Luxembourg Tax Alert 2020-19
Luxembourg Tax Alert 2020-19
Protocol to Luxembourg - Russia tax treaty has been signed
On 6 November 2020, a new Protocol for the Double Taxation Treaty (“DTT”) between Luxembourg and Russia has been signed by both parties (the “Protocol”).
In April 2020, the Russian Ministry of Finance sent an official letter to the Luxembourg Ministry of Finance to amend Article 10 "Dividends" and Article 11 "Interest" of Luxembourg-Russia DTT to introduce a 15% withholding tax (“WHT”) rate. For more information, please see our tax alert.
The parties held several rounds of negotiations to agree on a list of exemptions for which a reduced WHT rate for dividends and interest would apply and a compromise was achieved. The Protocol will enter into force, once the ratification process will be finalized and shall apply to the fiscal period beginning on or after the 1st January of the calendar year following the year in which this Protocol enters into force. Meaning if the protocol will enter into force in 2020, it shall apply from the 2021 fiscal year onward. However, in the event that the ratification is not completed until next year (i.e. in 2021), the Protocol shall apply from 2022 onward.
— 5% dividend WHT
Pursuant to the draft version of the Protocol, a 5% WHT rate for dividends will be preserved for certain categories of income recipients. This rate will therefore apply to beneficial owners of income if they are one of the entities listed below:
- an insurance institution or a pension fund; or
- a publicly listed company ; or
- a government, its political subdivision or local authorities; or
- the Central Bank.
— WHT exemption on interest
The exemption for the taxation of interest income will be preserved for banks and the entities listed above, except publicly listed companies (see below, the latest could benefit from 5% WHT). The exemption also applies to income paid on certain classes of securities traded on a registered stock exchange:
- government bonds;
- corporate bonds; and
- external loan bonds (Eurobonds).
— 5% interest WHT
In respect of paying interest on loans provided by a publicly listed company1, the WHT rate may be reduced to 5% on the condition that the recipient company is the beneficial owner of the interest.
The WHT rates introduced by the Protocol (i.e. an increase of dividends and interest WHT rates) would lead to a significant raise of the tax burden for Russian groups located in Luxembourg and foreign investors that invest to Russia.
Hence, steps that should be taken now are summarized as follows:
- Distribute dividends this year applying the reduced tax rates provided by the Luxembourg-Russia DTT currently in force;
- Assess the current structure to determine the impact of the Protocol and analyze the possible restructuring options.
Given that Eurobond connected loans as well as publicly traded companies should benefit from the reduced WHT rates, the Eurobond structures/IPO could be considered by the Russian groups/foreign investors that invest in Russia. Furthermore, the existing WHT exemption on royalty payments is not affected by the Protocol.
 A beneficial rate will apply to publicly listed companies if at least 15% of company shares are in the free float on registered stock exchange and if the company’s stake in a dividend payer is at least 15% and the period of ownership has been at least one year.
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