Israel – Russia Tax Treaty

The sanctions on Russia and their potential implications for Israeli companies

The sanctions are constantly changing, and additional sanctions may be imposed. It is important to check for any economic actions involving Russia and Belarus.

Here is a summary of key sanctions that may be relevant to Israeli businesses

• Sanctions imposed by the European Union
• Restriction of Russia’s access to capital markets in the EU.
• Financial restrictions on Russia and individuals of Russian origin.
• Export restrictions on technology.
• Restrictions in the oil industry.
• General trade and investment restrictions.
• Entry bans to the EU and freezing assets of individuals and entities.
• Restrictions on visas.

Expansion on the Restrictions Related to Our Areas of Expertise

• Restriction of Russia’s access to capital markets in the Union – A ban is in place on trading in Russian government bonds (OFZ) in the markets of Union countries.
• Financial restrictions on Russia and individuals of Russian origin (Effective from April 12, 2022) – There is a prohibition on trading in financial instruments and financial devices issued by banks and local companies under Russian government control in Union countries. Likewise, providing loans or new cards to entities is prohibited.

1. Transfers of funds exceeding 100,000 euros from Russia to the Union are prohibited.
2. Prohibition on Selling debentures in Russian rubles is prohibited.

• General trade and investment restrictions – The ban extends to funding or public assistance for investments in Russian companies, except for commitments made before February 26, 2022. Small financial aid in food, agriculture, medicine, humanitarian aid, and assistance to small or medium-sized European companies with projects worth 10 million euros is allowed.

The sanctions imposed by the USA

• Sanctions on financial transactions.
• Adding Russian entities to the SDN (Specially Designated Nationals and Blocked Persons List), which is an American list of entities with whom any transaction is prohibited for individuals subject to U.S. jurisdiction.
• Adding entities to the SSI list (Sectoral Sanctions Identifications), which includes individuals operating in sectors of the Russian economy deemed to contribute to the crisis in Ukraine. Inclusion in the list doesn’t necessarily impose sanctions on the entities.
• Adding Russian authorities to the CAPTA list (Correspondent Account or Payable-Through Account). CAPTA sanctions forbid U.S. financial institutions from dealing with or processing transactions for listed foreign financial institutions.
• Imposing restrictions on Russian debt.
• Imposing a ban on importing fuel products from Russia to the U.S. and on investments in the Russian energy sector.
• Sanctions on financial transactions.
• Exports from the U.S. to Russia and Belarus.
• Exports from countries other than the U.S. (including Israel) to Russia and Belarus

Preventing Legal Exposure to Sanctioning Authorities

• Examination of contracts in depth – In the context of economic actions up to the Ultimate Beneficial Owner (UBO) rights (such as in the energy and gas sector).
• Identification of transactions or actions that may involve other actors operating behind the front-line actors in the transaction or engagement.
• In every new contract – add a termination clause or contract cancellation in case sanctions are imposed on the parties involved in the contract, directly or indirectly.
• In business relationship identification (KYC – Know Your Client) – a thorough examination of the shareholders and controlling parties involved in the transaction and contract termination. It is recommended to maintain documentation of the checks conducted on the transaction and the parties involved.

It is crucial to continuously monitor the evolving sanctions to ensure non-exposure. Our office recommends as a precautionary measure to refrain from any business activity related to Russia or Belarus. Transferring funds from these countries is nearly impossible. In this sensitive period, it is always advisable to check who the Ultimate Beneficial Owner (UBO) is in transactions and ensure that there is no risk that the transaction will circumvent the sanctions, thereby endangering the other party to the transaction and encouraging terrorism and assisting Russia and Belarus in continuing their policies.

Bilateral Agreements between Irael and Russia

1. Convention on Social Security
2. Double Taxation Convention

Social Security Convention

In 2017, a social security agreement between Israel and Russia was signed to prevent a situation of double social security between the two countries.

To read the treaty in Hebrew, click here.

Russia– Israel Tax Treaty

A double taxation treaty is a bilateral agreement under which two states set the tax rules that apply to income and assets related to the two states. The bilateral tax treaty between Israel and Russia was signed in 1994 and entered into force in January 1, 2001. In addition, the treaties include principles for the exchange of information on tax issues between the two countries.

To read the full double taxation treaty between Israel and Russia, click here.

Applicability of the MLI

Russia and Israel have signed the MLI, which means that there is an automatic exchange of information between the two countries. Both Israel and Russia signed the MLI in 2017 and ratified it in 2019.

Residency for Tax Purposes

Residency of an Individual

If an individual stays in Russia for over 183 days in a one-year period then they are required by law to pay taxes in Russia.

Information about residency in Israel, can be found in this link here.

Residency of a company

A company will be considered a resident of Russia, and therefore required to pay taxes, if the company was incorporated in Russia or if the company is based out of the country.

Russia’s Tax Regime

The Russia Tax Authority is called: Federal Tax Serice of Russia

Income Tax: 13%.

Russia imposes a flat income tax rate of 13% for taxpayers and does not have a minimum earning bracket.

Corporate and Branch Tax: 20%

VAT: 20% (standard rate). Special VAT cases: 0% or 10%

Capital Gains Tax: N/A.

Withholding tax

Inheritance / Estate Tax in Russia

Russia does not impose inheritance or estate taxes on its taxpayers.

Relocation

Russian immigration to Israel is frequent, with over 33,000 Jewish Russians making Aliyah to Israel in 2019 and similar numbers in the years following. However, Israeli immigration to Russia is not as common. With an estimated Jewish population of just 0.26% in the entire country, there are not many Israelis living in Russia. To move to Russia, however, one must apply for and receive a temporary residence permit. After five years of legal residence in Russia, one will be eligible for a permanent residence permit.

Real Estate Taxation in Russia

Real estate taxes in Russia vary depending on the value of the property. The property tax ranges in Russia are as follows:

Less than 300,000 RUB (0.1%)

300,000-500,000 RUB (0.1%-0.3%)

More than 500,000 RUB (0.3%-2%)

For more information on real estate taxes in Russian, click here.

To learn about real estate taxation in Israel read here.

Transfer of funds from Israel to Russia

In accordance with Section 170(a) of the Income Tax Ordinance in Israel, certain money transfers from Israel to Russia require the approval of an assessor on behalf of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into euros, so it is important to consult before transferring the funds – Contact us.

For more information on money transfers abroad, click here.

Types of business in Russia

1. Limited Liability Company (OOO or LLC): An OOO requires a minimum capital investment of 10,000 RUB to officially charter the business entity. Partners of an OOO assume liability that is restricted only to the investments that were paid into the business, and there may be a maximum of 50 shareholders.
2. Open Joint-Stock Company (OJSC): Open joint-stock companies need a minimum of 100,000 RUB as an initial capital investment and requires shares to be available for public purchase on an exchange.
3. Private Joint-Stock Company (PJSC): A PJSC functions similarly to an OJSC in that the company’s capital is divided into shares, but these shares are available exclusively to shareholders and are not made available to the public.
4. Partnerships: In Russia, there is no minimum value of capital required to start a partnership. Partnerships operate with at least two and up to 50 partners and function with a managing board of directors. Partners do not assume liability for the company, as liability is restricted to invested capital from each partner.

Incentive Laws in Russia

Russia has implemented incentive laws to provide taxpayers with a break in certain instances. For more specifics on incentive laws from the Federal Tax Service of Russia, click here.

Russia’s Double Tax Treaties