Russia Terminates Its Tax Treaty With The Netherlands
New agreement may be negotiated but until it is all tax benefits cease from 1st January 2022
Russia officially informed the Netherlands that it will terminate the tax treaty between both countries (Treaty), after attempts to renegotiate the treaty between both countries have (so far) failed. Consequently, the Treaty will cease to have effect as from January 1, 2022. In a letter to the Dutch Parliament, the Dutch State Secretary of Finance expressed the desire to continue negotiating a new treaty with Russia before January 1, 2022. However, while both states can still reach an agreement on a new treaty, companies and individuals that rely on the Treaty should factor in the risk that no tax treaty protection will be available after January 1, 2022.
The termination of the Treaty can have significant consequences for companies that receive income from the other state. Companies and individuals whose tax structures rely on the Treaty should carefully review what impact this would have for them. A few common consequences of the Treaty termination include:
- Russian companies with subsidiaries in the Netherlands should consider that the Dutch dividend withholding tax exemption will in principle no longer apply, generally resulting in a 15% Dutch dividend withholding tax and, in some cases, a 25% corporate income tax (against which any applicable dividend withholding tax would be creditable). This could also be relevant where a Russian company holds a Dutch subsidiary via a holding company in another jurisdiction, based on the Dutch “look through” approach.
- Dutch companies receiving income from Russia should also consider higher Russian withholding taxes on dividends (up to 15%), interest and royalty payments (both up to 20%). In the absence of a tax treaty, such withholding taxes are not creditable in the Netherlands.
- Dutch special purpose vehicles in Eurobond and LPN issuances used by Russian groups to attract financing on the market may also lose the domestic exemption and face the 20% Russian withholding tax on interest.
- Dutch companies holding shares or participation interest in Russian entities, whose assets are more than 50% represented by the Russian real property may be subject to the 20% withholding tax in Russia as this exemption would also terminate with the Treaty.
- Even if Dutch companies receive income from Russian sources indirectly though companies in the EU or other jurisdictions retaining tax treaties with Russia, current exemptions and reduced withholding taxes may get affected as Russia may aggressively apply beneficial ownership rules to structures including non-treaty states.
Companies and individuals whose tax structures rely on the Treaty are advised to:
- Consider paying the maximum allowed / possible amount of dividend, interest or royalties from Russia or the Netherlands before the end of 2021.
- Look into the possibility of migrating or merging Dutch companies to other jurisdictions (considering Russian and European anti- avoidance rules and rules on the disclosure of information on cross-border transactions).
- Identify and review corporate and contractual structures that the Russian or foreign tax authorities may view as unacceptable tax planning schemes.
- Consider whether a “look-through” approach may be applied for payments from Russia to Dutch companies, including in cases where the beneficial owner of the income is a Russian tax resident.
- Assess the implications of the potential inclusion of the Netherlands on the Russian Finance Ministry’s “blacklist” after the termination of the Treaty.
If your company decides to change its business structure, review its contractual relationships, or make payments from Russia before the end of 2021, we recommend taking the necessary steps as quickly as possible. That said, we also underscore the importance of complying with Russian law when considering a restructuring, as the Russian tax authorities may regard such changes with increased scrutiny.
Russia has been playing hard ball with other countries over these agreements which they view have been misused to attract capital away from Russia as opposed to the legitimate business and trade assistance they were designed to be. However, Russia has managed to renegotiate terms with other states such as Cyprus and Malta and it is likely that an announcement concerning a new tax treaty will be announced prior to the beginning of next year.
Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at email@example.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.