Bryan Cave Leighton Paisner (Russia) LLP, formerly Goltsblat BLP in Russia, advises that, on 19 May, the Council of the Federation of the Russian Federal Assembly approved a Law1 on Denunciation of the Double Tax Treaty between Russia and the Netherlands (“DTT”) and submitted it for signing by the Russian President.
Below is an overview of the most important, in our opinion, implications unless the countries reach an agreement and execute a new tax treaty before the end of 2021.
Loss of rights to benefits and exemptions under international treaties
The DTT provides a number of preferential tax rates and exemptions in certain cross-border payments. For example, loan interest paid by a Russian company to a Dutch company is usually exempt from withholding tax in Russia2. If the DTT terminates, the Russian withholding rate of 20%3 will apply without a chance to apply the DTT provisions, including those relating to a mutual agreement procedure4.
Individuals’ inability to declare dividends via a Dutch holding company
Currently, if a Russian company pays dividends indirectly through a Dutch company5, individuals may independently declare this income and deduct the Russian withholding tax6.
DTT denunciation will preclude the possibility of such reporting as it is conditional on an international tax treaty.
Taxation of profits of controlled foreign companies (CFCs)
CFC profit may be determined on the basis of their financial statements if one of the following two conditions is met: 1) an international tax treaty is concluded with the jurisdiction where this CFC is located, or 2) a favourable auditor’s report is obtained on the financial statements7. Since DTT denunciation will make the first condition unavailable, Russian tax payers will have to have their Dutch CFC audited.
Moreover, undistributed profit of the following Dutch CFCs will not be exempt from taxation in Russia8:
companies with an effective tax rate of at least 15%;
financial institutions (banks, insurance companies, issuers of traded bonds and companies holding assigned receivables attributed to traded bonds issued by another foreign company).
Changes in taxation of individuals’ income
Income of the Dutch tax residents will be subject to Russian taxes without application of the DTT benefits. Specifically, income consisting of dividends paid to Dutch resident will be taxed at 15% and a default tax rate of 30% will apply to all the rest of their income (unless, for instance, they are highly qualified specialists)9.
In addition, due to DTT denunciation Russian resident individuals will not be able to deduct actually paid (withheld) Dutch tax for the purposes of Russian PIT10.
Time of DTT termination
As per the DTT, if the denunciation notice is sent to the Government of the Netherlands before 30 June 2021, the DTT will cease to apply to tax periods starting from the next calendar year. In this case, the current tax treatment will be effective until the end of 2021 and the denunciation implications listed above will come into force on 1 January 2022.
We will keep an eye on how the situation is developing and update you on all significant changes.
3 Para. 4, Clause 1, Article 310 of the Russian Tax Code.
4 Article 142.7 of the Russian Tax Code
5 Clause 1.1, Article 208 of the Russian Tax Code.
6 Clause 11, Article 232 of the Russian Tax Code.
7 Clause 1.1, Article 309.1 of the Russian Tax Code.
8 Clause 7, Article 25.13-1 of the Russian Tax Code.
9 Clause 3, Article 224 of the Russian Tax Code.
10 Clause 1, Article 232 of the Russian Tax Code.
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