A Protocol to amend the income tax treaty between Luxembourg and Russia was signed on 6 November 2020.
The Protocol (once ratified and with its entry into force) will amend the withholding tax measures applicable for dividends and interest pursuant to the treaty Articles 11 and 12.
In April 2020, the Russian Ministry of Finance sent an official letter to the Luxembourg Ministry of Finance concerning amendments to treaty Article 10 "Dividends" and Article 11 "Interest" in an effort to introduce a 15% withholding tax rate. The parties held several rounds of negotiations and ultimately agreed on a list of exemptions for which a reduced withholding tax rate for dividends and interest would apply.
The Protocol will enter into force, once the ratification process is finalized, and will apply to the tax period beginning on or after 1 January of the calendar year after the year of the Protocol’s entry into force. Therefore, if the Protocol’s entry into force happens in 2020, the measures will apply from the 2021 tax year onward. If ratification is not completed until 2021, then the Protocol will apply from 2022 onward.
The withholding tax measures in the Protocol provide for:
The withholding tax exemption on royalty payments is not affected by the Protocol.
*A beneficial rate is available for publicly listed companies if at least 15% of company shares are in the “free float” on a registered stock exchange and if the company’s stake in a dividend payer is at least 15% and the period of ownership has been for at least one year.
These Protocol measures reflect an increase to the withholding tax rates for dividends and interest, and may result in an increased tax burden for Russian groups located in Luxembourg and for foreign investors that invest into Russia. To address this potential increased taxation, taxpayers may consider certain actions such as distributing dividends this year (in order to apply the reduced tax rates provided by the Luxembourg-Russia income tax treaty as currently in force) and determining the implications of the Protocol on the current investment structure and whether restructuring options would be appropriate.
Read a November 2020 report prepared by the KPMG member firm in Luxembourg
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