Understanding Double Taxation Between Uzbekistan and Russia
Resources:
1. The Agreement between the Government of the Republic of Uzbekistan and the Government of the Russian Federation // https://lex.uz/ru/docs/2472167?otherlang=4
2. Tax Code of the Republic of Uzbekistan // https://lex.uz/docs/-4674902
3. Tax Code of Russian Federation // https://www.consultant.ru/document/cons_doc_LAW_19671/
Agreement between the Government of the Republic of Uzbekistan and the Government of the Russian Federation on the Avoidance of Double Taxation on Income and Property dated July 27, 1995 (hereinafter - the Agreement) is in force.
Definitions in the Agreement
1. “Individual” means an individual, any legal entity considered a legal person for taxation purposes under the laws of the Contracting States, and any other association of persons;
2. “National person” means all individuals who are citizens of the Contracting States;
3. “Resident of a Contracting State” refers to any person who, under the laws of that State, is liable to taxation therein by reason of their domicile, residence, place of management, place of registration as a legal entity, or any other similar criteria. This term, however, includes only individuals deriving income from sources in that Contracting State or from gains arising from the increase in value of property located in that State.
Introduction:
Nowadays, the flexibility to work from outside a traditional office setting is getting popularity all over the world. Many people choose this type of work for a number of reasons, some people prefer to be based in one country, region, to be present when their children get back home from school, some people believe that working remotely increase productivity. All mentioned reasons makes people’s lives easier and more comfortable. However, not all people who choose a remote work raise a question on whether a tax on personal income shall be paid in a country of residence or a country of employment.
Domestic tax legislation of many counties aims to get and keep taxes inside the country. There is a risk that people’s income may be taxed twice if two countries have the right to tax their income because, for instance:
Uzbekistan-Russia
Under the Tax Code of Uzbekistan, income derived from work carried out in Uzbekistan is considered Uzbekistan-sourced and is subject to taxation in Uzbekistan. While in accordance with Article 208 of the Tax Code of the Russian Federation, remuneration (income) for work performed, services rendered, or actions performed outside the Russian Federation relates to income received from sources outside the Russian Federation.
Individuals receiving income from organizations that are not tax agents (non-resident) on the basis of concluded employment contracts shall independently calculate personal income tax payable to the relevant budget in accordance with the procedure established by the Tax Code of the Russian Federation. Following that, if a Russian citizen receives income (wages) from a legal entity in another country, such citizen shall pay personal income tax in Russia.
Based on the above mentioned, individuals earning income from another country could face tax obligations in both countries. To address this issue, the Double Taxation Agreement between Uzbekistan and Russia governs taxation rules, ensuring income is not taxed twice.
Which country—Russia or Uzbekistan—should individuals pay whitholding tax in?
The answer depends on a number factors such as residency and the location of employment as it is specified in the Double Taxation Agreement.
If a citizen of Russian Federation permanently living in Russia, but employed for remote work by a company located in Uzbekistan.
In accordance with Article 364 of the Tax Code of Uzbekistan, individuals - non-residents of Uzbekistan, receiving income from sources in Uzbekistan are recognized as taxpayers of personal income (withholding) tax.
The obligation to calculate, withhold and pay to the budget withholding tax is imposed on legal entities of Uzbekistan, in this particular case on the employer, who pays income to the individuals.
At the same time in accordance with Article 208 of the Tax Code of the Russian Federation, remuneration (income) for work performed, services rendered, or actions performed outside the Russian Federation relates to income received from sources outside the Russian Federation. Individuals receiving income from organizations that are not tax agents (non-resident) on the basis of concluded employment contracts shall independently calculate personal income tax payable to the relevant budget in accordance with the procedure established by the Tax Code of the Russian Federation.
However, Article 7 of the Tax Code establishes the priority of the rules and norms of international treaties of Russian concerning taxation over the rules and norms of the Tax Code and normative legal acts adopted in accordance with them.
Moreover, clause 2 Article 15 of the Convention sets out three conditions that must be met simultaneously in order to pay withholding tax (from the income, received in Uzbekistan) in Russia. Among these conditions is that such remuneration must not be paid by a permanent establishment or a fixed base which the employer has in Uzbekistan.
In accordance with the Convention a “permanent establishment (establishment)” means a fixed place through which an enterprise of one contracting state carries on business in the other contracting state.
Thus, in the above described situation, the requirements of clause 2 of Article 15 of the Convention are not met and income in the form of wages paid by the Uzbekistan legal entity to the Russian citizen (employee) may be taxed in the Uzbekistan.
If withholding tax is withheld Uzbekistan, then by virtue of Article 23 of the Convention, the amount of tax paid in Uzbekistan may be deducted from the tax levied on that resident in the Russian Federation. At the same time, such deduction may not exceed the amount of Russian tax calculated on such income in the Russian Federation in accordance with the provisions of the Tax Code of the Russian Federation.
If an individual works in both Uzbekistan and Russia during the year (split employment)
If an individual works in both Uzbekistan and Russia during the year (split employment), the tax obligations will vary based on the individual's residency status and the country where the work is performed.
If the individual stays in both countries 183 days, which qualifies him as a tax resident in both countries, the Agreement contains a "tie-breaker rule" (Article 4) to resolve conflicts of dual residency. Typically, the person’s center of vital interests (where their economic and personal ties are stronger) is used to determine the country of tax residence.
To prevent double taxation, the Agreement allows for tax credits or exemptions. For example, the individual may be able to claim a tax credit for taxes paid in one country against taxes owed in the other country (Article 23). This ensures the individual is not unfairly taxed on the same income in both countries.
Overall, the individual’s tax obligations will depend on details of their residency, the proportion of income earned in each country, and the application of the Agreement provisions, with specific rules on residency and source of income guiding the final determination.
Article 342 of Tax Code of Uzbekistan and Article 207 of Tax Code of the Russian Federation state that a certificate from the competent authority of a foreign state or another document confirming the fact of tax payment outside the territory of the Republic of Uzbekistan or the Russian Federation shall be considered as evidence that profit tax or a similar type of tax has been paid (withheld) outside the territory of the contracting State, this ensures that the income earned and taxed in a Contracting State by an individual is not taxed in other Contracting State for the second time.
