Russia is preparing a tax agreement with Oman

The Russian government intends to sign an agreement on the avoidance of double taxation (DTAA) with Oman. According to the order of Prime Minister Mikhail Mishustin dated July 28, 2022 (Vedomosti got acquainted with it), the draft document previously worked out with the Omani side was approved. Now the Ministry of Finance must hold talks with Oman and, upon reaching an agreement, sign an agreement.

The document, in particular, provides for a tax rate on dividend income of 10%, subject to holding 20% ​​of the company’s capital for 365 days, in other cases the rate will be 15%, on interest and royalties – 10%. The agreement also provides for exemption from taxation of dividends and interest if they are paid to the government, the central bank or pension funds of Russia and Oman. In addition, RDIF, VEB, Rostec, Rosnano, Rosatom, Roskosmos will be able to apply for such benefits.

The Agreement shall enter into force on January 1 of the calendar year following the year in which the document enters into force. The STAT will have to be ratified by the State Duma, now the deputies are on vacation.

The representative of the Ministry of Finance confirmed that work is underway to prepare for the signing of the agreement.

The text of the agreement is noticeably different from those that Russia concluded earlier, before the start of the campaign to revise the DTT, said Mikhail Filinov, partner at Technologies of Trust (former PwC in Russia). Instead of a tax of 5-0-0% for the triad “dividends – interest – royalties”, the new agreement proposes rates of 10-10-10%, he pointed out. This reflects the trend in the development of Russian tax practice – to prevent the reduction of the tax base, the expert believes.

The new version of the agreement with Oman is closer to modern realities and differs from the version of 2001, which has not entered into force, by higher tax rates on passive income, says Anna Zelenskaya, Associate Partner of the MEF. Previously, in the vast majority of agreements, interest and royalties were completely exempt from taxation, and dividends could receive a 5% rate.

The tax rates in the Oman treaty are less attractive than in the treaties with Qatar or Hong Kong (5% on dividends paid to Qatar and Hong Kong, or 5% on interest paid to Qatar and 0% to Hong Kong), but they are lower, than in agreements with jurisdictions in the EU, which Russia was actively reviewing in 2020–2021, noted Natalya Kuznetsova, partner of the Tax and Legal Department at Business Solutions and Technologies (formerly Deloitte in Russia).

And if we compare the conditions offered to Oman with a tax agreement, for example, with Switzerland, which has not yet been revised, then they are not super profitable, said Alexander Tokarev, a Kept partner (former KPMG in Russia).

The tax rates are reduced to only 10%, while with Switzerland the tax rate on dividends can be reduced to 5%, and interest and royalties are generally exempt, he noted. In general, the conditions offered to Oman are in line with the Model Double Taxation Convention approved by the government, he added.

Now Russia has tax agreements with more than 80 countries. In 2020, the Ministry of Finance began active work on their revision, after President Vladimir Putin instructed to exclude situations of optimizing payments to the budget using tax havens and to increase the rate on the withdrawal of dividends and interest to 15%. The president then warned that Russia would unilaterally withdraw from agreements with countries that would not accept its proposals. At the moment, tax treaties are being revised with Cyprus, Malta and Luxembourg. The Ministry of Finance failed to reach an agreement with the Netherlands, so the agreement was denounced and ceased to be valid on January 1, 2022. Last autumn, it became known that negotiations had begun to revise the agreement with Switzerland, but in March 2022, the Ministry of Finance announced the suspension of discussions. In the list for review, the agency also named Hong Kong and Singapore. The absence of an agreement means, in fact, double taxation of business in accordance with the fiscal systems of both states.

Given the current geopolitical environment and uncertainty over tax treaties with traditional partners such as the EU, it is important to expand cooperation with friendly states, but not all of them have tax treaties signed at the moment, says B1 partner (former EY in Russia) Marina Belyakova. A new double tax treaty is always a plus for taxpayers in Russia, especially in this case, since it is with the Persian Gulf country, where Russian business has actively moved in opposition to Western sanctions, Kuznetsova added.

The decision to sign an agreement with Oman now may indicate a willingness to develop relations with the countries of this region, Zelenskaya said. Probably, the countries may have certain agreements on joint projects that are associated with companies with state participation, which will be able to take advantage of these benefits, the expert believes.

While we don’t see much interest among Russian groups in using Oman to structure their overseas presence, this may in part be due to the country’s lack of a tax treaty, Tokarev said.

Zero interest and dividend rates for Russian state corporations reflect the increased role of the public sector in Russia’s economy, Filinov said. Russian state-owned companies could benefit the most from the proposed agreement, Tokarev added.

The attractiveness of the new agreement should be considered in conjunction with the taxation regime in Oman itself and the practice of applying agreements to avoid double taxation in Russia, Kuznetsova said. In Oman, under certain conditions (in particular, registration in the FEZ), income from activities abroad can be exempt from taxation, she noted. Thus, in her opinion, Oman can become an interesting alternative for Russian business as a platform for doing business abroad, since a comfortable level of income taxation can be ensured both in the Russian Federation (at the source of payment) and in Oman.

But it must be taken into account that even if there is an agreement with Oman, the Russian tax authorities may challenge the application of reduced rates. “In recent years, the tax authorities of Russia have developed a significant practice of challenging the application of reduced rates under double taxation agreements, therefore, it will be possible to get real benefits from the new agreement only if real activities are carried out in Oman, income is disposed of and there are other factors that testify to the actual right to apply reduced rates,” the expert noted.