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Tax perspectives for Russian companies in respect of the Russian-Netherlands double tax treaty denunciation

  • Russia
  • Netherlands


    What happened and when it will come into force

    Since early 2020 Russian Federation has been taking actions to increase tax rates under Since April 2020 Russian Federation has been taking actions to increase tax rates for several types of income under double taxation treaties (“DTTs”) with jurisdiction, that Russian Government recognizes as mainly used for holding activities.

    Netherlands were named among such jurisdictions and on August 2020 Russia has conditioned Netherland either to increase the withholding tax rates for dividend and interest income to 15% with minor exceptions or to denounce the agreement completely.

    After several months of discussions Russian Ministry of Finance reported that negotiations between the Netherland and Russian sides were unsuccessful and a couple of months later, on May 2021, Russia has signed a law denouncing the DTT with the Netherlands.

    Together with Russian Ministry of Foreign Affairs note sent to Netherland side in June 2021 these actions constitute the complete procedure for denunciation of the DTT under article 31.

    Thus, the tax agreement with Netherlands, one of the most popular jurisdictions among multinational groups to structure their business in Russia will terminate on January 01, 2022.

    What tax treatment for Russian companies without an agreement will be from 2022

    From the January 1, 2022, there will be a repeal of the exemptions and reduced rates under the DTT and the Russian tax code (the “RTC”) with respect to all types of payments:

    • dividends - first of all, the termination of the DTT will Other income, such as: income affect large holdings whose parent companies are located in the Netherlands, as dividend payments will now be taxed at the rate stipulated by the RTC (15%). New circumstances will significantly complicate reinvestment of funds and their redistribution within the group
    • interest - now if the Netherlands company has an actual right to income, then the money paid by Russian borrowers will be taxed at source at the rate of 20%
    • royalties - after the termination of the DTT, all payments classified as royalties will be taxed at the rate of 20% tax at source

    Other income, such as: income from the sale of shares in a company with more than 50% of its assets consisting of immovable property located in Russia, interest income on circulating bonds, separate exemptions for profit of CFCs will no longer apply.

    As for the look-through approach, companies paying income abroad will still be able to apply it. All holdings where the actual recipient of income is a foreign non-Dutch company are free to apply a reduced tax rate or exemption if the DTT with the state of its incorporation allows that.

    As for the groups whose parent company is located in Russia or who have recognized themselves as a Russian tax resident there is a transition period from January 1, 2021 to December 31, 2023, when to apply a 0% tax rate on indirect participation through foreign companies, the following conditions must be met:

    • indirect participation in the paying company is not less than 50%
    • the amount of dividends is not less than 50% of the total amount of distributed dividends
    • the sum of money equal to the amount of dividends paid should be credited to the account of the actual recipient of the dividends within 180 days from the date of payment of the dividends
    • after the end of the transitional period, a 13% rate will apply to the payments described above

    Potential risks for Russian companies for payments in the remaining period of 2021

    Due to the denunciation of the DTT with the Netherlands, we do not exclude the closest attention of the Russian tax authorities to payments made in 2021.

    • We do not recommend making any distributions if they are significantly in excess of your standard business practice and there is no sufficient business ground for that or making distributions for the first time when there is a historical basis for making such distributions
    • We recommend performing a detailed analysis of the BO status of income recipient when making any profit distributions or other types of payments
    • We recommend analyzing the possibility to apply look-through approach in the Netherland recipient is unsure on the BO status of the received income
    • We recommend preparing a full documental package on reduced tax rate or tax exemption application for the payment made
    • We see a high risk of denial of DTT benefits if you decide to pay in 2021 and make a payment in 2022

    What further avenues are there since 2022?

    1. Pending amendments to national legislation and impact assessment

    First of all, it should be noted that due to negotiation process with the Netherlands, Russian officials stated that the preferential taxation provided for by the DTT can be provided by RTC.

    We assume that at the level of the Russian tax law it is possible to fix reduced rates for those companies that at the moment of denunciation were registered in the Netherlands and were actual recipients of income from Russia.

    It is also possible that at the level of the RTC the possibility of tax credit will be provided.

    However, at the time of writing this Alert, such initiatives have not been formalized as bills or in any other way – it might happen in autumn 2021.

    2. Look-through approach

    Application of the look-through approach is good tax decision for a multinational group who does not want to make any restructuring and at the same time used Netherland jurisdiction solely or merely for holding activity.

    They key condition for dividend income is that DTT with the actual recipient of such income should allow indirect participation to Russian companies (like Russian-US DTT or Russian-UK DTT).

    However, we remind you that applying the look-through approach should be grounded from the business perspective and is easy to implement if it is your normal tax practice in Russia already.

    3. Contractual restructuring

    Contractual restructuring could be used as an efficient tool for group of companies that actively conclude different intra-group contracts for loans and royalties.

    However, we recommend substantiating the business purpose of such a restructuring and remember that the new entity concluding a contract should have all necessary assets (funds, trademarks, brands, etc.).

    4. Corporate restructuring

    One of the most monumental but time-consuming ways is a corporate restructuring.

    Usually restructuring can take place in the following forms:

    • liquidation of a Netherlands company with distribution of Russian subsidiary shares to the mother company
    • merger of a Netherlands company with another group company in the EU
    • establishment of another parent company in the EU and sale of Russian subsidiary shares to this company

    In general, the time, cost and opportunity for corporate restructuring depends directly from your structure. Before making such a decision, we recommend a detailed analysis of your corporate structure and potential ways to change it with a clear business benefit for your activity.

    However, we remind you that if the company decides to change its residence in the Netherlands, then it will have to pay the so-called “exit tax”, which will have to pay tax on all “realized” assets.

    5. Redomiciliation in the Russian SAR

    For the group of companies who associate themselves mostly with Russian business application of special tax regimes in Russia might be the best option.

    SAR is a territory in the RF with a flexible regime of tax and currency regulation for those companies that decide to relocate their structure to Russia.

    The basic conditions for such redomiciliation are:

    • a legal entity is a commercial organization
    • registered in a jurisdiction that allows it (as far as we know, the Netherlands only allows redomiciliation within the EU, thus an “intermediate” jurisdiction may be necessary)
    • registration in a FATF or MONEYVAL country
    • commitment to make an investment of RUB 50 m
    • and others
    6. Redomiciliation to another EU jurisdiction

    Redomiciliation to another EU member state is similar to corporate restructuring.

    The key issue here is assessing time and financial costs of the redomiciliation, tax regime in the new jurisdiction, impact of such option on the business of the whole group and potential business benefits for redomiciliation in a new EU country.

    However, we remind you that if a company decides to change its residence in the Netherlands, then it will have to pay the so-called “exit tax”, which will need to pay tax on all “realized” assets.

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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