“Stupid” decision – Putin’s decree hurts Austrian companies

“The suspension is unilateral, the agreement is still in force on the Austrian side and therefore mainly affects Austrian companies with investments in Russia or other investors who are tax resident in Austria and have invested in Russia from here,” he said. Hristov from the Viennese office of the law firm DLA Piper. This means that Russia would suspend the tax rates on dividends, interest and licenses that the double taxation treaty provides for these companies and these companies would be smuggled in up to the Russian tax rate. According to the agreement, the tax rate has so far been between zero and 15 percent, depending on the type of income. The usual rate for foreign investors in Russia is between 15 and 30 percent, the expert explains.

Large Austrian companies affected
Hristov assumed that Putin’s decision would be directly relevant to large Austrian companies with operations in Russia. The decree of 8 August was not so clearly formulated. “But how does it work in practice? The big companies ask their local advisors and they will say: we don’t know, but it is likely that this can be avoided in the future. I can also imagine that they will get the same answer from the Russian Ministry of Finance,” he said.

“Unfriendly states” central
In connection with Russia’s suspension of anti-discrimination standards in the agreement, the expert also expected Russia to introduce special rules targeting investors from “unfriendly countries”. Aside from the bilateral double taxation avoidance agreement with Austria, Putin on Tuesday also suspended provisions in 37 other bilateral agreements with countries that Russia has officially labeled as “unfriendly”.

The expert sees that Russia wants to continue to comply with some provisions in the Austrian and at the same time in the other agreements related to the protection of Russian investor interests: “I assume that they want to reserve the right to protect investors from Russia against foreign double taxation despite the suspension of the agreement,” he explained. To his knowledge, there were no provisions in Russia that would provide for the avoidance of double taxation in the absence of an agreement to avoid double taxation. By contrast, in Austria, under the Federal Tax Code, applications in this regard could be submitted to the Ministry of Finance.

The expert believed that the Austro-Russian double taxation treaty could soon be terminated. Not only Putin suggested this in the decree. The formal termination of the agreement, which would be formally possible on 1 January 2025 at the earliest, could also be initiated from Vienna. In this way, one could respond in a legally compliant manner to Russia’s suspension of the agreement, which is in violation of international law. The other 37 states affected by the Putin decree could act analogously.

Shifts to an “intermediate level”
As a result of the termination of these agreements between Russia and the West, tax lawyers expect – comparable to the sanctions regime against Russia – a shift to an “intermediate level”. “There are many states that maintain semi-friendly or amicable relations with Russia and at the same time have semi-friendly relations with us,” he said. The United Arab Emirates, Hong Kong, Turkey and Serbia have double taxation agreements with both the West and Russia and are not affected by the Putin decree.

No economic sense
Against the background of these alternative solutions and an expected further withdrawal of Western investors, the lawyer sees no economic sense in Putin’s current decision. Given the slow decline of the Russian economy, Moscow should really be interested in keeping Western companies and not suspending double tax deals, he explained. “I think relatively objectively it’s stupid to do something like that,” Hristov said.