News on double taxation treaty with Russia

Income flowing to Russian residents from the Czech Republic

The decisive date for the change in the approach to the payment of taxable income from the Czech Republic to Russian tax residents is 29 September 2023. From this date, payers must proceed in accordance with the Czech Income Tax Act and disregard the previously applicable double taxation treaty. The decisive date for determining the tax treatment is the moment when the payer is obliged to withhold tax or secure tax under Czech regulations. However, Russia has not withdrawn from the Convention on Mutual Administrative Assistance in Tax Matters. This means that instead of the 35% withholding tax rate, the standard 15% rate will apply.

Income flowing to Czech residents from Russia

In the period from 11 August to 28 September 2023 when the treaty was not consistently implemented by both states, the financial administration offers Czech tax residents with income from sources in Russia a choice between two regimes:

• They may avoid double taxation under the treaty (but the tax can only be offset to the extent that income under the treaty can be taxed in Russia) and potentially use the tax that has not been offset as a tax expense under the Income Tax Act.
• If it is more advantageous for the taxpayer, they may claim the entire tax paid in Russia as a tax expense under the Income Tax Act.

From 29 September 2023, only the Czech Income Tax Act applies to income from and to Russia, which allows only the second option mentioned above.

The key point in determining the tax treatment of one-off (non-recurring) income subject to Russian withholding tax is when the taxpayer is obliged to withhold tax in Russia. If this moment cannot be determined precisely, the financial administration allows to determine the tax regime based on the moment of generating the income under the Czech Income Tax Act. The same procedure applies to income that is taxed in Russia through income tax returns. The financial administration’s information also specifies how to proceed for one-off and gradually accruing income. Income generated gradually must be divided into income before 28 September 2023 and income after that date, or income between 11 August and 28 September 2023 when the taxpayer has the option to choose the relevant regime.
 
If income from the Russian Federation is attributed to a Russian permanent establishment, it is subject to the same tax treatment as one-off or gradually accruing income, which requires the allocation of expenses and revenues over different periods. All expenses and revenues for the 2023 calendar year attributable to the Russian permanent establishment should be allocated into two periods, namely (i) the period from 1 January 2023 to 28 September 2023 and (ii) the period from 29 September 2023 to 31 December 2023. Alternatively, (iii) the period from 11 August 2023 to 28 September 2023 when the taxpayer has the option to choose the relevant tax regime may also be used.