Антон Именнов прокомментировал разрыв соглашения с Нидерландами об избежании двойного налогообложения
Dutch multinationals doing business in Russia could be hit with higher taxes if Moscow carries through on a threat to abandon a 25-year-old tax treaty.
A Russian minister said Wednesday the country would abrogate its pact if the Netherlands won’t agree to change the treaty. That could result in double taxation as early as next year not only for Dutch companies, but also for U.S. and international businesses that invest in Russia through Dutch entities.
The Dutch government has warned the move would hurt Dutch business. A Philips spokesman says the company is monitoring the debate, but declined to comment further. Royal Dutch Shell and Heineken didn’t respond to requests for comment.
President Vladimir Putin’s government has been working over the past year to renegotiate Russia’s double tax treaties, hoping to tap revenue it says is slipping away to low-tax jurisdictions popular among Russian businesses and reduce opportunities for tax abuse.
It has already renegotiated treaties with Cyprus, Malta, and Luxembourg.
Now Moscow wants the Dutch to agree to—among other things—an increase in the withholding tax rate to 15% for dividends and interest. Certain dividends are currently taxed at 5%, with no withholding on interest.
But the Netherlands said that under Russia’s conditions, Dutch businesses would be harmed because the treaty benefits would be available to only a limited group of taxpayers.
The Netherlands hasn’t received a formal notice from Russia that it will terminate the treaty, and is trying to continue discussions to reach an agreement, a Dutch Finance Ministry spokesperson said Feb. 11.
Russia wants to apply higher taxes even in cases where companies aren’t engaged in abusive practices, limit treaty benefits to listed companies, and add more conditions for eligibility, the Dutch spokesperson said.
Finance ministry sources on both sides say negotiations are ongoing to preserve the tax pact, which was agreed to in 1996 and took effect in 1998, if possible.
But if no solution is reached, a treaty breakdown resulting in double taxation would “make it difficult for Dutch companies to operate in Russia,” said Anton Imennov, managing partner at the Pen & Paper law firm in Moscow, adding that they’re “likely to be forced out of the market or reduce their presence.”
Direct investment from the Netherlands to the Russian Federation reached $55.9 billion in 2019. Business-friendly rules make the Netherlands a key tax structuring jurisdiction for many large companies.
Unprecedented Push
The Netherlands said Dec. 7 that Russia’s proposed changes take “too limited account of real economic activities,” and would have “negative consequences for both the Dutch and Russian businesses.”
Moscow said the Netherlands’s proposed solution, details of which aren’t available, was unacceptable as it preserved “channels for withdrawing money.”
“There is no mutual understanding with the Netherlands” on the renegotiation, Alexey Valerievich Sazanov, state secretary-deputy minister at the Russian Ministry, said Wednesday. And Russia won’t offer different terms to those agreed by Cyprus, Malta, and Luxembourg, he said.
The Dutch State Secretary for Finance told Parliament on Jan. 26 that Russia had not officially notified the Netherlands that it will terminate the treaty, but if it did, the treaty benefits would disappear as of 2022.
Effect on Businesses
Governments enter bilateral tax treaties to help prevent companies from being double taxed on the same income.
Some treaties have perks to encourage investment between countries, such as allowing for low or zero withholding tax rates on dividends, interest or royalties.
Treaties also provide a framework for resolving disputes between companies and governments. Treaties are amended often, but rarely canceled altogether.
If the treaty is abandoned, companies that do business between the two countries could face double taxation because Russia would apply higher withholding taxes which, without the treaty, would no longer be creditable in the Netherlands, said Bart Le Blanc, partner at Norton Rose Fulbright in the Netherlands.
Turkish companies investing in Russia via the Netherlands could see their tax bills almost double, from 24% to 45.6%, said Eray Buyuksekban of KPMG.
Ending the tax treaty could also hurt Russian businesses that use the Netherlands as a hub for outbound investments, said Artem Toropov, a senior tax associate with Baker McKenzie in Moscow.
“This can lead to a decrease in the amount of cash that is eventually distributed in the Russian Federation, which can negatively affect Russian business that invests around the world,” Toropov said.
—With assistance from Isabel Gottlieb