On December 04, 2020, the Ministry of Finance of Russia declared that several rounds of negotiations with their counterparts from the Ministry of Finance of the Kingdom of the Netherlands held with a view to amend the Double Tax Treaty (DTT) and increase withholding tax to 15% on dividends and interest, did not reach a positive result.
The conditions offered by the Russian side were similar to those that have already been approved with Cyprus, Malta, and Luxembourg.
As of today, the procedure for termination of the DTT with the Netherlands has been launched. However, it will last at least 2 months and the Ministry of Finance of Russia seems to be ready to pursue the negotiations on the said subject-matter in order to reach an acceptable solution during this period.
In case of positive outcome, withholding tax would increase from 5% to 15% on dividends and from 0% to 15% on interest. Preferential rate of 5% might be offered to dividends and interest paid to institutional investors and public companies under certain conditions.
Should the DTT be terminated, Russia-sourced income distributed to the Dutch companies would be assessed to withholding tax at the rate of 15% on dividends and 20% on interest and royalty.
This would have a serious impact not only on certain major Russian companies (including state-owned ones) but also foreign investors having structured their holding in the Russian operating entities via the Netherlands.
In any case, at this stage, the approach to any restructuring should be careful.
Whatever the end of the negotiations, the DTT will remain in effect in 2021, which leaves some time for assessing the situation and planning the most appropriate maneuver. Furthermore, we do not exactly know what other DTTs might be revised in the near future. Switzerland and Hong-Kong have already been mentioned in this context even though no official notices were sent to these jurisdictions.
Starting from 2021 the Multilateral Instrument and the principal purpose test will become applicable to the DTT between Russia and the Netherlands, which might question the eligibility of numerous entities to the benefits offered by the treaty. Indeed, according to the principal purpose test, the benefits arising out of a DTT shall not be granted if the application of such benefits was one of the main objectives of any structure or transaction.
In this context, we would advise to closely follow the negotiation status. Depending on its outcome and a number of other criteria and constraints to be considered in each particular case, it might be justified to preserve the existing structure, to eradicate the Dutch holding company or to relocate it to another favorable jurisdiction or even to opt for a “look-through” approach.
What the outcome might be, we recommend to outline the Dutch and Russian tax implications.
We would be pleased to offer you a professional advice tailored to the needs of your company based on our impressive cross-border experience.
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NAZALI TAX & LEGAL |