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Luxembourg: Protocol amending income tax treaty with Russia is signed

Luxembourg: Protocol amending income tax treaty

A Protocol to amend the income tax treaty between Luxembourg and Russia was signed on 6 November 2020.

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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.

Background

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.

Protocol

The withholding tax measures in the Protocol provide for:

  • A 5% dividend withholding tax for certain categories of income recipients—that is, beneficial owners of income if they are one of the following entities: (1) an insurance institution or a pension fund; (2) certain publicly listed companies;* (3) a government, its political subdivision or local authorities; or (4) the central bank.
  • An exemption from withholding tax on interest—the exemption is preserved for banks and entities listed above (except for publicly listed companies). The withholding tax  exemption also applies to income paid on certain classes of securities traded on a registered stock exchange (such as government bonds, corporate bonds, and external loan bonds (Eurobonds)).
  • A 5% withholding tax on interest—regarding interest on loans provided by certain publicly listed companies, the withholding tax rate can be reduced to 5% on the condition that the recipient company is the beneficial owner of the interest.

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.

KPMG observation

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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