France suspends the key provisions of a double taxation agreement with Russia
By notice dated on June 23, 2024,[1] the French Ministry of Europe and Foreign Affairs, in accordance with the principle of reciprocity, announced the suspension of most of the key provisions of the bilateral double taxation agreement concluded between France and Russia on November 26, 1996 (hereinafter – “French-Russian SOIDN” or “SOIDN”) . [2]
France has taken the decision on suspension according to the principle of reciprocity in response to Russia’s unilateral suspension of most of articles of the French-Russian SOIDN validated by the Presidential Decree No. 585 dated on August 08, 2023.
While the announcement of the French retaliatory measures was expected, the retroactive effect of this suspension (the notice states that the suspension shall take effect from August 08, 2023) has caused at least surprise, as well as many questions, both fundamental [3] and purely practical, as to its application in a context where the French declaration campaign for individuals and legal entities as for 2023 incomes has been officially terminated.
France has decided to suspend the same provisions of SOIDN as Russia had previously suspended, that is: articles 5 – to 22 and article 24 of the French-Russian SOIDN and paragraphs 2 – to 9 of the Annex thereto. . The suspended provisions mainly concern the following:
–“Distributive” rules, which allocate taxation rights between the states-parties to the SOIDN and set limits on the taxation of foreign residents’ income (e.g. maximum withholding tax rate). These provisions include the taxation of permanent establishments, business profits and income from independent personal services, income from immovable property, dividends, interest, royalties, alienation of property (capital gains), wages under employment, and various other categories of income (artists’ and sportsmen’s fees, pensions, student income and other income);
–Provisions related to the taxation of property and wealth;
–Non-discrimination clause;
–Expenses authorized for deduction by permanent establishments.
However, the articles on residency and conflict of residency (“tie-breaker” rule) (article 4), elimination of double taxation (article 23), mutual agreement procedure (article 25) and exchange of information (article 26) remain in force as of today.
Please consider below a brief overview of the consequences of this SOIDN suspension for the French companies and individuals continuing to operate in Russia, as well as for Russian residents receiving income from France.
I/ CONSEQUENCES FOR FRENCH TAX RESIDENTS RECEIVING INCOME FROM THE RUSSIAN FEDERATION
IN FRANCE
Since Article 23 of the French-Russian SOIDN, which provides for methods of eliminating double taxation, does not figure among the suspended articles, we believe that a French tax resident would still have sufficient legal grounds to continue to claim a tax offset in France in respect of income from a Russian source, provided that such income was taxable in Russia under the previously effective provisions of the SOIDN.
Thus, income from a Russian source that was previously eligible for a French tax offset in France[4] using method of exemption with progression (private independent business with a permanent base in Russia, wages under employment performed in Russia, etc.), will, in our opinion, not be affected by the suspension and French tax residents – recipients of such income will be able to continue to claim a tax deduction in France.
Recipients of categories of income that previously entitled them to a Russian tax offset (income from the alienation of Russian real estate, dividends) shall still retain the right to a tax offset in France. However, we believe that the portion of tax accrued / withheld at source in Russia exceeding the limit provided for by the SOIDN (as may happen in some cases in respect of dividends paid to companies), will not be eligible for a French tax offset.
As a reminder, under French domestic law, French tax residents are entitled to apply a deduction for tax paid abroad, provided that there is no double taxation agreement between France and the country of source of income. Although from a formal point of view the French-Russian SOIDN has not been terminated and remains in force, we believe that this tax deduction mechanism may also be applied to certain types of income from Russia, which previously, under the provisions of the SOIDN prior to its suspension, were taxed exclusively in France (interest, royalties), but due to the suspension of the SOIDN are now subject to withholding tax at source in Russia.
We are looking forward to receiving official clarifications from the French tax authorities on the practical implementation of Article 23 of the French-Russian SOIDN.
