DTT Luxembourg-Russia - Note Protocol

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 interest. 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...

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