Federal Law 139-FZ came into force on 26 May 2021, thereby denouncing the agreement between Russia and the Netherlands on double taxation avoidance and tax evasion provisions relating to income and property tax.
Russia's Ministry of Finance made the denouncement after many attempts to amend the agreement since initiating it with the Netherlands at the end of 2019. During this period, Russia took the same action in its negotiations with Malta, Cyprus and Luxembourg, whose companies were traditionally used to structure ownership schemes concerning Russian assets. Russia proposed to significantly amend the terms of the double taxation avoidance agreements, demanding that the taxation rate on passive income (such as interest, dividends and royalties) for those countries' residents rise to 15% from the existing very low or zero rate.
However, for Malta, Cyprus and Luxembourg, the notification of denouncement after months of difficult negotiations led the three countries to respond with a protocol to amend the tax agreements on Russia's terms. However, the Netherlands chose not to make concessions for Russia's main requirements, which concluded the negotiations. The termination of the agreement is set for 1 January 2022. It is the first denouncement of a tax agreement in Russian history.
The termination of the agreement with the Netherlands will have a negative impact for a significant number of companies operating in the Russian market, since many international holding companies have used this jurisdiction to structure ownership of Russian assets. However, the redomiciliation of foreign companies to internal offshore zones in Russia's Special Administrative Regions (SARs) may be a solution (for further details please see "Range of benefits for companies domiciled in SARs significantly expanded").
Despite the benefits that the SARs offer, foreign investors working with Russia through Dutch companies will encounter difficulties when looking to establish the old arrangement with other jurisdictions, as the Ministry of Finance intends to make similar revisions to tax agreements with jurisdictions such as Hong Kong, Singapore and Switzerland in order to increase taxation of passive income.
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