On 19 May 2021 the upper chamber of the Russian Parliament (the Federation Council) voted for the bill to terminate the Russia - Netherlands tax treaty. Parliament’s vote brings the termination of the Russia-Netherlands tax treaty one step closer and at this point, it seems inevitable. The next phase is that the President of the Russian Federation signs the bill for it to become law.
Last year, Russia took the initiative to renegotiate its tax treaty with the Netherlands. These discussions started after the President of the Russian Federation announced the introduction of minimum withholding tax rates on dividends and interest payments to so-called conduit jurisdictions in March 2020. From the Russian perspective the Netherlands, alongside with Cyprus, Luxembourg, Malta, Switzerland, Hong Kong and Singapore qualify as conduit jurisdictions that are used to shift capital from Russia.
Denunciation of Russia – Netherlands tax treaty
On 9 April 2021, the Russian Government has announced to denunciate the Russia – Netherlands tax treaty as the Netherlands have not accepted the proposed amendments to the treaty. Following up on the announcement, the Russian Government officially approved the denunciation of the Russia – Netherlands tax treaty and submitted a draft bill to Parliament on 12 April 2021. The draft bill was discussed and voted for by the lower chamber (the State Duma) and the upper chamber of the Russian Parliament (the Federation Council). At this stage the President needs to sign the bill for it to become law.
According to Article 31 of the Russia – Netherlands tax treaty, if the bill is ratified and the Dutch side is notified on the denunciation before 1 July 2021, the tax treaty will cease to be effective from 1 January 2022.
Although the tax treaty renegotiations with the Netherlands are officially still ongoing, it is unlikely that the Russian and Netherlands delegations will come to an agreement shortly and thereby forfeiting the last step of the denunciation procedure. On earlier occasions, the Russian Ministry of Finance had already begun developing draft laws on denunciation the tax treaties in place with Malta and Cyprus. However, as both countries agreed to the treaty amendment proposed by Russia the denunciation procedure was forfeited and no draft bill was submitted to parliament.
Impact termination Russia – Netherlands tax treaty
The denunciation of the Russia – Netherlands tax treaty will result in the following changes.
Withholding tax rates
Dividend payments made by Russian companies to Dutch shareholders are subject to a withholding tax of 15%. Likewise, interest and royalties payments from Russia to the Netherlands will become subject to a withholding tax at a rate of 20%.
Note that withheld Russian withholding tax on dividends, interest and royalties may not be eligible for a tax credit against any Dutch corporate income tax due on such income.
Capital gains on shares in real estate companies
Capital gain from the sale of shares in so-called qualifying real estate companies (i.e. companies whose assets consists of more than 50% of real estate property located in Russia) may become subject to Russian taxation. This is not a particularly significant change as this tax treatment was established by the MLI as of 1 January 2021.
Dual resident entities
The termination of the Russia – Netherlands tax treaty may also impact so-called “dual resident” entities which are tax residents in both jurisdictions. In the absence of the tax treaty dual resident companies can no longer rely on the tax residency rules and could be faced with double taxation.
Russian domestic issues
Companies should also review the potential implications as a result of the possible inclusion of the Netherlands by the Russian Ministry of Finance on the black list of jurisdictions (Order of the Russian Ministry of Finance of 13 November 2007 No.108n). Inclusion of the Netherlands on this list may lead to a denial of various Russian tax benefits for Russian taxpayers, such as (i) participation exemption for dividends received from abroad, (ii) exemption with respect to the property received free-of-charge; and (iii) exemption with respect to the sale of shares in Russian entities.
Companies need to prepare
Given it is expected that the Russia – Netherlands tax treaty will be denunciated shortly, we recommend that companies act swiftly and start assessing what the tax impact is of a treatyless situation as of 1 January 2022. The denunciation of the Russia – Netherlands tax treaty would force Dutch and Russian companies that have entities in place in the other jurisdiction to change their corporate and contractual structures to avoid potential tax leakages. We recommend that companies get ahead and use the remaining timeframe of six months to have contingency plans in place for needed business restructuring.
We will keep you updated on future developments.
In case of queries, please contact your regular contact within DLA Piper.