In a significant development for international taxation, the United States Treasury Department announced on June 17, 2024, the formal suspension of key provisions of the U.S.-Russia income tax treaty. This move, which takes effect on August 16, 2024, marks a pivotal moment in U.S.-Russia fiscal relations and carries far-reaching implications for businesses, investors, and individuals with cross-border interests between the two nations.

Background and Context

The U.S.-Russia income tax treaty (the “Convention between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital”) was ratified in 1992. For decades, it has served as a crucial framework for managing tax matters between the two countries, helping to prevent double taxation and facilitating economic cooperation.

Key Suspended Provisions

The suspension affects Paragraph 4 of Article 1 and Articles 5 to 21 and 23 of the treaty, as well as its accompanying protocol. These articles cover crucial aspects of cross-border taxation, including:

• • Income from permanent establishments;

• • Dividends, interest, and royalties;

• • Capital gains; and,

• • Various other types of income.

Under the original income tax treaty, Russian taxpayers had the option to be withheld at 0% on most U.S. source interest, pensions, annuities income and 10% on select dividend income. But after the suspension, most types of U.S. source income, including, but not limited to, dividends, interest, independent personal services, income from employment, directors’ fees, pensions, and other income, must be withheld at the non-treaty, Chapter 3 rate of 30%. In short, withholding agents must treat Russian taxpayers similarly to non-treaty taxpayers starting August 16, 2024.

Effective Date and Duration 

The suspension takes effect on August 16, 2024, applying to both taxes withheld at source and other taxes. This gives affected parties a brief window to prepare for the changes. Importantly, the suspension will continue indefinitely until both governments decide otherwise, creating uncertainty for long-term tax planning.

Actions Required

With the August 16, 2024 effective date approaching, Summit recommends brokers, foreign financial institutions, and other withholding agents to take prompt action.

If you are a Qualified Intermediary and trading via an omnibus account structure with your upstream withholding agent, you should plan to move your confirmed Russian account holders to the 30% withholding rate pool for Form 1042-S filing purposes. If you must add any new omnibus account pools, you must inform your upstream custodians with an updated Form W-8 IMY and withholding statement.

If you are trading with your upstream custodians on a fully disclosed basis, then you may want to discuss the changes to the withholding rates with your upstream broker and ask them to withhold accordingly. 

Summit would be happy to assist you with this process. For more information, please reach out to consulting@summitfinancialservices.com.

 

Published August 6, 2024.