On 18 December 2013 the Russian Ministry of Finance (MoF) published Letter No. 03-08-05/55702, clarifying the tax treatment of contractual penalties paid by a Russian company to a Ukrainian company for violation of the contractual terms. According to article 309 of the Tax Code, contractual penalties paid to a foreign company are subject to taxation in Russia. However, the provisions of the Russia–Ukraine Income and Capital Tax Treaty (1995) should also be considered.
The Ministry also referred to the protocol of consultations on the elaboration of common approaches in interpreting the provisions of the treaty. The competent authorities have defined the principal characteristics of the term “other income” and approved the list of income subject to taxation under that article of the treaty. In principle, it is considered that one-off payments of a random nature, which could not be associated with any other type of income specified in other articles, may qualify as other income according to article 20.
The Ukrainian State Tax Administration considers that contractual penalties should be covered by article 20 of the treaty. The Russian MoF has therefore concluded that the contractual penalties paid by a Russian company should be taxed in Russia at the rate of 20%, based on article 20 of the treaty.
