Update on status of negotiations on double tax treaty between the Netherlands and Russia
In our article dated November 5, 2020 we informed you about reports in the media that the negotiations between Russia and the Netherlands on amendments to the double tax treaty between the two countries had reached an impasse. There have now been relevant developments from both the Russian and the Dutch side.
Recently, KPMG Russia held an interview with the Russian Deputy Minister of Finance about the negotiations on the double tax treaty. The Russian Deputy Minister of Finance indicated that Russia wants to amend the current double tax treaty in a way that is similar to the amended double tax treaties between Russia and Malta, Luxembourg and Cyprus. According to the Russian Deputy Minister of Finance, Russia offered the same conditions to the Netherlands as to the aforementioned countries, but there is currently no mutual understanding with the Netherlands regarding the conditions for amending the double tax treaty.
The Russian Deputy Minister indicated that the Netherlands would like to maintain opportunities to route income out of Russia with minimal taxation, which is unacceptable for Russia. Hence, Russia started the procedure to terminate the double tax treaty. A bill to terminate the treaty is currently being prepared by the Russian Ministry of Finance and is awaiting the necessary internal approvals.
Although the preparations to terminate the double tax treaty have started, the Russian Deputy Minister of Finance also indicated that the Russian government has no desire to terminate the double tax treaty and that it is therefore still not certain that the double tax treaty will be terminated. However, Russia offers each country the same conditions and it is not planning to customize these conditions for each separate jurisdiction. This would mean that if a country does not accept these conditions, termination of the double tax treaty would be the only option.
At the end of 2020, a Member of the Lower House of Parliament asked the Dutch Deputy Minister of Finance several questions about the status of the negotiations between Russia and the Netherlands on the double tax treaty. On January 26, 2021, the Dutch Deputy Minister of Finance sent a letter to the Lower House with regard to these questions. In this letter, the Dutch Deputy Minister of Finance indicated that the Dutch government assumes the negotiations are still ongoing and that the Dutch government intends to reach an agreement in this respect, regardless of reports circulated in the media that Russia has started the national procedure to terminate the double tax treaty.
The Dutch government is of the opinion that the renewed double tax treaty should contain provisions to mitigate treaty abuse (as suggested by Russia) as well as provisions to avoid double taxation. The Dutch government believes that the Russian proposal would result in only a limited number of taxpayers being able to apply certain benefits of the double tax treaty and hence, in their opinion, insufficient consideration has been paid to the interests of other taxpayers with active businesses. However, it seems that the Dutch government has not yet been able to translate their views into convincing solutions acceptable to both parties.
We understand that the business community has also expressed its concerns both to the Russian and the Dutch Ministries, but so far without any tangible results. Although both parties have indicated they are still on speaking terms, all signs seem to indicate that the termination of the double tax treaty is a realistic option. There is probably more at stake than only renewal of the double tax treaty. In this respect, we would like to point out that if the official notification of termination is sent to the Dutch government before July 1, 2021, the double tax treaty would be terminated as of January 1, 2022.
We will update you on further developments once they occur. For more information, or if you would like to discuss the potential implications that this might have for you or your business, please contact the members of Meijburg & Co’s Russia/CIS Desk: Jens Karreman, Kevin van Heesch and Joep Verhoeven or Alexander Tokarev of KPMG Russia.