Protocols to Russian Double Tax Treaties with Switzerland and Luxembourg

 

On September 25, 2011 Russia and Switzerland signed a protocol amending the Russia-Switzerland Double Tax Treaty, dated November 15, 1995. On November 21, 2011 Russia and Luxembourg signed a protocol to the Russia-Luxembourg Double Tax Treaty, dated June 28, 1993.

Implications for taxpayers

The protocols introduce important changes into the Tax Treaties with Switzerland and Luxembourg, including the withholding tax rates on dividends and interest, taxation of shares of real property investment holding, exchange of information and anti-conduit provisions. The protocols will enter into force after both parties have completed ratification procedures under their domestic laws and will start to apply from the calendar year following their entry into force.

What the law says

Major changes compared to the current versions of the each treaty are summarized in the tables below.

1. Protocol to the Russia-Switzerland Tax Treaty

Key Development Current Treaty Protocol
1.Withholding tax rate on interest 0% - interest on commercial credit;
5% - interest on bank loans;
10% - interest on other obligations.
0% withholding tax rate for any interest received by a beneficial owner.
2. Capital gain on sale of shares Capital gains from alienation of shares are not subject to withholding tax. Capital gains from alienation of shares in non-publicly traded companies directly or indirectly deriving more than 50% of their value from real property are taxed in the state where the property is located. Gains from alienation of shares of companies using real property for carrying out their business are tax-exempt.
3. Payments on Units of Real Estate Investment Funds and Mutual Investment Funds Uncertainty exists as to the type of income (taxable or non-taxable) and the applicable withholding tax rate. Payments on units of real estate investment funds or mutual investment funds deriving more than 50% of income from shares are considered dividends. Payments on units of mutual investment funds deriving less than 50% of income from shares are considered interest.
4. Exchange of information No exchange of information provisions. New provisions on exchange of information are introduced in line with the OECD approach. Exchange of information requests are not limited to taxes covered by the tax treaty and may include, for example, VAT-related information.
5. Anti – conduit provisions No anti – conduit provisions. Provisions against the use of conduit companies, i.e. when all or substantially all income received by a conduit company resident in one of the states is directly or indirectly paid to another person who is not a resident of either contracting state. The application of the tax treaty benefits to conduit companies is restricted.
6.Tax residence No definition of the place of effective management for tax residence purposes. Place of effective management is introduced in line with the OECD approach as the place where the key management and commercial decisions that are necessary for the conduct of the entity's business as a whole are in substance made, taking into account all relevant facts and circumstances.
7. Certificate of tax residence No direct requirement for apostille in the tax treaty. Apostille not required.

2. Draft Protocol to the Russia-Luxembourg Tax Treaty

Key Development Current Version Protocol
1. Withholding tax rate on dividends The lowest withholding tax rate is 10%. The lowest withholding tax rate is reduced to 5% provided that the recipient of dividends holds at least 10% in the capital of the payer and has invested at least EUR 80,000.
2. Capital gain on alienation of shares Capital gains from alienation of shares are not subject to withholding tax. Capital gains from alienation of shares in non-publicly traded companies with more than 50% of assets invested in real property are taxed in the state where the property is located.
3. Payments on units of Mutual Investment Funds Uncertainty exists as to the type of income (taxable or non-taxable) and the applicable withholding tax rate. Payments on units of Mutual Investment Funds created primarily for investment in real estate are considered income from real property. Payments on units of other investment funds are considered dividends.
4. Exchange of information Limited exchange of information provisions. Extensive provisions on exchange of information that are in line with the OECD approach. Exchange of information requests are not limited to the taxes covered by the tax treaty and may include, for example, VAT-related information.
5. Anti – conduit provisions No anti-conduit provisions Provisions against the use of conduit companies similarly as introduced for tax treaty with Switzerland.
6. Certificate of tax residence No direct requirement for apostille in the tax treaty. Apostille not required.

Actions to consider

- Consider Luxembourg and, possibly, Switzerland for creating holding structures for investments in Russia. However, the potential taxation of profits from alienation of shares in companies directly or indirectly deriving more than 50% of their value from real property located in Russia should be kept in mind;

- Consider Switzerland for structuring financing to Russia;

- Companies currently structuring their real estate investments through Switzerland and/or Luxembourg, including with using of Mutual Investment Funds, should keep in mind the potential tax implications upon exit and consider alternative structures;

- Companies using companies in Switzerland and Luxembourg that can fall under new anti-conduit rules, e.g. companies lacking substance in the country of tax residence should reconsider their existing structures.

Conclusion

Once the protocols enter into force Switzerland and Luxembourg may become favorable jurisdictions for holding Russian assets and performing financing operations along with the currently popular Cyprus and the Netherlands.

 

For further information please contact Alexander Chmelev +7 495 787 27 00, Sergei Zhestkov +7 495 787 27 00, Arseny Seidov +7 495 787 27 00, Roman Bilyk +7 495 787 27 00 or Andrei Serov +7 812 303 90 00.

Baker & McKenzie

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