From Russia with love

5 november 2020
Rusland

Negotiations on double tax treaty between the Netherlands and Russia reach an impasse

The Russian newspaper Izvestiya recently reported that the negotiations between Russia and the Netherlands on amendments to the double tax treaty between the two countries have reached an impasse (Russian version and unofficial English translation). The newspaper reports that the Netherlands rejected the initial proposal made by the Russian Ministry of Finance. According to Izvestiya, Russia subsequently offered several additional conditions that would significantly improve the position of the Netherlands compared to the initial proposal.

Proposed amendments

The developments reported by Izvestiya follow on from the announcement by the Russian Ministry of Finance in August indicating that it wishes to amend some provisions of the double tax treaty. The proposed amendments include an increase in the maximum withholding tax rate on dividends and interest payments. Under the current treaty a reduced tax rate of 5% applies to certain qualifying dividend payments, and withholding tax cannot be levied on interest payments. In proposing the above amendment, Russia hopes to significantly limit the application of these benefits and increase the maximum withholding tax rate in these cases to 15%. The proposal does include several exceptions to the increased withholding tax rates, but these can only be applied in specific cases (e.g. for publicly listed companies and certain types of financing arrangements).

Impact for Dutch residents

These measures may have a considerable impact on Dutch residents investing in Russia, making investment more expensive for them. Although the Russian proposal includes an exception for publicly listed companies, it is important to recognize that a significant part of the Dutch investment in Russia stems from non-listed private sector businesses (e.g. family-owned businesses) or from the headquarters of foreign multinational companies with an economic presence in the Netherlands to which the exception would not apply.

Standstill

Izvestiya reports that after the immediate rejection of the proposal by the Dutch authorities, the Russian authorities offered to expand the exception to include private businesses, provided the ultimate beneficial owners of those businesses are also Dutch tax residents. Nevertheless, the negotiations have come to a standstill according to the newspaper. Although not confirmed by either of the authorities, Izvestiya claims that the reason is that the Netherlands wishes to maintain the current treaty provisions for real estate companies, whereas the Russian authorities would also like to make changes in this respect. The provisions in the current tax treaty prohibit Russia from taxing Dutch residents when selling legal entities with a significant share of real estate in their assets.

Renouncing the double tax treaty: an adverse impact?

Although the Russian authorities had indicated that they would renounce the treaty in full if their conditions were not met, they seem to recognize that the situation for the Netherlands is different than that for some of the other jurisdictions for which Russia has already successfully amended the treaty provisions (e.g. Cyprus). A major factor is that a full exemption from withholding tax provided under national law in the Netherlands would only apply if there is a tax treaty with Russia. Renouncing the treaty would thus lead to withholding tax of 15% on dividend payments made by Dutch taxpayers to Russian corporate investors. Russian companies investing in and/or through the Netherlands would thus also be faced with increased withholding taxes in the Netherlands if the treaty is renounced.

Renouncing the double tax treaty would thus have an adverse impact for mutual investments and business between both countries. In our view, the ultimate outcome of the negotiations should reflect the economic importance of the mutual investments made by private businesses in both countries. Furthermore, the legitimate economic business reasons underlying the investment structures of Russian and foreign multinationals with Dutch intermediate holding companies should be recognized during the process.

More information?

We will update you on further developments once they occur. For more information, or if you would like to discuss the potential implications that this might have for you or your business, please contact the members of Meijburg & Co’s Russia/CIS Desk: Jens Karreman, Kevin van Heesch or Nick van der Burgt or Alexander Tokarev of KPMG Russia.

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