Double Tax Treaty Protocol for Russia and Luxembourg
On 6 November 2020 Russia and Luxembourg signed a new protocol amending the double tax treaty concluded between the two countries (Protocol), which has been in effect since 1 January 1998. On 30 December 2020, the Russian President signed Law No. 486-FZ to ratify the Protocol. In Luxembourg, the law approving the Protocol was adopted and the corresponding notification was sent to the Russian Ministry of Finance on 5 March 2021. Based on this, the provisions of the Protocol should be applicable for any taxable period beginning on or after 1 January 2022. The Protocol amends the list of exceptions for the application of a preferential withholding tax rate of 5% on dividend and interest income.
The domestic withholding tax rate on dividends in Russia is 15%, and the withholding tax rate on interest is 20%.
This is the third double tax treaty to be amended on the initiative of the Russian Federation this year. Similar protocols amending the double tax treaties with Cyprus and Malta were signed on 8 September 2020 and on 1 October 2020 respectively. On 30 December 2020, the protocols with these states passed the ratification procedure in Russia.
The Russian Ministry of Finance also sent a letter to the Dutch competent authority requesting the amendment of the existing double tax treaty. The Ministry of Finance also plans to start similar negotiations with Switzerland.
Major Changes
Dividend income
The Protocol provides for the increase of the treaty-based withholding tax rate applicable to dividends from 5% to 15%.
The reduced 5% rate may still apply if all the following requirements are met:
- the recipient of dividends is the beneficial owner of income (BOI); and
- shares of the dividend recipient are listed on a registered stock exchange and at least 15% of the stock granting voting rights are in free float; and
- the dividend recipient directly holds (for at least 365 days including the day of dividend payment) at least 15% of the capital in the company paying out the dividends.
In addition, the reduced withholding tax rate of 5% will apply to dividend payments to insurance institutions, pension funds, Central Banks and the government bodies of Russia and Luxembourg.
Interest income
The standard withholding tax rate for interest payments introduced by the Protocol is 15%.
The Protocol further stipulates that a reduced withholding tax rate of 5% will apply to interest paid to listed companies meeting the criteria for the application of the reduced dividend withholding tax rate (see above).
Under the terms of the Protocol, there will be no withholding tax if either of the following requirements is met:
- The recipient of the interest payment (i) is the BOI and (ii) belongs to one of the following categories: banks, insurance institutions, pension funds, Central Banks or government bodies of Russia or Luxembourg; or
- interest is paid on listed government bonds, corporate bonds or external bond loans (Eurobonds).
The existing treaty-based withholding tax exemption of royalty payments is not amended by the Protocol.
Potential impact on existing structures and restructuring options
If the benefit of the reduced 5% withholding tax rate or withholding tax exemption is considerably restricted by the amendment to the Protocol, from a Luxembourg tax perspective, arm’s length interest payments made by a Luxembourg company are, in principle, not subject to withholding tax on outbound payments and withholding tax on dividends can be reduced to zero under the local withholding tax exemption, provided that certain conditions are met. The impact of the Protocol on payments from Luxembourg tax resident companies to fully taxable companies resident in Russia may therefore be limited in practice.
The Protocol appears to be targeting Russian groups with Luxembourg holding or financing platforms for which it is unlikely that the conditions for the reduced withholding tax rate or withholding tax exemption will be met. An assessment of their current structure may be necessary in order to determine the potential adverse tax impact of the Protocol.
It should be noted that under the double tax treaty concluded between Luxembourg and Russia as amended by the Protocol, the payment of royalties paid by a Russian resident to a Luxembourg beneficial owner would still benefit from a withholding tax exemption in Russia.
Eurobond structures may also offer a tax efficient alternative (with a reduced withholding tax rate of 5% on interest payments under such bonds) for Russian groups having a Luxembourg financing platform or investors contemplating investing in Russia via Luxembourg.
