Denunciation of the Double Tax Treaty between the Russian Federation and the Netherlands – the end of era or still good perspectives?
On 11th May the lower chamber of the Russian Parliament voted to denounce the Double Tax Treaty between Russian Federation and the Netherlands, existing since 1996.
The Russian government proposed to notify the Dutch side of the denunciation of the agreement by June 30, 2021 and to denounce it effectively on January 1, 2022.
The Parties to the tax treaty could not reach an agreement on amendment of the terms and conditions of the agreement similar to those reached after some negotiations with Cyprus, Malta and Luxembourg.
In particular, the Russian side insisted on increasing the tax rate on the withdrawal of capital in one form or another from 5% to 15%.
While there are still discussions on what the final outcome might be, let us briefly look at this issue from a practical point of view to understand if there are grounds for serious concerns and whether Netherlands may still be considered as an advantageous jurisdiction for doing business with Russian elements in the structure.
It goes without saying, that each structure should be scrutinized on an individual basis, but generally speaking, the main disadvantage shall apply by distributing dividends from a Dutch subsidiary company to a holding company in Russia.
In the meantime, advantages arising from the domestic legislation (like participation exemption) shall continue to apply.
Depending on the relevant factual circumstances of each structure, capital gains derived by Russian holding companies from Dutch subsidiaries, as well as repayments of share capital and share premiums, should still be released from taxation in the Netherlands.
It is important to mention that the Netherlands and Russia also have a bilateral investment treaty in place.
If relocation is considered to competitive jurisdictions, it is important to take the following into account:
- From DAC6 perspective immediate relocation (in course of the next 2 years) may be considered as tax aggressive behavior, so one should act with precautions;
- Dutch tax authorities take the position that once an entity is incorporated in the Netherlands it shall remain a local tax resident even if place of effective management is changed/legal conversion is made;
- Exit tax and high costs of relocation should be borne in mind;
- Adverse tax consequences of the relocation/conversion itself should be minded;
- For some jurisdictions (Luxembourg) minimum substance requirements apply for holding companies (real office space and annual wage costs of not lower than EUR 100 000) in order to enjoy the benefits of the local double tax treaties.
Please contact our managers for further advice in case of interest.