On 5 March 2021, the Protocol to the Double Tax Treaty between Luxembourg and Russia (Treaty) entered into force and is effective for tax years beginning on or after 1 January 2022.
Following a change in Russia’s tax treaty policy regarding withholding taxes on dividends and interest, the Protocol was negotiated upon request by Russia, which initiated similar amendments to double tax treaties with Cyprus, Malta and the Netherlands, with the aim to generally increase withholding tax rates on dividends and interest to 15%.
In its former version, the Treaty provided for a reduced withholding tax on dividends of 5% of the gross amount of the dividend if the beneficial owner was a company other than a partnership holding directly at least 10% of the capital of the distributing company and had invested at least €80,000 or its equivalent in Russian ruble.
The Protocol to the Treaty replaces the aforementioned rate by a 15% withholding tax rate applicable to dividends paid by a company which is a resident of a Contracting State to a beneficial owner resident of the other Contracting State. A reduced 5% withholding tax rate may still be available in a few limited situations, namely:
- If the beneficial owner is an insurance undertaking or a pension fund.
- If the beneficial owner is a company whose shares are listed on a registered stock exchange provided that no less than 15% of the voting shares of that company are in free float and which holds directly at least 15% of the capital of the company paying the dividends throughout a 365-day period that includes the day of the payment of the dividend.
- If the beneficial owner is the Government or a political subdivision or a local authority thereof.
- If the beneficial owner is the Central Bank.
Dividend distributions by Luxembourg companies to Russian capital companies may benefit from a withholding tax exemption under Luxembourg domestic law which is not affected by the change to the Treaty.
The Protocol to the Treaty also replaces Article 11 on interest with a new wording aligned to that of the 2017 Model Tax Convention on Income and on Capital of the Organisation for Economic Co-operation and Development (OECD Model Convention). While under the former version of the Treaty, payments of interest to a resident of the other Contracting State were only taxable in the residence State, the Protocol introduces a limited taxation right for the source State. However, for payments to a beneficial owner who is resident of the other Contracting State, the rate is capped at 15% on the gross amount of interest paid. No withholding tax applies if: (i) the beneficial owner is an insurance undertaking or a pension fund, the Government or a political subdivision or a local authority thereof, the Central bank or a bank; or (ii) the interest is paid on government bonds, corporate bonds or Eurobonds that are listed on a registered stock exchange.
Furthermore, a reduced withholding tax rate of 5% applies if the beneficial owner of the interest is a company whose shares are listed on a registered stock exchange provided that no less than 15% of the voting shares of that company are in free float and which holds directly at least 15% of the capital of the company paying the interest throughout a 365-day period that includes the day of the payment of the interest.
Finally, in line with the OECD Model Convention, the Protocol introduces a source rule according to which interest is considered as originating in the State of residence of the debtor of the interest. An exception to this principle is made for interest-bearing claims which are linked to a permanent establishment or a fixed base in a Contracting State.
Under Luxembourg domestic law most types of interest are not subject to withholding tax. This remains unaffected by the changes to the Treaty.