Russia terminates tax settlement with the Netherlands – Tax


Russia terminates tax agreement with the Netherlands

July 30, 2021

Gorodissky & Partners

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Federal Law 139-FZ came into force on May 26, 2021, thereby terminating the agreement between Russia and the Netherlands on double taxation and tax evasion rules for income and wealth tax.

The Russian Ministry of Finance announced after many attempts to amend the agreement since it was initiated with the Netherlands in late 2019, to structure ownership of Russian assets. Russia proposed significantly changing the terms of the double tax avoidance treaties by requiring that the tax rate on passive income (such as interest, dividends and royalties) for residents of these countries be raised from the current very low or zero rate to 15% .

For Malta, Cyprus and Luxembourg, however, the notice of termination after months of difficult negotiations led the three countries to respond with a protocol amending tax treaties on Russia’s terms. However, the Netherlands chose not to make concessions on Russia’s key requirements, thereby closing the negotiations. The termination of the agreement is scheduled for January 1, 2022. It is the first termination of a tax treaty in Russian history.

The termination of the agreement with the Netherlands will have a negative impact on a significant number of companies operating in the Russian market, as many international holding companies have used this legal system to structure ownership of Russian assets. The relocation of foreign companies to internal offshore zones in Russia’s Special Administrative Regions (SAR) can, however, be a solution (for more details see “Scope of services for companies based in SAR significantly expanded”).

Despite the benefits offered by the SARs, foreign investors working with Russia through Dutch companies will struggle to negotiate the old arrangement with other jurisdictions as the Treasury Department plans to negotiate tax treaties with jurisdictions such as Hong Kong, Singapore and Switzerland to increase the taxation of passive income.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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