Russia and Luxembourg sign a Double Tax Treaty Protocol.
Legal Update No. 295
Goltsblat BLP advises of the signing, on 21 November 2011, of a Protocol on Amendments to the Treaty between the Russian Federation and the Grand Duchy of Luxembourg on Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital of 28 June 1993. The provisions of the Protocol duplicate those of protocols recently signed to international tax treaties of the Russian Federation, including with Cyprus and Switzerland. The Protocol constitutes an integral part of the Treaty, comes into effect after performance by the parties of the relevant domestic procedures and will apply from the beginning of the calendar year following that during which it comes into effect.
The main changes introduced by the Protocol (according to the draft proposed to the Government of the Russian Federation of 11 August 2011 No. 1410-r) may be summed up as follows:
1. The minimum tax withheld at source on dividends is cut to 5%
The Protocol establishes a reduced 5% rate for tax withheld at source on dividends, rather than the 10% in the current version of the Treaty. Also changed are the conditions for emergence of the right to use the given reduced rate, specifically: a 10% interest in capital and investment of at least 80 thousand Euros (compared to a 30% interest and a capital investment of 75 thousand Ecu (their equivalent) in the current version). In consideration of the limited number of tax treaties signed by the Russian Federation that envisage a reduced dividend tax of 5%, the given amendment will greatly increase Luxembourg’s appeal as a platform for investing in Russia.
2. Taxation at source of other incomes is permitted
The Protocol introduces amendments allowing taxation at source of incomes not specified in the Treaty, whereas such incomes are not subject to tax under the majority of other tax treaties. According to the Russian legislation, there is quite an extensive list of such incomes, including some types of income not covered by the Treaty (such as distribution of property among the participants in a company on its liquidation, fines and penalties for violating contractual obligations), and it is also permitted to charge tax at source on “other analogous incomes”. Accordingly, the given amendment requires additional analysis and more careful planning of operations involving payments from Russia in favour of Luxembourg companies.
3. The taxation regime for unit funds is specified
Similarly to the protocol to the Treaty with Cyprus, the Protocol extends the provisions of the article on incomes from real estate allowing them to be taxed at source in the country where the given real estate is located to incomes from unit funds set up primarily for investment in real estate. Payments on units of other unit investment funds or analogous forms of mutual investment will be considered, for the purposes of the Treaty, as dividends.
4. Sale of shares in companies with over 50% of their assets in real estate is taxable
The right is introduced to withhold tax at source from sales revenues relating to shares in companies with over 50% of their assets either directly or indirectly in real estate located in a party to the Treaty. An exception is established to this rule in relation to sale of shares during a reorganisation or quoted on a registered stock exchange or if the revenue recipient is a pension fund, similar institution or the government.
5. Steps for applying thin capitalisation rules
The definition of dividends will include incomes subject to the same taxation as incomes from shares in accordance with the tax legislation, even if paid out in the form of interest, the purpose of this possibly being to provide an opportunity to withhold tax at source in the event of reclassification of the type of income, including when the thin capitalisation rules are applied.
6. The provisions on exchange of information between competent authorities are extended
The provisions of article 26 of the Treaty relating to exchange of information are supplemented by more detailed provisions on the procedure and conditions for such exchange. A similar wording is used to that of the other protocols recently signed to tax treaties and complies, in general, with the text of the Model Convention of the Organisation for Economic Co-operation and Development (OECD) in relation to taxes on income and capital. As in the situation with the other states, the procedure, exchange and composition of the information provided largely depend on domestic administrative procedures adopted by Russia and Luxembourg in this respect.
The Protocol also introduces certain other specifying provisions that are generally analogous to those of the protocol to the treaty with Cyprus and include questions of the emergence of a permanent establishment in the event of provision of cervices in the other signatory state through individuals, restriction of benefits in the event of abuse of the provisions of the Treaty and specification of the criteria for determining residence of companies at the location of their actual (effective) management.
to Evgeny Timofeev,
Partner, Head of Tax Practice for Russia/CIS,
T: +7 (495) 287 44 44,
to Andrey Shpak,
T.: +7 (495) 287 44 44,
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