The Netherlands levies a withholding tax on dividends distributed to its shareholders by companies established in the Netherlands. The Dutch statutory withholding tax rate for dividends is 15%. Under the current double taxation treaty, the Netherlands benefits from a withholding tax rate of 5% and 15% respectively for dividends. In the case of shareholders of Russian companies, an exemption from withholding tax (âinhoudingsvrijstelling) can be applied to the withholding tax on dividends. After the termination of the applicable double taxation agreement, this exemption from withholding tax ceases to apply. The purpose of the tax is to prevent the inflow of dividends from the Netherlands into low-tax jurisdictions without taxation and in situations of abuse. Taxpayers currently relying on the double taxation agreement between Russia and the Netherlands to reduce withholding tax rates and avoid double taxation should consider the potential impact of termination and consider taking corrective action in a timely manner. The termination of the tax agreement between Russia and the Netherlands will result in the following changes as of January 1, 2022. The Russian Federation and the Netherlands have been negotiating the current double taxation convention between the two countries for some time, which dates back to 1996. According to an information letter from the Dutch Ministry of Finance to the Dutch Parliament (Tweede Kamer) in April this year, Russia and the Netherlands have already presented a draft agreement for a new tax treaty in early 2020. After that, however, Russia resumed negotiations on the applicable rates of withholding taxes on interest, royalties and dividends, as well as on the conditions under which companies are entitled to contractual benefits. DISCLAIMER: Due to the generality of this update, the information contained in this document may not be applicable in all situations and should not be implemented without specific legal advice based on certain situations.
The Russian Finance Ministry proceeded with the termination after numerous attempts to change the agreement since its launch with the Netherlands in late 2019. During this period, Russia took the same steps in its negotiations with Malta, Cyprus and Luxembourg, whose companies have traditionally been used to structure ownership regimes with respect to Russian assets. Russia has proposed to significantly change the terms of double taxation treaties by requiring that the tax rate on passive income (such as interest, dividends and royalties) for residents of these countries be increased from the existing very low or zero rate to 15%. The system for the reimbursement of employment-related investments will be withdrawn retroactively. In return, employers` contributions to the unemployment fund will be paid in 2021. Note that the Russian withholding tax on dividends, interest and royalties will not be taken into account in the Dutch corporate tax due on this income. This means that the only option for Dutch taxpayers receiving Russian income subject to Russian withholding tax is to deduct withholding tax as a cost. This means that withholding tax is deductible from the tax base as a cost and is not deductible from the tax payable (which would be the case if a tax credit were available).
This is particularly relevant in view of the recently re-enacted Russian RGA, which assumes, inter alia, that if Dutch companies continue to receive income indirectly from Russian sources through EU companies or other jurisdictions that have concluded effective double taxation agreements with Russia, contract facilitation and reduced withholding tax rates will be challenged under beneficial ownership rules. In the autumn of last year, Russia and the Netherlands had discussions initiated by Russia on the revision of the provisions of the tax treaty between countries. However, these negotiations ended with the inability of both sides to reach an agreement. We assume that the content of the proposed protocol was similar to that already signed by Russia with Cyprus, Luxembourg and Malta and included an increase in withholding tax rates on dividends and interest to 15%, with a significant restriction of access to reduced rates. Withholding tax rate: Dividends, interest and royalties are subject to much higher withholding tax rates. Dividend payments by Russian companies to Dutch shareholders are subject to a withholding tax of 15% (in certain circumstances, the national exemption may apply). Similarly, interest and royalty payments from Russia to the Netherlands will be subject to a withholding tax of 20%. .