Amendments to double taxation conventions. Old games, new rules

Nowadays we all live in a state of constant uncertainty, which is why it is more important than ever to separate rumors from facts, panic attacks from strategic planning, and treat everything we hear and see with a critical eye. Each time faced with a new bit of news one should ask oneself simple questions:

  • What has happened/what has changed?
  • How will this affect me/my business?
  • When will changes take place?
  • What has to be done before changes take effect?

Thus, what happened at the end of March in the field of international taxation?

On March 25, 2020, the President of the Russian Federation gave instructions to the Government of the Russian Federation to make a list of countries and consequently of double taxation conventions (DTC), and to ensure making amendments providing for the withholding tax at the rate of 15% on dividends and interest paid to tax non-residents of the Russian Federation. If no convention is reached with the contracting jurisdiction, the current convention shall be terminated.

On March 26, 2020, the Government gave instructions to the Ministry of Finance to review conventions within one month. On the same day, the Ministry of Finance issued an information notice specifying that amendments shall only affect transit jurisdictions, particularly Cyprus.

Currently, letters on amendments to conventions have been sent to the following jurisdictions:

  • Cyprus
  • Luxembourg
  • Malta

It is also highly likely that the said instruction will affect the following jurisdictions:

  • the Netherlands
  • Switzerland
  • Ireland

The diagrams below present compared effects:

As is seen from the diagrams above, in jurisdictions where dividends are exempt from taxation the difference in the tax burden for dividends is not significant. However, in terms of interest income the difference is much more significant, especially in case of the DTC termination.

Despite the fact that no amendments are planned to be made to the DTC terms regarding royalties, there is still a possibility of the DTC termination, and in this case instead of the reduced rate at the source of payment and the set-off option, the taxpayer will have to pay the withholding tax at the rate of 20% with no set-off option.

Moreover, one of the consequences of the DTC termination will be the absence of necessity to confirm an actual recipient of income.

The next logical question is when the agreement may be terminated.

Therefore, if a written notice of the DTC termination with the Russian Federation is filed, changes will affect taxpayers on or after January 1, 2021. And in case of most jurisdictions, the Russian Federation should send such notifications by July 1, 2020, otherwise the conventions will be considered terminated only from January 1, 2022.

In view of the above, businesses have time until the end of the year to maneuver. However, while maneuvering in this transition period one should stay reasonable and consistent, because for example a sharp increase in interest on loans, especially retrospectively, is sure to attract the attention of the tax authorities that will require an economic justification for changing the terms of the loan agreement. In case of dividends, it should be noted that dividends may only be paid from the company’s profit, i.e. losses make the payment of dividends unreasonable.

At the same time, each case of restructuring is individual and there is no one multi-purpose solution, since both the structure of the holding and the goals pursued and their priority viewed by the owners are different.

With that in mind, before fleeing to other jurisdictions that have not yet come to the attention of the Ministry of Finance, it is necessary to pay more attention to the current situation, to assess not only risks and costs, but also the potential and growth points that may still have remained unnoticed in already familiar jurisdictions.

Anna Senchenko, LL. M.

Leading Lawyer

Tax and Legal Practice

Korpus Prava (Russia)

Other Articles on Topics
See Also Articles from the Issue
No relaxation during “Bed rest”

Under the current global circumstances, pretty much all business areas face difficulties, including financial institutions and corporate administrators. All current and potential clients are important for any company, but especially in any unstable economic conditions.

June 25, 2020

Online onboarding – thanks for being there for us

Due to the current global situation, it is quite difficult to schedule a meeting at the moment. What actions may be taken to ensure that the working process with new clients is not suspended, while all legal requirements are still met?

June 25, 2020

Anti-crisis measures for the corporate sector in Cyprus

Currently, all areas of life and economic activities experience difficulties with operating, including areas of corporate management and corporate reporting.

June 25, 2020

Fresh take on remote meetings held by companies in Cyprus: theory and practice

Due to the introduction of travel restrictions and quarantines it has become virtually impossible to hold face-to-face meetings, as well as to ensure the presence of company shareholders and directors.

June 25, 2020

Impact of the new virus on corporate procedures

In view of the spread of new virus the Government decided to introduce a number of changes into corporate procedures carried out by joint-stock companies and limited liability companies.

June 25, 2020

Interest on interest – new tax for individuals

In 2020, the phrase “The world will never be the same again” became really popular. And this statement has already become reality for people who keep their savings with Russian banks.

June 25, 2020

… and again I’m back to start, I am back to Leningrad!

Under the current conditions, the main restriction faced by all individuals and corporations is travel restrictions for individuals, cancellation of air service, and closure of borders.

June 25, 2020

Searching for force majeure…

The introduction of restrictive measures in a number of regions of the Russian Federation aimed at preventing the spread of the new virus caused numerous difficulties related to the inability of the parties to perform their obligations, disruption of events, etc.

June 25, 2020

Possible reasons for out-of-court repudiation of the agreement

This article provides a consolidated list of the reasons for repudiation of the agreement set by the current law. This list is not exhaustive, and the possibility of applying a particular reason should be further checked in each case.

June 25, 2020

Special reasons for exemption from liability for non-repatriation of foreign currency earnings

Under the current circumstances, proper execution of transactions between foreign counterparties has become significantly harder.

June 25, 2020

Lessee vs Lessor: which side is the new virus on?

Under the current conditions, various lessee organizations face the following problem: they have to pay rent for vacant premises (offices, shops, pavilions).

June 25, 2020

Prevention and treatment of the government contract breach

New virus is a current factor that seriously hinders economic growth and threatens the well-being of both individuals and businesses. Regardless of the measures taken by the government to give assistance to affected businesses, the current situation is fraught with losses that are unavoidable.

June 23, 2020

Supporting measures for accountants in lockdown

This article covers the most significant changes related to those economic areas that are not recognized as particularly affected, as well as some measures to support small and medium-sized businesses operating in the affected economic areas.

June 23, 2020

Brief overview of the key measures taken in Hong Kong to support business

In early April 2020, Hong Kong announced adoption of an economic support package of HKD 137.5 billion (USD 17.6 billion) to help individuals and industries affected by the outbreak of new virus.

June 23, 2020

Brief overview of the key measures taken in Cyprus to support business

During the period from March 2020 to the present day, state authorities of Cyprus have taken and continue to take various measures to support the business and economy of the island during the spread of the virus.

June 23, 2020

Subsribe to the Journal

Your subscription to our journal will definitely boost the efficiency of your specialists and downsize your expenses for consultants.

The journal is available free of charge in the electronic version.

Free Download