On 12 April 2021, the Russian Government approved a legislative initiative to denounce the Russia – Netherlands tax treaty and submitted a bill to this effect to the State Duma, the lower chamber of the Russian Parliament. The consideration of the bill by the State Duma is scheduled for 12 May 2021.
The termination of the double tax treaty between Russia and the Netherlands will cause Russian withholding tax rates to increase to 15% for dividends and 20% for interest and royalties. Gains from the sale of shares in property-owning private Russian companies will become taxable in Russia. Dividends paid from the Netherlands to Russia will likewise be subject to Dutch withholding tax (the current rate is 15%).
When the tax treaty is terminated, the increased Russian withholding tax on interest and royalties will likely not be creditable against any Dutch corporate income tax due on such income. This could result in double taxation.
Moreover, the termination of the tax treaty may also impact “dual resident” entities which are tax resident in both Russia and the Netherlands, and which currently rely on the tax residency tie breaker of the treaty to avoid double taxation. In the absence of a tax treaty, such dual resident entities could be faced with double taxation.
In early December 2020, Russia’s Finance Ministry announced that it was preparing a bill for the termination of the country’s tax treaty with the Netherlands. The next legislative steps are approvals by both the State Duma and the Federation Council and the signing of the bill by the President.
In the autumn of last year, Russia and the Netherlands held talks initiated by the Russian Government on revising the provisions of the tax treaty between the countries. However, those negotiations ended with the two sides unable to reach agreement. We understand that the proposed protocol was similar in content to the protocols signed by Russia with Cyprus, Luxembourg and Malta and involved increasing the withholding tax rates for dividends and interest to 15% with substantial limits placed on access to the reduced withholding tax rates.
Under the termination rules set forth in Article 31 of the tax treaty, a party must notify its treaty partner of the termination of the treaty at least six months before the end of any calendar year in order for the treaty to cease to have effect beginning from the following tax period. This means that, if the bill is passed and the Russian party notifies the Netherlands of the termination of the treaty no later than June 2021, the treaty will cease to have effect beginning from 1 January 2022. If the notification is given later, the treaty will be denounced no earlier than 1 January 2023.
Taxpayers that currently rely on the double tax treaty between Russia and the Netherlands for reduced withholding tax rates and avoidance of double taxation should consider the potential implications of the termination and consider taking timely remedial actions.
For additional information with respect to this Alert, please contact the following:
Ernst & Young, Moscow
- Vladimir V Zheltonogov
- Oleg L Lvov
Ernst & Young Belastingadviseurs LLP, Rotterdam
- Cyrille Prevaes
- Janco van Dam
- Liza Oleynikova