By Alexander Miller, lawyer – Eurasia Business News – June 8, 2021

View on houses in Amsterdam – The Netherlands – Photo credit : Pixabay.

Following unsuccessful negotiations, the Russian Federation sent to the Netherlands a notice of withdrawal from their bilateral tax agreement on the avoidance of double taxation, in effect since 1998.

This was announced on June 7 in a letter to the Dutch parliament by Hans Vijlbrief, the State Secretary for Finance of the Netherlands :

“The Russian Federation has notified us of its withdrawal from the agreement […].This means it will expire on January 1, 2022.”

The Dutch official added that “this is a step in the wrong direction, but it is not irreversible.” 

Both the Russian Federation and the Netherlands benefit from a well-functioning double tax treaty. The Netherlands will therefore continue its efforts to engage in dialogue and to resolve the issue by the end of the year.” wrote Hans Weilbrieff in a letter to the Dutch Parliament.

Therefore, the Netherlands will continue efforts to involve the Russian Federation in the dialogue and resolve the issue by the end of the year.”

According to the Dutch official, the Russian Federation wanted to amend the tax agreement to grant tax benefits to listed companies under strict conditions, even when there is no question of treaty abuse. Only listed corporations registered in the Netherlands and owning shareholding in a subsidiary in Russia would have been eligible to the regime avoiding double taxation, reported Hans Vijlbrief in his letter.

The Kremlin wants to stop Russian capital flight through the Netherlands and offshore jurisdictions. Russia amended in 2020 its tax agreements with Malta, Luxembourg and Cyprus, in order to increase tax income

The Dutch State Secretary explained that the Netherlands made counter-proposals to the Russian initiative to amend the agreement, but a solution that would suit both sides could not be found :

 “The main consequence of the denunciation of the agreement will be that the Russian Federation will be able to impose a higher tax on paid dividends, interest and royalties,” said Hans Weilbrieff. 

He added that : “In addition, those taxes withheld at a higher rate will not be eligible for tax deduction after the agreement is terminated. This is due to the fact that in the absence of a tax agreement, these payments will not be subject to tax deductions and, in general, they will be taxed twice, in the Netherlands and Russia.”

The termination of the bilateral tax agreement will increase the tax burden on Russian-controlled companies registered in the Netherlands and operating in the Russian market.

On May 19, 2021, the upper chamber of the Russian parliament approved the bill on the withdrawal. The Russian President Vladimir Putin signed this bill on May 26.

The decision to terminate the tax agreement with The Netherlands, in effect since 1998, was taken after that several rounds of negotiations to amend the treaty were eventually unsuccessful.

According to the Dutch Minister of Finance, Russia would be also approaching Switzerland, Singapore and Hong Kong for amending bilateral tax treaties.

Read also : France will tax GAFA in 2020, despite US threats

At the end of March 2020, the Russian President Vladimir Putin ordered a 15% tax on income in the form of dividends and interest transferred to accounts opened and held in foreign countries. This reform led to two possibilities: whether foreign States accept to make changes to bilateral agreements on the avoidance of double taxation, agreements with which made it possible to withdraw profits from Russia, paying tax at an effective rate of 2-3%, whether Russia decides to terminate such agreements if appropriate changes are not agreed with foreign States.

Read also : G7 countries believe that corporate tax should be at least 15%

Since that substantial payments of income of Russian origin are made through the Dutch jurisdiction, the Ministry of Finance of the Russian Federation held negotiations with the Ministry of Finance of the Netherlands to amend the bilateral tax agreement. The Russian side offered the Netherlands conditions similar to previously agreed with Cyprus, Luxembourg and Malta. However, the Dutch Government did not agree with the proposal of the Russian Federation. Both States could not find a compromise.

The Russian companies operating through the Netherlands now face an increase in the tax burden and a double taxation. The parent companies of well-known X5 Retail Group and Yandex are registered in the Dutch jurisdiction.

Termination of the double tax agreement would result in the rise of Russian withholding tax rate to 15% with respect to dividend payments and 20% with respect to interest and royalties payments.

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