Wyden Says Sanctioned Russians Should Lose US Tax Breaks

In light of Russia's invasion of Ukraine, certain Russians and Belarusians operating in the U.S. should no longer enjoy some forms of beneficial tax treatment available to foreigners, Senate Finance Committee Chair Ron Wyden, D-Ore., said Friday.

Under the proposal Wyden is developing, certain foreigners with income connected to the United States would be disqualified from utilizing a variety of tax provisions, including a reduced withholding tax rate for dividends and interest that's part of some tax treaties, Wyden said. The result would be that individuals included in the initiative would be subject to the full income tax, which is usually a 30% withholding rate on payments, he said.

"Russian oligarchs and companies supporting Putin shouldn't be getting tax breaks in the United States," Wyden said in a news release. "We should take away every special tax benefit for all sanctioned individuals, as well as give [Treasury Secretary Janet] Yellen the authority to identify other individuals, companies, or governments supporting the invasion that should lose their tax goodies."

Individuals and entities identified by the Office of Foreign Assets Control, the unit in the U.S. Department of the Treasury that enforces and administers economic sanctions, would lose their tax breaks under the proposal, according to Wyden. Yellen would also have the authority to identify other individuals and entities that should qualify, including the Russian and Belarusian governments, Wyden said.

The U.S. signed a bilateral tax treaty with Russia that went into effect in 1994. The U.S.' tax treaty with the Commonwealth of Independent States, made up of former Soviet republics, includes Belarus. The dividends rate in the Russian tax treaty doesn't exceed 10% for those paid by regulated investment companies.

Separately, U.S. businesses paying taxes to the Russian or Belarusian governments should no longer be able to utilize the foreign tax credit, Wyden said. Additionally, the global intangible low-taxed income provision included in the Tax Cuts and Jobs Act wouldn't apply to those entities, he said. 

The foreign tax credit is disallowed, per Internal Revenue Code Section 901(j) , for income earned in countries that support terrorism or don't have diplomatic ties with the U.S. Those countries include North Korea, Iran, Sudan and Syria. Any country engaged in or materially supporting the invasion of Ukraine should be added to the list, Wyden said.

"The United States should not subsidize a single dollar of taxes paid to Russia, which will be used to fund this cruel war," Wyden said. "If U.S. companies choose to keep paying taxes to Russia — taxes that are funding the bombing of hospitals for women and children — they should do it without a penny of help from American taxpayers."

President Joe Biden's administration has implemented a variety of sanctions on Russia since the war began last month. Those include, for instance, a ban on the importation of Russian crude oil, certain petroleum products, liquefied natural gas and coal. The ban also bars U.S. investment in Russia's energy sector and prohibits Americans from financing foreign companies that are making investments to produce energy in Russia.

The Treasury Department did not immediately respond to a request for comment.

--Additional reporting by James Arkin. Editing by Roy LeBlanc.

For a reprint of this article, please contact reprints@law360.com.