Netherlands: Update about tax treaty negotiations with Russia

Netherlands: Tax treaty negotiations with Russia

Since the start of negotiations in 2020 for a new income tax treaty between the Netherlands and Russia, there have been new developments.

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Russian developments

Recently, the KPMG member firm in Russia conducted an interview with the Russian Deputy Minister of Finance about the treaty negotiations.  The Russian Deputy Minister of Finance indicated that Russia wants to amend the current tax treaty in a way that is similar to the amended tax treaties between Russia and Malta, Luxembourg, and Cyprus. According to the Russian Deputy Minister of Finance, Russia offered the same conditions to the Netherlands, but there was no mutual understanding reached with the Netherlands regarding the conditions for amending the tax treaty.

The Russian Deputy Minister indicated that the Netherlands would like to maintain opportunities to route income out of Russia with minimal taxation—a position that was unacceptable for Russia. Hence, Russia started the procedure to terminate the existing tax treaty. A bill to terminate the treaty is currently being prepared by the Russian Ministry of Finance and is awaiting the necessary internal approvals.  

Although the preparations to terminate the tax treaty have started, the Russian Deputy Minister of Finance indicated that the Russian government has no desire to terminate the treaty; therefore, it is still not certain that the tax treaty would be terminated. However, Russia offers each country the same conditions in its treaty negotiations, and Russia is not planning to customize these conditions for each separate jurisdiction. This would mean that if a country does not accept these conditions, termination of the tax treaty would be the only option.

Dutch developments

At the end of 2020, a member of the Lower House of Parliament asked the Dutch Deputy Minister of Finance several questions about the status of the tax treaty negotiations between Russia and the Netherlands. The Dutch Deputy Minister of Finance on 26 January 2021 sent a letter to the Lower House with regard to these questions, indicating that the Dutch government assumes the negotiations are still ongoing and that the Dutch government intends to reach an agreement, regardless of reports circulated in the media that Russia had started procedures to terminate the tax treaty.

The Dutch government’s positions are:

  • The renewed income tax treaty must contain provisions to mitigate treaty abuse (as suggested by Russia) as well as provisions to avoid double taxation.
  • The Russian proposal would result in only a limited number of taxpayers being able to apply certain benefits of the income tax treaty, and hence, insufficient consideration has been paid to.

KPMG observation

The business community has expressed concerns both to the Russian and the Dutch officials, but so far without any tangible results. Although both governments have indicated they are still on speaking terms, all signs seem to indicate that the termination of the existing income tax treaty could be realistic. There is probably more at stake than only renewal of the tax treaty. In this respect, if the official notification of termination is sent to the Dutch government before 1 July 2021, the tax treaty would be terminated as of 1 January 2022.

Read a March 2021 report prepared by the KPMG member firm in the Netherlands

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