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Netherlands: Update on tax treaty negotiations with Russia

Netherlands: Tax treaty negotiations with Russia

According to reports, negotiations between Russia and the Netherlands for amendments to the existing income tax treaty between the two countries have reached an impasse.

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It is being reported that the treaty negotiators for the Netherlands rejected an initial proposal made by the Russian Ministry of Finance, and that Russia subsequently offered several additional conditions that would significantly improve the position of the Netherlands compared to the initial proposal.

In August 2020, the Russian Ministry of Finance indicated its desire to amend certain provisions of the income tax treaty—specifically for an increase in the maximum withholding tax rate on dividends and interest payments. Under the current income tax treaty, a reduced withholding tax rate of 5% applies to certain qualifying dividend payments, and no withholding tax applies with regard to interest payments. Russian proposed a change to limit application of these benefits and to increase the maximum withholding tax rate for dividends and interest to 15%. There would be several exceptions to the increased withholding tax rates, but these exceptions would only be applied in specific cases (e.g., for publicly listed companies and certain types of financing arrangements).

The proposed treaty measures could affect Dutch residents investing in Russia, by making investment more expensive. While the Russian proposal includes an exception for publicly listed companies, a significant part of Dutch investments in Russia are from non-listed private sector businesses (such as family-owned businesses) or from the headquarters of foreign multinational companies with an economic presence in the Netherlands to which the exception would not apply.

In response to the rejection of Russia’s proposal by the Dutch authorities, the Russian authorities offered to expand the exception to include private businesses, provided that the ultimate beneficial owners of these businesses would also be Dutch tax residents. There are reports that the Netherlands is seeking to maintain the current treaty provisions in an effort to benefit real estate companies. Provisions in the current tax treaty prohibit Russia from taxing Dutch residents when selling legal entities with a significant share of real estate in their assets.
 

Read a November 2020 report prepared by the KPMG member firm in the Netherlands

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