Russia Is Getting Ready to Ditch the Tax Treaty with the Netherlands

Tax & Legal 7 December 2020

LT in Focus Russia is getting ready to ditch the tax treaty with the Netherlands

The start of denunciation procedures was officially communicated by the Ministry of Finance and a respective bill was announced on the Federal Draft Legislation Portal. Read on for more details.

In his statement in March 2020, the President of Russia said that “all income (interest and dividends) payable abroad Exceptions proposed to the Netherlands (similar to Cyprus and must be taxed appropriately”. Luxembourg) In furtherance of presidential instructions, the Ministry of Dividends Finance approached several jurisdictions with tax treaty Public company* 5% amendments. So far, the proposals have been sent to Cyprus, Malta, Insurance company; pension fund 5% Luxembourg, and the Netherlands. Government, political party or local 5% The proposed amendments provided for an increase of the authorities, Central Bank withholding tax rate on dividends and interest payable abroad to 15 percent (with a few exceptions for institutional Interest investors). The Netherlands were offered conditions similar to Cyprus Public company* 5% and Luxembourg (see on the right). Insurance company; pension fund Exemption Agreements with Cyprus, Malta, and Luxembourg were Government, political party or local Exemption eventually reached, but negotiations with the Netherlands authorities, Central Bank have not borne any fruit so far. According to the information published by the Ministry of Bank Exemption Finance, the Netherlands proposed a different approach to revising the tax treaty, which “was turned down by the Securities listed on a registered stock Exemption Russian side as preserving tax loopholes.” exchange: • Government bonds According to the ministry, the existing tax treaty with the • corporate bonds Netherlands offers quite attractive taxation terms and • Eurobonds enables profit shifting from Russia by paying tax at an effective rate of two or three percent. *Companies whose shares are listed on a registered stock exchange According to the statistics provided by the ministry, over the with at least 15 percent voting shares in free float and that have been holding at least a 15-percent interest in the income payor for 365 days. past three years, significant resources have been channelled to the Netherlands in the form of interest payments and dividends: over RUB 457 billion in 2017, over RUB 412 billion in 2018, and over RUB 339 billion in 2019.

© 2020 ООО «Делойт Консалтинг». Все права защищены. 1 The development of a denunciation bill was announced on terminated starting from the next calendar year (Article 31 the Federal Draft Legislation Portal. of the tax treaty). What might be the consequences of treaty denunciation? This means that, whatever the outcome, the current tax treaty will continue for at least one more year (until the end • All payments to Dutch residents will be taxed under the of 2021), which gives the taxpayers enough time to respond Russian Tax Code, which will result in an even higher (as to the changes. compared to the proposed amendments) tax load on passive income, with interest and royalty payments taxed Secondly, the ministry already made similar denunciation at a 20-percent rate and dividends – at 15 percent. statements when negotiation with Cyprus and Malta had hit a dead end. • Termination of the treaty may hamper information exchange between the countries. Similarly, the development of a bill on the termination of the treaty with Malta was announced. • Russian companies and individuals that receive income from Dutch residents can be affected, since taxation of Yet, the agreement was eventually reached. such income abroad will be governed by the local laws Therefore, although announced, the denunciation will not and it will not be eligible for the treaty benefits. necessarily take place (naturally, there are no guarantees • Offsetting the tax withheld in the Netherlands might that the Cypriot and Maltese scenarios will repeat). become challenging: Thirdly, termination of the treaty will seriously affect the  for legal entities, offset of tax on dividends will not be activities of many large companies, e.g., foreign investors available; for other types of passive income, an that structure investments in Russian enterprises through additional set of documents will need to be collected Dutch companies, as well as Russian groups that gained access to foreign exchanges through Dutch public holding  individuals will not be entitled to offsetting Dutch companies. WHT against their PIT, as the respective tax treaty provision will be missing. The denunciation will also have an impact on large Russian holdings that have used this jurisdiction for global expansion. Important considerations All these factors will largely shape the future of the treaty. Firstly, to unilaterally withdraw from the tax treaty, Russia must send a corresponding written notification through We will keep you posted on further developments. diplomatic channels no later than six months before the end of the calendar year. In this case, the treaty is considered

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