Tax sanctions for business relations with Russia

The Tax Haven Defence Act continues to gain importance in practice. Originally coming into force at the beginning of 2022, the Tax Haven Defence Act initially received less attention in day-to-day advisory practice. With the inclusion of Russia in the list of affected countries from 1 January 2024, the law will be a more frequent part of everyday advisory work in the future.

The following article briefly outlines the effects of the Tax Haven Defence Act in connection with business relationships with Russia:

Stricter add-back taxation

If the income of a subsidiary located in Russia is subject to taxation of less than 15%, the stricter add-back taxation will apply from 1 January 2024. In simple terms, the tightened add-back taxation means that all income of a subsidiary located in Russia and subject to low taxation will be added at the level of the German shareholder and will be subject to taxation there. The effective tax rate is decisive for the assessment of low taxation (less than 15% tax burden). This is calculated on the basis of the ratio of the tax actually paid to the assessment basis derived in accordance with German profit calculation principles.

Withholding tax measures

In the case of the following business relationships, domestic business partners are obliged to withhold a tax deduction of 15% plus solidarity surcharge from the total income and pay it to the German tax authorities:

• Provision of services to persons resident in Germany,
• trading in goods or services with persons resident in Germany,
• Letting and leasing or the sale of rights that are entered in a domestic public book or register,
• Income from financing relationships with persons resident in Germany.

Non-application of double taxation treaties

Benefits from double taxation treaties are not granted (‘qualified treaty override’ pursuant to Section 1 (3) sentence 2 StAbwG). This means, among other things, that a distribution from Russia may result in a higher overall tax burden.

Increased obligations to co-operate

Taxpayers must keep comprehensive records of business relationships with affiliated companies in the respective countries and submit these to the tax authorities – without being requested to do so – within one year of the end of the financial year. Detailed and comprehensive records of the business relationships must be prepared. In particular, the records must describe the business relationship, the underlying contracts, the functions performed and the market and competitive conditions. The records must be prepared no later than one year after the end of the relevant calendar or financial year and submitted to the responsible tax office and the Federal Central Tax Office (BZSt).

From 1 January 2026, further measures will apply to profit distributions and the sale of shares. In accordance with Section 8b KStG and relief under double taxation agreements will not apply. Tax exemptions and tax reductions under German tax law will be cancelled. Dividends and capital gains from the sale of shares in a Russian corporation are fully subject to taxation in Germany.

From 1 January 2027, there will be a ban on the deduction of business expenses and income-related expenses from business transactions with partners based in Russia. In addition, a DAC6 report is required for business relationships with affiliated companies based in Russia that result in a business expense deduction in Germany.

All of the measures listed also apply to other countries such as Fiji, Samoa and Panama, which are covered by the Tax Haven Defence Act.