IN RUSSIA
(i) Increased Russian withholding tax rates or taxation of previously untaxed Russian source passive income:
| Individuals – personal income tax in the Russian Federation | Companies – income tax in the Russian Federation | |||
| Before suspension | After suspension | Before suspension | After suspension | |
| Dividends | 15% | 15% | 5%/10%/15% | 15% |
| Interest | 0% | 30% (except for certain exemptions) | 0% | 20% |
| Royalty | 0% | 30% | 0% | 20% |
| Gain on sale (except for stakes/shares of a company with a predominant share of real estate in the assets) | 0% | 30% (with the period of ownership < 5 years), 0% (>5 years of ownership) | 0% | 20% |
| Income from real estate rental | 30% | 30% | 20% | 20% |
| Income from real estate sale | 30% ((with the period of ownership < 3/5 years), 0% (>3/5 years of ownership) | 30% (with the period of ownership < 3/5 лет), 0% (>3/5 years of ownership) | 20% | 20% |
(ii)For other consequences of suspension from the Russian side, see our Newsletter dated on August 31, 2023.
II/ CONSEQUENCES FOR RUSSIAN TAX RESIDENTS RECEIVING INCOME FROM FRANCE
IN FRANCE
Income of a Russian tax resident from a source in France to which a reduced tax rate in France could previously be applied under the provisions of the French-Russian SOIDN, or which was not taxable in France at all, will now be subject to taxation in France as follows:
| Individuals – Income tax in France | Companies – Income tax in France | |||
| Before suspension | After suspension | Before suspension | After suspension | |
| Dividends | 12,8% | 12,8% (or progressive taxation scale, if such a scale is chosen) | 5%/10%/15% | 25%* |
| Interest | 0% | 0%** | 0% | 0%** |
| Royalty | 0% | Progressive taxation scale *** | 0% | 25% |
| Gain on sale (except for stakes/shares of a company with a predominant share of real estate in the assets) | 0% | 0%**** | 0% | 0%**** |
| Income from real estate rental | Taxable in accordance with previously applicable French domestic taxation rules (19%) + social contributions (17.2%). Details of calculation of the tax base | Taxable in accordance with previously applicable French domestic taxation rules | ||
| Gain on sale of real estate and stakes/shares of companies with a predominant share of real estate in the assets | Taxable in accordance with previously applicable French domestic taxation rules (19%) + social contributions (17.2%). Details of calculation of the tax base | Taxable in accordance with previously applicable French domestic taxation rules | ||
*Special rules apply under the regime of « mère-fille » (parent – subsidiary) in accordance with French domestic law.
** Special rules apply for a permanent establishment for thin capitalization and in case of income received in a state that does not cooperate with France for tax purposes (the so-called ETNS list, except Russia, see below).
*** Subject to certain exceptions (sportsmen – WHT) and special conditions of the applicable regime (copyrights, trademarks, etc.).
**** Subject to the substantial interest exemption (25%) and the exemption related to the receipt of funds in a state that does not cooperate with France for tax purposes (the so-called ETNS list, other than Russia, see below).
Please note that contrary to popular opinion, the 75% withholding tax rate does not apply to income paid to a Russian resident, despite the fact that Russia has been included in the list of non-cooperative countries with France (ETNC list) since May 1st, 2024.
IN RUSSIA
Following Russia’s suspension of the French-Russian SOIDN, Russia obtained the right to tax certain new categories of foreign income previously taxable only in the state of source of income (e.g., income of a permanent establishment of a Russian company in France).
At the same time, the possibility to take advantage of the tax offset remains in Russia by virtue of Article 23 of the French-Russian SOIDN and the provisions of the domestic tax legislation of the Russian Federation (for Russian companies receiving income abroad – Article 311 of the Tax Code of the Russian Federation, for Russian residents – individuals – Article 232 of the Tax Code of the Russian Federation).
***
Please note that the present Newsletter is drafted exclusively for information purposes and does not constitute legal advice.
We hope that you find it useful. We will be happy to provide you with further information upon your request.
[1] Published in the Official Journal of the French Republic No. 0147 as of June 23, 2024 (NOR : EAEJ2416456V, section 76).
[2] Published in the Official Journal of the French Republic No. 0147 as of June 23, 2024 г. (NOR : EAEJ2416456V, section 76):
[3] The issue of retroactivity in international law deserves to be examined in a separate article.
[4] Фр. credit d’impôt égal à l’impôt français, англ. exemption with progression