It's Luxembourg's turn

The Russian Federation continues to revise tax treaties with countries used in cross-border tax-planning schemes. In the last week, Russia and Luxembourg have signed a protocol which, as declared, introduces amendments to the Russia-Luxembourg tax treaty similar to those that have previously been implemented in the treaties with Cyprus and Malta.

The current version of the Russia-Luxembourg tax treaty sets a standard 15% withholding tax rate on dividends as the default option. This is exactly what the Russian government would like to have in all treaties with countries providing “favorable” tax regimes. However, the treaty also provides a reduced tax rate (5%) which applies to entities (i) holding more than 10 percent of shares in a Russian subsidiary and (ii) having invested at least EUR 80,000 in the Russian subsidiary. Moreover, interest and royalties payable under the treaty are not subject to withholding tax.

After the amendments enter into force, the default 15% rate will remain unchanged, while the reduced dividend rate will become applicable only to state institutions (governments, central banks, pension funds and other state structures), insurance companies and publicly-listed companies (provided the company holds at least 15 percent of shares in a company paying dividends for at least 365 days).

The protocol also states that interest can be taxed in the country of its origination at the rate not exceeding 15%. However, interest payable (i) to state institutions (as named above) and commercial banks or (ii) on certain types of securities (government and corporate bonds, external debentures) is still exempt from withholding tax. Public companies meeting the above criteria (a more than 15 percent share and minimum 365-day shareholding period) are also eligible for another break. Such companies can benefit from the reduced 5% withholding tax rate on interest.

We do not expect the protocol to affect taxation of royalties.