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10-11-2020

New Protocol amending the Russia-Luxembourg Double Tax Treaty

On November 6, 2020 Luxembourg and Russia signed a protocol amending the existing double tax treaty, which increases the maximum withholding tax rates (i) in relation to dividends from 5% to 15% and (ii) in relation to interests from 0% to 15%. 

This is the third double tax treaty being revised at the request of the Russian Federation this year. A similar protocol to the tax treaty between Russia and Cyprus was signed on September 8 and to the tax treaty between Malta and Russia on October 1. The Russian Ministry of Finance also sent a letter to the Dutch Ministry of Finance requesting the amendment of the existing double tax treaty; negotiations between these two countries are still ongoing.

Amendments to double tax treaties concluded by the Russian Federation are part of the overall tax reform carried out in the Russian Federation focusing on discouraging income cashflows out of Russia and the overall use of foreign structures by Russian business. 

As stated by the Russian Deputy Finance Minister Alexei Sazanov: “It is important for us to concentrate financial resources in the country to implement measures to support the population and the economy in the current situation. In addition to revising tax agreements this year, we are preparing a number of innovations aimed at de-offshorization of the Russian economy”. 

Major changes
The signed version of the protocol to the Luxembourg-Russian double tax treaty has not been published yet; however, based on the draft attached to the Russian government resolution #2570-R dated October 6, 2020 approving the signing of the protocol the following changes are anticipated. 

Dividends
The protocol provides for the increase of the withholding tax rate applicable to dividends from 5% to 15%; the reduced 5% rate may nevertheless apply if the recipient of the dividend:

  1. is the beneficial owner; and
  2. its shares are listed on a registered stock exchange and at least 15% of the shares granting voting rights are in free float; and
  3. directly holds (during at least 365 days including the day of dividend payment) at least 15% of the capital in the company paying dividends.

In addition, the reduced withholding tax rate of 5% will apply on dividend payments to insurance institutions, pension funds, Central banks and the government bodies of Russia and Luxembourg.

Interest
The standard withholding tax rate for interest payments introduced by the protocol is 15%. The protocol further stipulates that a reduced withholding tax rate of 5% will apply to interest paid to listed companies meeting the criteria for the application of the reduced dividend withholding tax rate (see above).

There will be no withholding tax on interest due:

  1. if the recipient of the interest payment is the beneficial owner of the payment and belongs to one of the following categories: banks, insurance institutions, pension funds, Central banks and the government bodies of Russia and Luxembourg;
  2. on interest paid on the following types of securities listed on a registered stock exchange: government bonds, corporate bonds and external bond loans (Eurobonds).

From a Luxembourg tax perspective, in general, at arm’s length interest payments made by a Luxembourg company are not subject to withholding tax; therefore, this amendment would have limited impact on payments made from Luxembourg tax resident companies.

The provisions of the new protocol to the Russia-Luxembourg double tax treaty would apply as from 2021, provided the protocol is ratified by both Luxembourg and the Russian Federation before the end of 2020. We will keep you updated on further developments. In the meantime, feel free to reach out to us should you have any questions or would like to exchange your thoughts.

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