Denunciation of the tax agreement with the Russian Federation: consequences
20.05.2021
On May 19, the Russian parliament finally approved the decision to denounce the Double Taxation Agreement between the Netherlands and the Russian Federation (hereinafter referred to as the Agreement), which now awaits signature by the president. If the Russian side sends a notice of denunciation of the agreement before June 30, 2021, its effect will terminate on January 1, 2022, the document states.
On the one hand, the expected termination of the Agreement is not the best news and another step towards the deterioration of the investment climate in the Russian Federation. On the other hand, the changes will hardly affect the overwhelming number of Russians living in the Netherlands, and business will continue to have adequate ways to control the tax burden. In particular, the Dutch national legislation itself allows in some cases to avoid double taxation even without the existence of agreements on the avoidance of double taxation. Below we will consider the main consequences of the denunciation of the Agreement.
Consequences for Russians resident in the Netherlands
The main issues facing individuals in the context of international taxation are the taxation of income from employment, dividends from a business and real estate property. Below are the main tax situations taking into account the absence of an Agreement.
Real estate in Russia
If you own real estate in Russia, the Netherlands will unilaterally grant a tax reduction in Box 3 and you will be exempt from paying tax on your house or apartment in Russia. Eligibility for an exemption from paying tax on real estate abroad in the Netherlands does not depend on whether you have to pay income tax abroad or on the amount of this tax.
Long-term rental income from real estate in the Netherlands is not taxable in Box 1 as it cannot be equated to income from work. The income from passive rent accumulated on accounts is declared once a year in Box 3. We covered this issue in detail on our webinar on Box 3, the first part of which took place on May 19.
Income from the sale of real estate in the Russian Federation will also not be taxed in the Netherlands. This again does not depend on the existence of the Agreement and the fact that the tax was paid in another country. The proceeds from the sale of real estate will subsequently become taxable in Box 3 as savings under the general Dutch tax rules.
Income from work received to / from Russia
If tax is levied in the country of origin of income, the Netherlands can grant (partial) exemption from tax on foreign income. The amount of this exemption is calculated based on the ratio of foreign income to income earned in the Netherlands. In fact, the payment of tax is not verified, and the amount of taxes paid in another country does not affect the amount of exemption in the Netherlands. You can calculate in advance the exact size of the exemption based on specific input data by contacting our tax consultants.
Dividends received from a Russian company
In the absence of double taxation treaties, the Netherlands will only deduct foreign tax on dividends if it is paid in a closed-listed developing country. Russia is not currently one of them. Thus, when paying dividends to a resident of the Netherlands, a Russian company is obliged to withhold dividend tax to a non-resident in the amount of 15%, then in the Netherlands dividends must be declared in Box 2 at a rate of 26,9% (for 2021), unless you use the exemption from Declaring Box due to 30% taxiing.
In order to prevent such an overpayment, it is necessary to adapt the ownership structure accordingly. Contact us for information on specific options or for an individual analysis of your situation.
Hack and predictor Aviator
Thus, in the taxation of individuals, the termination of the Agreement will, to a greater extent, change the procedure for taxation of dividends. This does not negate the possibility of comfortable tax structuring even after denunciation. For the rest of the objects of taxation for residents of the Netherlands, termination of the Agreement does not entail critical changes.
Consequences of termination of the Agreement for legal entities
Denunciation of the agreement could change the alignment in tax mechanics when paying dividends, interest on loans and royalties (income from copyright and licenses). It is these types of payments that are most common when choosing the Netherlands as a jurisdiction for companies with passive income and holdings. Consider several possible scenarios below:
1. Payment of dividends from the Russian Federation to the Netherlands.
A Russian company withholds tax on dividends to a non-resident company in the amount of 15% of the total amount of dividends. In the Netherlands, dividends received are not subject to corporate tax.
2. Payment of dividends from the Netherlands to the Russian Federation.
When paid in the Netherlands, 15% of the tax must be withheld; in Russia, dividends are not additionally subject to income tax, provided that certain conditions stipulated by the legislation of the Russian Federation are met.
3. Payment of royalties and / or interest under loan agreements from the Russian Federation to the Netherlands is subject to 20% tax.
In the Netherlands, income received is not exempt from income tax.
4. Payment of royalties and interest from the Netherlands to the Russian Federation.
Russia is not included in the list of low tax or non-cooperating jurisdictions, so the Netherlands will not withholding tax when paying royalties or interest. In Russia, the income received will be subject to income tax.
Conclusions
In the new environment, you need to take care of an early assessment of how the denunciation of the Agreement will affect your business and assets. In some cases, a certain adaptation of the structure or logic of the movement of funds may be required.
One of the universal solutions can be the relocation of the operating and holding company into one jurisdiction (the Netherlands), which greatly simplifies business management and meets modern trends towards simplifying corporate structures. In parallel, the issue of changing the tax residency of the beneficiaries to Dutch and transferring assets to Europe can be resolved.
Obviously, each situation requires an individual plan that fully takes into account the specifics of business processes and the owner's strategy. We are open to analyze your personal and business tax implications and find suitable solutions. In addition to taxes and corporate law, our competence includes issues business relocation и emigration to the Netherlands.
If you still have any questions, fill out the contact form below, we will be happy to help you!
Authors of the article: Sergey Graf and Olga Lukasheva – lawyers at Nalog.nl
