On November 21, 2011, the Double Tax Treaty between the Grand-Duchy of Luxembourg and the Russian Federation dated June 28, 1993 (hereafter the "DTT") has been amended by a protocol implementing new important rules aiming to avoid double taxation and to prevent fiscal evasion with respect to taxes on income and capital (hereafter the "Protocol"). The Protocol will enter into force in both countries as from January 1, following the date on which the respective ratification procedures have been completed.
The purpose of such amendment is to improve DTT provisions in relation to economic interest, focused on dividend taxation which should then increase the appeal of Luxembourg for Russian investments in Europe. The most important changes can be summarised as follows:
A NEW REDUCED WITHHOLDING TAX
One of the most interesting amendments introduced by the Protocol is to provide a reduced withholding tax of 5% for dividend distributions, instead of the current applying rate of 10%. In order to benefit from the new reduced rate, the following conditions shall be met:
- at least 10% of the share capital of the company paying the dividends and located in the country of origin (i..e country from which the dividends are paid) must be held by the beneficial owner located in the recipient's jurisdiction;
- such beneficial owner shall invest at least EUR 80,000.- (or the equivalent in Russian Rubles).
In so far as the Russian Federation signed a limited number of tax treaties providing a reduced withholding tax rate for dividends (or equivalent relevant provisions), the given amendment should increase Luxembourg's attractiveness as a platform for investments in Russia.
A NEW DEFINITION OF DIVIDENDS
As soon as the Protocol enters into force, a new larger
definition of dividends will apply. Under the amended DTT, will be
considered as dividends also incomes subject to the same taxation
as incomes from shares in accordance with the tax legislation of
the country of origin, even if paid out in the form of
The purpose of this change is to apply the same tax treatment of the income between the recipient and the country of origin, which could be different in the version of the DTT currently in force.
Indeed, for the time being, if an interest payment is re-qualified as dividend payment by the country of origin, it could be subject to a withholding tax in such country and considered as interest and also taxable for this purpose by the recipient country.
Therefore, the new change will avoid a double taxation, as the income will be treated as dividend in both countries. Such income should only be submitted to the withholding tax in the country of origin.
Furthermore, will be also covered by the new definition payments on depositary receipts and payments on shares or units of investment funds or any other collective investment structure (except real estate investment structures).
REAL ESTATE INCOMES
In accordance with the modified article 13 of the DTT, capital
gains from alienation of shares in companies with more than 50% of
assets derives directly or indirectly from real estate investments
will be taxed in the country where the property is located.
Furthermore, the same rule will apply to capital gains from the sale of units in real estate investment funds.
Therefore, incomes resulting from the sale of shares in a Russian real estate company held by a Luxembourg company or by a Luxembourg investment fund will be taxed in Russia.
However, in the following cases, only the recipient country will be able to retain a tax:
- alienation of shares during a reorganisation,
- alienation of shares quoted on a registered stock exchange,
- alienation of shares by a pension fund, a similar institution or a government.
INVESTMENT FUND STRUCTURES
Except the cases of gains from unit funds set up primarily for investment in real estate, payments on units of other investment funds or similar forms of mutual investment funds will be considered, for the purposes of the DTT, as dividends. In this respect, investment fund structures as SICAV and SICAF will be treated as classic Luxembourg companies and should be eligible for DTT provisions benefit.
WITHHOLDING TAX OF OTHER INCOMES
According to the new article 21 introduced by the Protocol,
incomes not specified in the DTT will be taxable in the country of
origin. As the current version of the DTT provides that incomes not
covered by the DTT are taxable only in the recipient country
(except incomes listed in article 21.2), such incomes may also be
submitted to a withholding tax from the country of origin if
considered as "other incomes" as, for instance, fines and
penalties for violating contractual obligations, distribution of
property among the participants in a company or liquidation of a
Therefore, each transaction involving payment from Russia to Luxembourg and not especially covered by the DTT required a careful planning and must be analysed on a case by case basis.
EXTENSION OF THE PROVISIONS RELATED TO THE EXCHANGE OF INFORMATION
Based on the OECD Model Tax Convention on income and capital,
the provisions of article 26 introduce more detailed procedures and
conditions for the exchange of information.
Indeed, exchange of information requests will also include taxes not covered by the DTT as, for example, value added tax.
Moreover, the provision prevents a contracting country from refusing to supply information required by the other contracting country on the sole grounds that the information are covered by the obligation of professional secrecy (i.e. information held by banks or other financial institutions, authorised representatives as well as persons acting as trustee).
OTHER RELEVANT CHANGES
Limitation of benefit clause
The Protocol introduces a new clause regarding the limitation of benefit. In this respect, if the competent authorities of each contracting country conclude that the main scope of the existence or the establishment of a company is to exploit the provisions of the DTT only to obtain tax reduction or tax exemption otherwise not permitted, such reduction or exemption will not be granted.
Location of the effective management of companies
The protocol provides non limitative criteria to determine the place of effective management of companies in order to determine the tax residence. Indeed, where the place of effective management of a company cannot be determined, the competent authorities should try to find a solution by common consent on this matter, taking into account relevant criteria, and in particular:
- the place where the board of directors (or any equivalent body) meetings are held,
- the place where the company's main day-to-day senior management is carried on,
- the place where the company's managers generally work.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.