Treasury Department Confirms Suspension of U.S.-Russia Income Tax Treaty

The U.S. Department of the Treasury on June 17, 2024, confirmed it had formally notified Russia about the suspension of 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 (U.S.-Russia Tax Treaty).

Background

The U.S.-Russia Tax Treaty, established on June 17, 1992, was designed to prevent double taxation and fiscal evasion regarding taxes on income and capital. Due to the ongoing conflict between Russia and Ukraine, several countries have imposed economic sanctions on Russia. In response, on Aug. 8, 2023, Russia unilaterally suspended its double tax treaties with several nations, including the U.S. This action halted the provisions of the U.S.-Russia Tax Treaty concerning the taxation of income from permanent establishments, dividends, interest, royalties, capital gains and various other income types.

On Dec. 28, 2023, the IRS released Tax Notice 2024-11, which updated the list of treaties that meet the requirements for lower-taxed "qualified dividends" under Internal Revenue Code Section 1(h)(11). Specifically, it removed the tax treaty with Russia and made such removal effective for dividends paid on or after Jan. 1, 2023.¹

2024 Treasury Department Action

Following Russia's actions, the Treasury Department on June 17, 2024, confirmed it had formally notified Russia about the suspension of the U.S.-Russia Tax Treaty, set to commence on Aug. 16, 2024. This suspension applies to taxes withheld at the source and other relevant taxes, and will persist until a mutual decision is made by both nations to reinstate the U.S.-Russia Tax Treaty. U.S. withholding agents are required to update their systems to accommodate the revised withholding tax rates.

Due to the current suspension, taxpayers are no longer able to access treaty benefits, resulting in potential double taxation and heightened tax liabilities for American and Russian entities operating cross-border, thus escalating operating costs and compliance burdens.

If you have questions about how these actions may impact your business, please contact the authors or another member of Holland & Knight's Tax Practice.

Notes

¹ Tax Notice 2024-11 also removed the tax treaty with Hungary from the same list of tax treaties and added the tax treaty with Chile.

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