New Protocol to Luxembourg-Russian Double Tax Treaty Set to Take Effect

Background

On 6 November 2020, Luxembourg and Russia signed a Protocol amending the Luxembourg-Russian Double Tax Treaty.

This new Protocol provides new withholding tax rates and rules for the taxation of dividends and interest payments. The legislation will take effect beginning 1 January 2022.

New Withholding Tax Rates

Dividend Withholding Tax

This new Protocol replaces the original 5% withholding tax rate by a 15% withholding tax rate applicable to dividends paid by a company, which is a resident of a contracting state, to a beneficial owner-resident of the other contracting state.

However, a 5% withholding tax rate could still apply if the beneficial owner of the dividends is:

• An insurance undertaking or a pension fund;
  
  
• A company whose shares are listed on a registered stock exchange provided that not less than 15% of the voting shares of that company are in free circulation and which holds directly at least 15% of the capital of the company paying the dividends throughout a period of 365 days including the day the dividends are paid;
  
  
• The Government of the other contracting state or a political subdivision or a local authority; or
  
  
• If the beneficial owner of the dividends is the Central Bank of the other contracting state.

Interest Payments Withholding Tax

The Protocol introduces a withholding tax of 15% on the gross amount of interest paid.

It also provides a reduced withholding tax rate of 5% applicable if the beneficial owner of the interest is a company whose shares are listed on a registered stock exchange provided that no less than 15% of the voting shares of that company are in free circulation and which holds directly at least 15% of the capital of the company paying the interest throughout a 365-day period including the day of the payment of interest.

Finally, the Protocol mentions that no withholding tax applies if:

• The beneficial owner is an insurance undertaking or a pension fund, the Government or a political subdivision or a local authority thereof, the Central bank or a bank of the other contracting state; or
  
  
• The interest is paid on government bonds, corporate bonds or Eurobonds listed on a registered stock exchange.

For Luxembourg outbound dividends and interest, this Protocol should have no significant effect since an exemption from dividend withholding tax is available to qualifying shareholders under the participation exemption and no withholding tax is generally levied in Luxembourg on arm’s length interest.

Conclusion

The Protocol is leading to an increase of withholding taxes in Russia, restricting the application of the reduced 5% withholding tax rate on dividends and introducing a withholding tax on interest. Those changes are part of a broader tax policy initiated by Russia to renegotiate its Double Tax Treaties, as it is also the case with Cyprus, Malta, and the Netherlands. Additionally, Luxembourg and Russia joined MLI meaning that some attention should be given to the principle purpose test for future transactions.

Yann Ricard was a contributing author to this insight.