On 30 April 2020, the Russian Federation notified the Secretary-General of the OECD that it has completed its internal procedures for the entry into effect of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (Multilateral Instrument or MLI).
Please find below an update how and when the MLI will affect current Russian – Dutch investment structures and our recommendation in this respect.
Introduction of the Multilateral Instrument
The MLI is a legal mechanism to ensure that the anti-BEPS (i.e. Base Erosion and Profit Shifting) actions are deemed included in existing double tax treaties (DTT) without the actual amendment thereof.
If the MLI will be in force in the Netherlands and another Dutch tax treaty jurisdiction whereas both jurisdictions have assigned their tax treaty as ‘Covered Tax Agreement’ the existing DTT provisions will be amended.
The Netherlands and Russia have assigned the Russian-Dutch DTT as Covered Tax Agreement, as soon as the MLI will be in force in both jurisdictions, inter alia a new anti-abuse rule, the so-called Principle Purpose Test (PPT), will be (deemed) added to the existing provisions. The PPT is worded as follows:
”Notwithstanding any provisions of a CTA (i.e. Covered Tax Agreement), a benefit under the CTA shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the CTA.”
Furthermore, the tax residency of companies will be determined by way of a mutual agreement (MAP) procedure between the tax authorities of the Netherlands and Russia (instead of the current allocation method based on the place of effective management). In absence of any mutual agreement, a company will in principle not be entitled to any tax relief or exemption provided by the tax treaty.
For more information on how the MLI will change the Russian-Dutch DTT, reference is made to our earlier newsletter.
Entry into force
As per 1 January 2020, the MLI applies in the Netherlands. Although the MLI took effect in Russia on 1 October 2019, the application in Russia was subject a specific condition consisting of a notification of the completion of internal procedures with respect to a specific Covered Tax Agreement. Taking into account that this notification was made on 30 April 2020, the MLI will generally apply to the Netherlands – Russia tax treaty as per 1 January 2021.
Due to the introduction of the PPT and MAP clauses in the Russian-Dutch DTT, discussions may (inter alia) arise on entitlement to the benefits of the DTT and tax residency of Dutch and Russian companies.
We recommend assessing whether your investment structure meets the current and future requirements of the DTT and verify this (in any case) with a Russian tax counsel.
Obviously, we would be pleased to share our comments and answer your questions on the upcoming MLI application.
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