Signing double taxation agreements with other countries develop economic relations. However, Belarus’ decision to suspend agreements with unfriendly countries is causing serious discussions and unrest. The article explores the nuances, tips and consequences of such a decision.
Which countries are considered unfriendly
In April 2022, the Belarusian government determined which foreign countries committed unfriendly actions against Belarusian companies and individuals. Thus, the Belarusian government has taken retaliatory measures against the sanctions imposed by several foreign states against Belarus. The list of unfriendly states includes all the countries of the European Union and 12 others. These are Australia, Canada, Norway, Albania, Great Britain, the USA, Montenegro, Switzerland, and others.
Anti-sanctions measures are being taken based on the list of unfriendly states. For example, in relation to residents of unfriendly states in Belarus, the execution of executive documents issued in their favour has been suspended.
What is the essence of international tax agreements?
The point of international tax agreements to avoid double taxation is not to tax the same amount twice in different countries.
For example, when income tax is paid to a state with which Belarus has a tax agreement, then options are possible for a tax resident of a foreign state:
- In the state of tax residence, you will not need to pay such a tax again.
- The amount paid in Belarus is considered when calculating such a tax in the state of tax residence.
- A reduced tax rate is applied in the state of tax residence.
The conditions for avoiding double taxation depend on the terms of an international tax agreement concluded with a particular state.
For the tax authorities of Belarus, a certificate from a foreign state confirms the tax residence of a foreign state and the payment of taxes there. The same procedure applies to tax residents of foreign countries with which Belarus has concluded tax agreements.
The certificate is issued to a tax resident of a foreign state by a Belarusian company from which he receives income or, in some cases, by the tax inspectorate.
For which income tax benefits were provided
Foreign investors, including those from unfriendly states with which agreements on avoiding double taxation were concluded, were granted tax benefits on dividends and interest in Belarus. Tax agreements were in force with the United Kingdom, Cyprus, Switzerland, Germany, and other countries included in the unfriendly list.
What does the suspension of tax agreements mean?
Restrictive tax measures have been taken for tax residents of unfriendly states who have retained their investments in Belarus since June 1, 2024: international agreements on avoiding double taxation have been suspended. Such measures have been taken against residents of 27 states currently included in the list of unfriendly ones. The income of residents of these states, which is received in Belarus, will be subject to the rates established by the tax legislation of Belarus.
Such measures will increase the tax costs of foreign investors since taxes paid in the state of their tax residence will not be offset in Belarus. In addition, the tax costs of Belarusian companies that pay dividends, interest, and other payments to residents of unfriendly states may increase.
What should Belarusian companies that pay income to residents of unfriendly states do?
Option 1. It is possible to increase expenses
First of all, Belarusian companies need to find out which part of tax agreements with states whose tax residents are income recipients has been suspended.
Next, you need to analyse the contract with the income recipient. The contract may contain a condition for compensating withheld taxes at the expense of the source of income payment, the Belarusian company.
Next, you need to determine the procedure for paying and attributing such compensation to accounting: include it in costs or attribute it to profit.
Option 2. To restructure the transaction
A Belarusian company may restructure a deal to pay income to tax residents of unfriendly states. Friendly states that have tax agreements with the states of tax residence of income recipients may be involved in such a transaction.
More options
There are more options, including options for hiding income as part of contract payments. However, this may entail financial risks for Belarusian companies related to the possible requirement to comply with a certain price level and cost justification.
What can foreign companies from unfriendly countries do?
Tax agreements with unfriendly countries remain in force until June 1, 2024. Subsequently, foreign companies from unfriendly countries that receive income from Belarusian companies may change their tax residency by moving to other states. The new tax residence must meet the following conditions:
- The state is not included in the list of countries unfriendly to Belarus. Today’s countries include several states, including Russia, Kazakhstan, and the United Arab Emirates.
- These states and Belarus have agreed to avoid double taxation.
Peculiarities of taxation of dividends received by individuals from unfriendly states
Concerning dividends received after January 1, 2024, and exceeding 200,000 Belarusian rubles, an increased income tax rate of 25% is applied to the excess amount. The usual income tax rate in Belarus is 13%. This rule applies to residents and non-residents of Belarus.
In case of suspension of tax agreements, dividend recipients from unfriendly states will not be able to minimise the amount of tax.
Peculiarities of taxation of remuneration of members of the Board of Directors of companies
The Tax Ministry of Belarus explained that the 25% rate will not apply to the remuneration of members of the board of directors of companies, which are paid by the decision of the general meeting of the company’s owners and are provided for by the company’s charter. In this case, such persons who are residents of unfriendly states will not suffer significant tax losses if tax agreements are suspended.
The period of validity of tax restrictions
The Government of Belarus has suspended the tax agreements to avoid double taxation until December 31, 2026. However, it is envisaged that the suspension can be lifted earlier if the circumstances under which the tax restriction is established cease to apply or a proposal from the Belarusian tax ministry is received.
What will they do with tax agreements in unfriendly states
In which case it will be necessary to obtain information from the tax authorities of a foreign state classified as unfriendly in Belarus. It is possible that, as a retaliatory measure, the execution of the tax agreement will be suspended in whole or in part, possibly denounced.
Contact us
If you have any questions related to the suspension of tax agreements to avoid double taxation with unfriendly states, we will be happy to help you! Our long-term experience in tax law will help you resolve any disputes.
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