Russia, Bahrain, To Discuss Double Tax Treaty

The Russian Finance Ministry is to hold negotiations in response to a request from Bahrain to conclude a Double Tax Treaty Agreement (DTA), according to Deputy Finance Minister Alexei Sazanov. Bahrain made the request in June.

DTAs are useful when trade, especially in services and investment, is developing between two countries when their respective tax regimes are different. They avoid the scenario where, for example, a Russian national working in Bahrain is taxed on his salary and then taxed again on the same salary because he is a Russian national (hence the name “double tax”).

They are also useful, especially in the services industry sector, as they typically provide mechanisms to reduce profits taxes by allowing the charging of withholding tax, which is typically lower, on items such as fees for patents and trademark use by a subsidiary. They can also include preferential tax benefits in certain industry sectors depending upon bilateral negotiations.

We showcase the differences between Russia and Bahrain in Corporate Income Tax (CIT), Individual Income Tax (IIT), and Withholding Tax (WT) below:

Country	CIT	IIT	WT
Bahrain	0*	0	0
Russia	25%	13-22%	15%

*excepting certain hydrocarbon sectors where the CIT rate is 46%.

In the Bahrain case, the DTA mechanism will be of more use to Russian energy companies as opposed to individuals, as they may offset part of their 46% CIT taxable income against the zero-rated withholding tax fee by having the Russian parent company charge its Bahrain subsidiary for the use of trademarks and patents. This implies that Bahrain wishes to attract more Russian investment into its energy sector.

The proposed Russia-Bahrain DTA may also include specific preferential tax treatment in other industry sectors, such as agriculture.