The new agreement on avoidance of double taxation in the “coin box” of the Russian Federation

07.06.2013

With the help of the Federal Law N 107 about the ratification of the Agreement between the Government of the Russian Federation and the Government of the United Arab Emirates on the taxation of investment income of the Contracting States and their financial and investment institutions, Russia has supplemented the list of agreements which help to avoid double taxation.

The agreement provides a list of persons who are entitled to receive benefits. It includes the Government of the United Arab Emirates, and the governments of each of the seven emirates (Abu Dhabi, Dubai, Sharjah, Ras al-Khaimah, Fujairah, Umm al-Quwain and Ajman), the Central Bank of the UAE, Investment government of Abu Dhabi, Emirati investment government, as well as any financial or investment organization, institution, agency, authority or other entity, which is wholly owned by the Government of the UAE or by any local government. This also includes the state pension fund of the United Arab Emirates.

It is important to say that the parties may also decide to extend the benefits which are entailing from the agreement for other legal entities that are fully owned by the central or local governments of Russia and the UAE.

Important preferences which are provided by the Agreement related to the following aspects:

• The first point is related to dividends. They will not be taxed in Russia, if paid to a legal entity authorized to receive benefits under the Agreement. It should be noted that dividends do not include the distribution of funds profit which invest primarily in real estate (Article 4);

• Secondly, the rate of interest. When an interest is paid to the entities of the UAE, who are entitled to benefits under the Agreement, they will also not be taxed in Russia (Article 5);

• Thirdly, the income from the alienation of immovable property. This income will be taxable in the state of income, including income from the alienation of shares whose value directly or indirectly more than 50% based on the value of real estate in Russia. Income from the alienation of another property, such as personal property is exempt from taxation in the state of the source (Article 6).

You can find more information about other preferences in the text of the Agreement.

Definitely, this step will facilitate the inflow of investments from the eastern financial market. In a word, it remains to wait when the agreement will come into force.

Expert’s opinion

On the one hand the Islamic money, including money from Iran and Iraq, get an opportunity to operate in the Russian Federation and get an additional channel to enter into world market.

On the other hand we have the peculiarities of the Islamic financial system and the traditionally close attention from the United States to transactions of this region.

How to get a tax resident certificate of the company? How the percent of the credit will be indicated, if in the Islamic world this concept is forbidden by the Koran, and in the Russian Civil Code we can’t find corresponding terms to Islamic banking?

It is very interesting situation, but not everything is clear.

Time will show whether the investment flows from Russia to Emirates and back without any taxes.

Yaroslav Lomakin ( Managing partner of “Honest&Bright” company)