International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Luxembourg: Income tax treaty with Russia successfully renegotiated

Sponsored by

Sponsored_Firms_deloitte.png
Amendments will apply from January 1 2022

Nicolas Devergne and Adam Kundrat of Deloitte discuss the amendments made to the income tax treaty between Russia and Luxembourg.

After a few months of negotiations and ratification procedures, the new protocol amending the 1993 Convention between the Grand Duchy of Luxembourg and the Russian Federation regarding the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (treaty) entered into force on March 5 2021 and will apply as from January 1 2022. 

The main change consists of an increase in the withholding tax rates for dividends and interest as provided in Articles 10 and 11 of the treaty, respectively.

Following a shift in tax policy announced by Russian President Vladimir Putin, which aims to improve economic conditions adversely impacted by the COVID-19 pandemic and achieve a fairer taxation system, Russia has decided to renegotiate its tax treaties

To this end, Russia has asked various countries to agree to amend the terms of their treaty with Russia in accordance with this new policy. If renegotiations fail with a particular country, Russia will unilaterally terminate its treaty with that country. 

After Cyprus and Malta, Luxembourg agreed to amend its treaty with Russia by signing the protocol on November 6 2020. Russia announced that it may start negotiations shortly with Switzerland and Hong Kong.

Withholding tax

Under the prior version of the treaty, the interest could only be taxed in the recipient state and thus was exempt from withholding tax. The default rate on dividends was limited to 15% and a 5% rate applied in cases where the beneficial owner fulfilled certain criteria, such as a 10% shareholding threshold and a minimum investment of €80,000 (approximately $97,000).

The renegotiated treaty sets the withholding tax rates on interest and dividends at 15%, which is the general Russian domestic rate for dividends and certain interest. In addition, the conditions to qualify for a reduced 5% rate for both dividends and interest as well as a 0% rate for interest are more restrictive.

Interest payments may still be exempt from withholding tax if the recipient of the interest income is the beneficial owner of the interest and a tax resident of a contracting state and if the recipient is either:

  • An insurance undertaking or a pension fund;

  • The government, a political subdivision, or a local authority of the contracting state

  • The central bank of the contracting state; or

  • A bank, or if the interest is paid in respect of government bonds, corporate bonds, or eurobonds listed on a registered stock exchange.

The reduced 5% withholding tax rate on interest will apply when the recipient of the interest income is the beneficial owner of the interest, a tax resident of a contracting state, and a company whose shares are listed on a registered stock exchange, provided that no less than 15% of its voting shares are in free float and provided that it holds directly at least 15% of the capital of the company paying the interest throughout a period of 365 days that includes the date of payment.

Regarding dividends, the reduced withholding tax rate of 5% will apply under similar conditions, i.e. when the recipient of the dividend income is a tax resident of a contracting state, the beneficial owner of the dividend, and either: 

  • An insurance undertaking or a pension fund;

  • The government, a political subdivision, or a local authority of the contracting state;

  • The central bank of the contracting state; or

  • A company whose shares are listed on a registered stock exchange, provided that no less than 15% of its voting shares are in free float and provided that it holds directly at least 15% of the capital of the company paying the dividend throughout a period of 365 days that includes the date of payment.

Closing remarks

While the new protocol could impose a higher tax burden on some private investors, it keeps preferential rates on interests and dividends for institutional investors. 

Also, it is worth noting that Russia’s renegotiations of its treaties with several countries creates a level-set environment. In that regard, for instance, Russia has started the treaty termination process after its first round of talks with the Netherlands failed, although the latter has reiterated its intention to renegotiate its tax treaty with Russia. 

Luxembourg, on the other hand, might expect to be in a competitively more advantageous position (e.g. for Russian entities investing in Luxembourg or Luxembourg entities investing in Russia) compared to countries whose tax treaty with Russia has been or will be terminated.

 

Nicolas Devergne

Partner, Deloitte 

E: ndevergne@deloitte.lu

Adam Kundrat

Senior, Deloitte 

E: akundrat@deloitte.lu

 

more across site & bottom lb ros

More from across our site

Charlotte Sallabank and Christy Wilson of Katten UK look at the Premier League's use of 'dual representation' contracts for tax matters.
Shareholders are set to vote on whether the asset management firm will adopt public CbCR, amid claims of tax avoidance.
US lawmakers averted a default on debt by approving the Fiscal Responsibility Act, but this deal may consolidate the Biden tax reforms rather than undermine them.
In a letter to the Australian Senate, the firm has provided the names of all 67 staff who received confidential emails but has not released them publicly.
David Pickstone and Anastasia Nourescu of Stewarts review the facts and implications of Ørsted’s appeal at the Upper Tribunal.
The Internal Revenue Service will lose the funding as part of the US debt limit deal, while Amazon UK reaps the benefits of the 130% ‘super-deduction’.
The European Commission wanted to make an example of US companies like Apple, but its crusade against ‘sweetheart’ tax rulings may be derailed at the CJEU.
The OECD has announced that a TP training programme is about to conclude in West Africa, a region that has been plagued by mispricing activities for a number of years.
Richard Murphy and Andrew Baker make the case for tax transparency as a public good and how key principles should lead to a better tax system.
‘Go on leave, effective immediately’, PwC has told nine partners in the latest development in the firm’s ongoing tax scandal.