BOFIT Viikkokatsaus / BOFIT Weekly 2020/51
Russia has bilateral tax treaties with roughly 80 countries. These treaties spell out the rules that governments must follow on taxing income transfers between their countries. For example, taxes paid in Russia on income generated in Russia can be credited to the tax liability that might be imposed on that income when it is received in the other signatory country. Last spring, president Vladimir Putin ordered Russia to modify its tax treaties with certain countries, since within the treaties capital income transferred abroad is taxed at substantially lower rates than in Russia. Russia seeks to both increase its tax take and reduce capital flight.
A recent IMF Working Paper estimates that 50 % of foreign direct investment from Russia abroad goes to phantom companies that conduct no actual business. Nearly 60 % of all foreign direct investment inflows to Russia come from phantom companies. Russian firms circulate capital in particular through Cyprus and the Netherlands. Russia’s finance ministry estimates that in 2018 and 2019, a total of roughly $50 billion was transferred from Russia in dividends and interest income to Cyprus and over $10 billion to the Netherlands.
So far, Russia has managed to renegotiate its bilateral tax treaties with Cyprus, Malta and Luxembourg. Under the revised agreements, Russia can collect a 15 % tax on dividend and interest income transferred from Russia to these countries instead of the previous typical tax rates of 0–5 %. There are still several exceptions to the agreements (e.g. institutional investors) to which the new higher tax rates are not applied. The new agreements enter into force at the beginning of 2021. Russia has tried to negotiate similar changes with the Netherlands, but the countries have not reached an agreement and Russia has started preparing measures for abandoning the bilateral tax treaty with the Netherlands altogether. Initiating talks with Switzerland and Hong Kong has also been on the table in Russia.
To make it worthwhile to keep capital at home, Russia is also planning to reduce taxation on dividends and interest income in domestic “tax havens”. Russia established two special administrative regions in 2018 in Kaliningrad and in Primorsky Krai with a view to getting especially Russian-owned firms registered abroad to repatriate to Russia. Firms registered in these regions receive tax benefits and other preferential treatment. Even so, firms have shown less interest in the regions than officials had hoped. To date, only 40 firms have registered in these special regions.