January 1999

by Matthew Edwards

The U.S. Embassy in Moscow and BISNIS have compiled the following guidance for U.S. companies seeking exemption from certain Russian tax requirements under provisions of the bilateral "Treaty on Avoidance of Double Taxation" ("the treaty"). This guidance is provided based on information from Russian authorities as well as anecdotal experiences of U.S. companies and tax practitioners active in Russia. Companies are advised that tax requirements in Russia may be subject to frequent change and inconsistent interpretation, and U.S. companies are advised to consult further with qualified tax advisors who have experience in Russia on specific questions or problems.

U.S. companies may claim exemption from certain Russian taxes under the treaty for income on which the company or its subsidiaries have paid U.S. income tax. U.S. companies claiming eligibility for exemption from Russian tax requirements under the treaty should apply for certification by the Internal Revenue Service (IRS) in the United States. Russian tax authorities require such certification in order to apply terms of the treaty. The IRS office in Philadelphia will issue a certificate to the U.S. company, after processing an application. Russian tax authorities should honor this certificate by not requiring the U.S. company to pay taxes covered under the treaty. Notarized affidavits from U.S. states or municipalities are not officially recognized by the Russian Government for tax purposes. Two Russian Government forms (1013DT and 1011FE) are required, as described below. U.S. companies may obtain these forms from the Russian State Tax Service or from their local tax inspectorates in Russia.

Form 1013DT
Unfortunately, starting with the 1998 tax year, foreign companies seeking advance exemptions from withholding under double-taxation treaties with Russia face a new hurdle. Although tax experts maintain that tax exemption is permissible under the terms of such treaties (including the treaty with the United States), the circumstances under which Russian authorities will grant such exemptions have narrowed. Specifically, in 1998, Russian tax authorities began using an updated version of form 1013DT, in order to enforce a previously non-existent distinction between so-called active income (defined to include income derived from services performed or goods provided) versus so-called passive income (such as dividends, interest, and royalties). Under the new Russian interpretation, only passive income is deemed eligible for advance exemption from withholding. Active income, on the other hand, is now subject to withholding, regardless of whether it is covered by a double-taxation treaty. In addition, any taxes thus withheld from such income that is nontaxable according to terms of a double taxation treaty can only be reclaimed via a refund from Russian tax authorities. In other words, most foreign companies that were previously able to avoid having taxes withheld from Russian-sourced income covered by the treaty will now have to pay the taxes and then apply to have them refunded by the Russian Government.

Form 1013DT is a claim under the treaty for an exemption from withholding for income sourced in Russia before the tax payment is made. Form 1013DT requires certification from the director of the IRS Philadelphia Service Center (contact information at end of article). The completed form 1013DT must be sent to the IRS Service Center, along with a written request for certification that the U.S. entity (i.e., partnership, corporation, subsidiary, or individual) has filed a U.S. income tax return (as a domestic corporation, partnership, or resident) for a specified period of time usually a given tax year. Specific documentation for each type of entity is outlined below.

• Partnership requests for certification must include written authorization from each partner so that the IRS can disclose that each partner has filed a return (use form 2848, Power of Attorney and Declaration of Representative, or form 8821, Tax Information Authorization, to indicate your permission for this disclosure).
  
• Corporation requests must include the corporation's name, employer identification number, tax return form number, and tax period for which the certification is requested.
  
• Subsidiaries, filing on the return of a parent corporation, should include in the request a copy of page one of the latest consolidated income tax return and a listing of the subsidiaries and their employer identification numbers.
  
• Individual requests must show that the person (1) filed a U.S. income tax return as required of a citizen or resident alien of the United States for the given tax year, or (2) produced an immigrant identification card.
  

Form 1011FE
Form 1011FE, a Notification on Sources of Income within Russia, is also required by the Russian State Tax Service. The 1011FE does not require IRS certification, but is to be filled out by the company and submitted to the Russian State Tax Service.

U.S. companies that do not apply in advance for certification still may be eligible for exemption under the treaty. However, these will have to get the IRS certificate and then apply to the Russian Finance Ministry for a refund of eligible tax paid in Russia. This refund process can be cumbersome and lengthy and is not as certain as an advance exemption from withholding.

Based upon anecdotal evidence, the Commercial Service of the U.S. Embassy in Moscow notes that, in some instances, Russian tax authorities may not respect the IRS certificate. The Commercial Service recommends that U.S. companies report any such instances to the IRS regional office in Bonn, Germany, which is documenting such reports in case follow-up is required.

A list of Moscow-based U.S. companies offering professional tax advice is available from U.S. & Foreign Commercial Service (US&FCS ) in Moscow, fax: +7 (095) 737-5033.

Matthew Edwards is a commercial attache with theUS&FCS at the U.S. Embassy in Moscow.

Addresses and Telephone Numbers

• For details or questions on provisions of the U.S.-Russia Treaty on Avoidance of Double Taxation, contact the International Division of the IRS at (202) 874-1550 or (202) 874-1460.
  
• The Russian State Tax Service is located at Neglinnaya ulitsa 23, 103381 Moscow, K-381, Russia.
  
• IRS - Philadelphia Service Center, Foreign Certification Request, P.O. Box 16347, Philadelphia, PA 19114-0447, Attn: FIRPTA Unit; fax: (215) 516-3906, -2555, or -3412.
  
• To report problems, U.S. companies may contact Maggie Lullo at the IRS Regional Office in Bonn, telephone +49 (228) 339-2101.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)