists carefully monitor changes in legislation in this area. If you have any questions or need an advice on this topic, please contact the Acsour manager.

Document: Federal Law of November 27th, 2023 No. 539-FZ