Awaiting decision with regards to the denunciation by the Russian government of the Double Tax Treaty with the Kingdom of Netherlands- potential consequences.

During 2020, Cyprus, Luxembourg and Malta agreed to the requested changes by Russia to amend the existing double tax treaties. Not being in a position to bargain Russia’s request the changes were concluded. Cyprus under the circumstances expressed satisfaction regarding the negotiations which took place and the final conclusion of the revised double tax treaty left what could be considered as a bitter sweet outcome considering that Russia confirmed that the same provision would also apply to agreements that Russia has with other treaty partners. The withholding tax rates for dividends and interest was increased to 15%, however Cyprus did manage to secure, among others, the reduction of withholding tax (to nil or 5% accordingly) of regulated entities, exemption from withholding tax on interest payments from corporate bonds, government bonds and Eurobonds and also maintained zero withholding tax on royalty payments.

Following the announcement by the Russian President and the official warning, the Russian Federation shared its proposal with the Netherlands, seeking to revise the terms of the tax agreement between the two countries in a similar way to those successfully signed with other member states of the European Union.

Despite the fact that talks were held by the two sides in an effort to find common ground, the Ministry of Finance of Netherlands, in contrast to the before mentioned countries, rejected the Russian proposal and the two sides failed to reach any agreement.

Following this outcome, the Russian government has taken a legislative initiative by way of a draft bill submitted to the lower chamber of the Russian Parliament, the State Duma on the 12th of April 2021, aiming to denounce the double tax agreement currently in force.

The hearing of the proposed bill by the State Duma was scheduled in May, 2021.

This initiative followed the public statement made by the President of Russia with regards to imposition of withholding tax between the range of 15% to 20% on dividend and interest payments of Russian origin to all the jurisdictions, starting from 2021, accompanied by an official warning stating that the Russian Federation would proceed to unilaterally revoke any double tax agreement with any treaty partner, in case they would reject the proposal with the revised terms.

According to the rules for termination laid down in Article 31 of the Treaty, the party intending to terminate the treaty must notify their treaty partner, no longer than six months before the end of any calendar year in order for the termination of the treaty to be effective from the beginning of the following tax year.

If the submitted bill is ratified by the legislative authority of the Russian Federation and notice is given before June 2021 to the Netherlands, the termination of the Treaty between the two countries will be effective from the beginning of 2022. In other case, the double tax agreement will remain in force at least until January 2023.

Potential termination of the double tax agreement between the two countries 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.

Another significant development as a result of such termination will be the profits derived from the sale of shares of property owning Russian companies becoming taxable in Russian Federation, as well as the fact that dividend payments originating from Netherlands to the Russian Federation will also be subject to Dutch withholding tax at the current rate of 15%.

This ‘’battle’’ between Russia and Netherlands will closely be followed by all the respective parties which have an interest regarding this outcome and only time will tell what implications or benefits could result from this.

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