Russia - Luxembourg tax treaty amendment - new WHT provisions on dividends and interest

In brief

On 6 November 2020, Luxembourg and the Russian Federation signed a protocol amending the Luxembourg - Russia double tax treaty ("Treaty"). The protocol particularly provides for an increase of the ordinary withholding tax ("WHT") rate up to 15% on dividends and interest payments, and at the same time introduces new requirements for application of the reduced withholding tax rates. 

The amendments to the Treaty will come into force on the day the ratification process is finalised (i.e. upon the last of the two notifications between the two States informing each other about the completion of the ratification process in each territory). The provisions of the protocol will then apply to tax periods starting as from 1 January of the calendar year immediately following the year during which the protocol will come into effect, e.g. taxable periods as from 1 January 2021 provided the ratification process is finalised by both Luxembourg and Russia by the end of 2020. If the ratification process is only finalised in the course of 2021, the protocol will only apply to taxable periods starting as from 1 January 2022.

Earlier in September, a similar protocol was signed with regard to the Russia - Cyprus double tax treaty. The negotiations regarding amendments to the Russia - Malta and Russia - the Netherlands tax treaties are apparently ongoing.

In detail

The protocol has been agreed following an increase of withholding tax rates for a number of countries announced by Russia earlier this year.

The Treaty in its current form provides for WHT exemption on interest payments from Russia to Luxembourg and relatively easy access to reduced 5% WHT on dividends. 

Once the protocol becomes effective, the ordinary WHT rate under the Treaty will be increased to 15% both for dividends and interest (provided the recipient is the beneficial owner of the income).

The reduced 5% WHT on dividends will be available if the beneficial owner of the payment is:

  • an insurance undertaking or a pension fund;

  • a company listed on a registered stock exchange (with at least 15% of shares in free float) and which holds at least 15% of the company making the payment during an uninterrupted period of at least 365 days;

  • the government, a local authority or the Central Bank of the other contracting state.

Under the amended Treaty provisions, interest payments should be exempt from WHT in the source country if the beneficial owner of payment is:

  • an insurance undertaking or a pension fund;

  • the government, a local authority or the Central Bank of the other contracting state;

  • a bank.

In addition, the WHT exemption should also be applicable to the interest paid in respect of the following securities listed on a registered stock exchange:

  • Government bonds

  • Corporate bonds

  • Eurobonds

Separately, the 5% reduced WHT should be applicable to the interest paid to a company (being a beneficial owner of the interest) listed on a registered stock exchange (with at least 15% of shares in free float) and which holds at least 15% of the company making the payment during an uninterrupted period of at least 365 days.

It should also be mentioned that some internal more favorable provisions can apply on dividend and interest payments from Luxembourg to a Russian entity. Indeed, Luxemburg does not levy (generally speaking) withholding tax on interest and the withholding tax on dividends can be reduced to nil under certain conditions.

The existing WHT exemption on royalty payments is not affected by the protocol. 

In conclusion

The changes to the Treaty may lead to an increase of WHT burden for Russian holding and financing structures. In that regard, it is important to analyse the effects of the changes and verify applicability of the reduced WHT rates or exemptions under the updated provisions of the Treaty.

Contact us

Alexandre Jaumotte

Partner, PwC Luxembourg

Tel: +352 49 48 48 5380

Nicolas Sansonnet

Director, PwC Luxembourg

Tel: +352 49 48 48 2025

Vladimir Areshyan

Senior Manager, PwC Luxembourg

Tel: +352 49 48 48 4397

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