Worldwide:
Russia Denounces Tax Agreement With Netherlands
30 July 2021
Gorodissky & Partners
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Federal Law 139-FZ came into force on 26 May 2021, thereby
denouncing the agreement between Russia and the Netherlands on
double taxation avoidance and tax evasion provisions relating to
income and property tax.
Russia’s Ministry of Finance made the denouncement after
many attempts to amend the agreement since initiating it with the
Netherlands at the end of 2019. During this period, Russia took the
same action in its negotiations with Malta, Cyprus and Luxembourg,
whose companies were traditionally used to structure ownership
schemes concerning Russian assets. Russia proposed to significantly
amend the terms of the double taxation avoidance agreements,
demanding that the taxation rate on passive income (such as
interest, dividends and royalties) for those countries’
residents rise to 15% from the existing very low or zero rate.
However, for Malta, Cyprus and Luxembourg, the notification of
denouncement after months of difficult negotiations led the three
countries to respond with a protocol to amend the tax agreements on
Russia’s terms. However, the Netherlands chose not to make
concessions for Russia’s main requirements, which concluded the
negotiations. The termination of the agreement is set for 1 January
2022. It is the first denouncement of a tax agreement in Russian
history.
The termination of the agreement with the Netherlands will have
a negative impact for a significant number of companies operating
in the Russian market, since many international holding companies
have used this jurisdiction to structure ownership of Russian
assets. However, the redomiciliation of foreign companies to
internal offshore zones in Russia’s Special Administrative
Regions (SARs) may be a solution (for further details please see
“Range of benefits for companies domiciled in SARs
significantly expanded”).
Despite the benefits that the SARs offer, foreign investors
working with Russia through Dutch companies will encounter
difficulties when looking to establish the old arrangement with
other jurisdictions, as the Ministry of Finance intends to make
similar revisions to tax agreements with jurisdictions such as Hong
Kong, Singapore and Switzerland in order to increase taxation of
passive income.
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